Three months into US-led sanctions designed to crush Russia’s economy for its war in Ukraine, Russia has appeared surprisingly resilient.
The ruble has rebounded and is now worth more than before the invasion. The Kremlin’s coffers are overflowing from record oil and gas sales. Even McDonald’s has reopened in Russia, rebranded under a Siberian billionaire’s ownership. Meanwhile, Russia’s military continues to hammer away at Ukraine with a steady supply of tanks and artillery.
But inside the Treasury Department, teams of sanctions experts view that resilience as a mirage. In exclusive interviews with CNN, top Treasury Department officials say they remain confident the sanctions are working and that beneath the surface, a much more dire story is unfolding within Russia’s economy, where they contend real and lasting damage is being inflicted.
“The US government has watched a narrative of ‘Look at Russia – look at the high value of the ruble, wow, Russia has really got these sanctions beat!’ and we’ve been like, ‘No!’ That’s the wrong message to take,’” said a senior Treasury official, detailing the months of work they have spent crafting sanctions against Russia.
As top US military officials in the Pentagon watch the hot war unfold in Ukraine, a new era of economic warfare is underway. It’s being waged by government lawyers, accountants, economists and finance whizzes toiling away in secure rooms lining the bowels of the Treasury Building and in the quiet confines of offices accessible by an underground tunnel just across Pennsylvania Avenue.
“They’re like our nerd warriors,” one senior administration official said with a bemused grin.
Compared with splashy moves like seizing oligarchs’ yachts and sanctioning President Vladimir Putin’s alleged girlfriend, the complicated maneuvers intended to destroy the pillars of Russia’s economy have come with relatively little fanfare.
As the Kremlin has moved to tout signs of economic stability, Treasury officials have taken more aggressive actions, including a series of subtle steps late last month that froze trading in Russian bonds and will almost certainly lead Moscow to default on its government debt for the first time since the Russian Revolution in 1918.
Still, Putin continues to suggest the sanctions aren’t working, saying in a speech on Friday that the West’s attempts to “crush” the Russian economy “were not successful.”
“There’s been a lot of energy to say this is all artifice,” said Andrea Gacki, director of the Treasury Department’s Office of Foreign Asset Control, which serves as the tip of the spear for US economic statecraft.
“But it’s all smoke and mirrors,” Gacki said in an interview from her office overlooking Lafayette Square. “All the real indicators show weakness.”
Just before midnight on February 23, not long before the first Russian missiles began landing across Ukraine, Elizabeth Rosenberg sat staring at a computer in the bowels of the Treasury Department, urgently typing away.
As the top Treasury official for terrorist financing and financial crimes, Rosenberg had spent weeks in an unrelenting relenting cycle of shuttling between secure rooms at the Treasury Building, hustling a few hundred yards away to attend meetings at the White House or jetting off on trips to hammer out technical details in European capitals.
Now, after days of subsisting primarily on Kirkland granola bars, she was drafting a classified memo laying out final decision points and considerations for Treasury Secretary Janet Yellen to take to a National Security Council meeting just a few hours away. As Rosenberg went through her edits to the document, a close aide looked over her shoulder, eating a bag of Cheetos.
Soon, a briefer walked directly toward Rosenberg with a sobering message: the first Russian missile had entered Ukrainian airspace. A short time later, the briefer returned. Now there were more than 30 strikes recorded, displayed on a heat map for Rosenberg to see. Soon, the briefer returned a third time. There were now too many missiles to count.
“Zero day,” as US officials had labeled the day of the Russian launch in their months of preparation, had arrived.
Rosenberg rushed to put the final touches on the memo that would serve as the basis of what would become the most expansive sanctions package ever to target an economy of Russia’s size. After months of arduous planning, overseas diplomatic negotiations and countless hours of technical discussions, the time had come to launch.
The Treasury Department’s sanctions experts are overseen by its Office of Terrorism and Financial Intelligence. Created after 9/11 to centralize the effort to disrupt terrorist networks and their financiers, the office has since evolved into a central tool of the government’s national security apparatus.
Unlike many of its foreign counterparts, Treasury has its own built-in intelligence apparatus in the Office of Intelligence and Analysis, which means top Treasury officials have access to the same classified intelligence that drives decision-making for US military operations.
