The West imposed some of the strongest-ever financial sanctions on Russia

The sanctions include cancelling a major gas pipeline, cutting off Russian banks, export controls, and more

Today's expression: Change of heart
Explore more: Lesson #450
March 14, 2022:

After Russia invaded Ukraine, the West imposed a predictable – and usually ineffective – round of financial sanctions on Russia entities like banks, businesses, and government officials. But then, the US and the EU upped the ante and coordinated some of the strongest-ever financial sanctions on Russia. But the biggest possible sanction remains off the table. Plus, learn what it means to have a “change of heart.”

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How the West coordinated financial sanctions on Russia

Lesson summary

Hi everyone, it’s Jeff and this is Plain English, where we help you upgrade your English with current events and trending topics. The full lesson, including the transcript, is available online at PlainEnglish.com/450.

Coming up today: Financial sanctions are a tool that the world’s most powerful economies can use to enforce international norms. Sanctions are used to force smaller economies to change their behavior. They don’t always work; in fact, they rarely cause major changes among sanctioned countries.

Nevertheless, the major western economies have banded together to sanction Russia. There are reasons to be optimistic: the world’s biggest economies have never before created a financial sanctions package this strong, and this coordinated. There is a chance that this sanctions package, imperfect and incomplete as it is, might really work.

In the second half of the lesson, we’ll talk about Germany’s new attitude on the global stage; that will be the example I’ll use to show you the English expression “change of heart.”

US, EU coordinate strongest-ever financial sanctions

After Russia launched its invasion of neighboring Ukraine, and after it became clear that this was a full-scale air and ground war, western governments had to respond. America, as a nuclear power, ruled out the possibility of direct military confrontation with Russia, another nuclear power. No European country was in any position to fight directly in Ukraine either. But neither could the U.S., Europe, and allies like Australia, Canada, and Japan sit by and do nothing either . That left financial sanctions.

Financial sanctions are a relatively recent development. It’s a catch-all term to describe a series of measures used to withdraw normal terms of trade from another country. In simple terms, if the U.S. sanctions a person or company, American companies can’t, by law, do business with that person or company. Over 10,000 people or entities have been sanctioned by the U.S. government.

Big economies use sanctions to punish