Over the years, the Office of Terrorism and Financial Intelligence’s mission evolved, from targeting terror networks, international crime syndicates, and weapons dealers to rogue states and more dynamic threats to US national security.
Nothing, however, has matched the effort deployed since Russia’s invasion of Ukraine.
Of the hundreds of people working inside the office, roughly two-thirds of them have been tasked to dealing with Russia, according to an official familiar with the unit’s work.
Along with examining classified intelligence, Treasury officials pore over an array of raw economic and market intelligence to guide and inform their strategies, a rarity in the sanctions world, which traditionally focuses on the closed-off or isolated economies of malign actors.
Combined with the unparalleled cooperation across the coalition of Western allies, officials say they have an unprecedented real-time view of Russia’s activities.
“Because there’s a significant prioritization of Russia concerns across all these jurisdictions in the world, what we have is a huge acceleration in our operational capacity to work together, to share information, to share intelligence and law enforcement information,” said Rosenberg, who has been part of the team of US officials traversing the globe since the invasion to shore up compliance and enforcement of the sanctions with governments and the private sector.
Inside Treasury’s Office of Foreign Asset Control, several officials on Gacki’s team are focused solely on finding and preparing targets inside Russia. The targeters, as they are called, track companies and supply chains, yachts and planes, foreign currency reserves and offshore assets. Then they figure out the most devastating way to destroy them.
“It’s a very target-rich environment, and you can’t say that about every sanctions program,” said Gacki, who has been with the office since 2008 and twice been awarded Treasury’s highest honor for service.
For Gacki’s team and their colleagues inside Treasury, the pace of the work has been relentless for months. Each new round of sanctions, going faster and farther than any before, has immediately been followed by new directives to find new targets, new options, new strategies to create pain for Putin.
“I think the thing people here felt very keenly was that this was our moment – that this was where we could actually make a difference in what we’re doing,” Gacki said. “It very much inspired people to new heights.”
Despite initial public boasts from President Joe Biden and others, Gacki and her staff always expected some of the most powerful of the sanctions imposed would bite would over time. While extraordinary in their scale and carefully calibrated targets, they’ve never been attempted against an economy of Russia’s size and integration.
The key ingredient was always going to be patience.
That presents a complex reality for trans-Atlantic leaders now grappling with rising inflation and soaring fuel costs – an acute threat to their domestic political fortunes and, potentially the united front painstakingly pieced together by US officials in the months before the invasion.
“What people need to remember is these types of sanctions are intended to give you leverage over time,” said Daniel Glaser, who was a top Treasury official in the administrations of George W. Bush and Barack Obama. “They don’t work overnight.”
Still, the damage inflicted is starting to come into view.
Critical supply chains in Russia have been shattered. Hundreds of Western companies have pulled out of the country. Export sanctions have strangled Russia’s access to essential technology and components necessary for entire industrial sectors. Tank factories have shut down. Missile manufacturers are scrambling for critical components and parts. An economy projected to grow in 2022 is now on a path to contract by as much as 15%.
In rare moments of candor, some Russian officials have provided glimpses into the economic damage taking hold.
Russian Minister of Transport Vitaly Savelyev said in May that the sanctions “have practically broken all the logistics in our country.”
Russia is by no means the first country that’s been sanctioned by the US. But compared with North Korea, Venezuela or Iran, it is far more integrated into the global economy, which has made this latest round of sanctions all the more destructive.
“I think that’s what people are missing – the fact that Russia has to rip apart 30 years of integration into the global economy,” said Elina Ribakova, the deputy chief economist at the Institute of International Finance.
Putin has spent years building up his defenses, amassing hundreds of billions in foreign currency reserves, bringing much of Russia’s industrial base under state control and selling Russia’s vast energy resources to the world. Putin also has something of a secret weapon: a 58-year-old Russian economist named Elvira Nabiullina, who has been leading Russia’s central bank since 2013.
US officials grudgingly acknowledge that Nabiullina has done an effective job managing Russia through this initial phase of the sanctions, just as she did in 2014 after Putin’s Crimea annexation triggered a much less severe round of sanctions from the West.
This time, Nabiullina has deftly raised interest rates, imposed capital controls, and sought holes and workarounds to float an economy under siege. As much as anything, those moves have bolstered the ruble in recent months after it went into free fall during the first days of the invasion.
“A good central banker can do things to buoy the currency,” one senior US official said. “They have a very good central banker. We knew that then; we know it now.”
Among Biden administration officials, Nabiullina is seen as perhaps the most effective of all of Putin’s top lieutenants.
“This is an experienced central banker who is making it look like the Russian economy is strong when it’s not,” said Gacki.
Treasury has something of its own secret weapon in Yellen. As Federal Reserve chair between 2014 and 20018, Yellen overlapped for a period with Nabiullina, and while the two have no relationship beyond a brief interaction or two at conferences, Yellen is keenly aware of her background and work.
More critical, however, was Yellen’s unrivaled understanding of central banks themselves, which led to her deep involvement in the front end of the design of those sanctions. As negotiators worked through potential options, Yellen gave her views on what would have the most acute and direct impact, according to a source familiar with the highly sensitive negotiations.
Yellen also delivered a critical message to her foreign counterparts as they considered the dramatic escalation to their sanctions plans. The US had information that Russia was urgently attempting to move assets in order to get out in front of any potential sanctions, the source said. Speed was of the essence.
Still, as stunning as many officials viewed the scale of the initial strike on Russia’s economy, Nabiullina’s ability to engineer the appearance of stability has drawn fresh questions about the true reach of the sanctions touted by leaders across the trans-Atlantic alliance.
“The effects of sanctions so far are less acute than we feared,” Nabiullina told reporters this week in Moscow shortly after the central bank lowered interest rates back to their level before the invasion.
But she also alluded to the uncertainty that lies ahead in an economy forced into a rapid reorientation.
“It shows the ability of companies to adapt,” Nabiullina said of the central bank’s improved economic outlook. “But it’s premature to say that the full effect of the sanctions has materialized.”
That’s exactly what the sanctions experts at the Treasury Department argue. And a look underneath the surface, they contend, reveals real and lasting damage designed to accelerate over time.
Gacki and her colleagues also believe there are limits to what Nabiullina can do to stanch the bleeding. They intentionally built in the equivalent of triggers – plus the authority to pull them without even launching new rounds of sanctions – to undercut the very actions they viewed as likely. They’ve observed each response and methodically, and over a period of months, taken steps to counter Russian actions and tighten the vise on key economic levers.
New sanctions in recent weeks have targeted things like accounting and management consulting services, coming as US officials say they’ve tracked Russian efforts to set up shell companies and third-party vehicles as workarounds to obtain urgently needed components for their defense industry.
“There’s a cat and mouse aspect to this,” said Glaser, the former Treasury official. “Your adversary is responding and then you have to respond to them.
The debates on how to escalate the economic pain continue inside the Biden administration.
The US has prepared secondary sanctions, which would be a significant escalation, but to this point it hasn’t pulled the trigger amid internal debates weighing economic consequences and fracturing alliances, according to people familiar with the deliberations.
Lists of top finance, political and military officials who haven’t been sanctioned yet are also ready, people familiar with the matter say, with some subject to intensive interagency debates weighing complex realities like whether pulling the trigger will harm specific markets or the jobs of US workers.
Treasury officials have been quietly, but deeply, engaged with their European counterparts to craft a mechanism to cut back Russia’s soaring oil and gas revenue, officials say. There has been a particular US focus on the technical aspects of EU countries banding together to impose a price cap on Russian revenue.
While the near-term effect of a sovereign debt default will likely be limited, the move will all but sever Russia from international financial markets – locking in acute isolation just as Western sanctions begin cutting Russia off from access to critical components like microchips.
It will also send a powerful political message meant to counter Putin’s claims of weathering the sanctions storm – and undercut his onetime boast that Russia always pays its debts.
“Basically, we’re trying to poke holes in a Russian public narrative that keeps trying to say that it’s strong when it’s not,” a senior Treasury official said. “It’s kind of wanting to pull back the curtain and say really, the Russian economy is not healthy.”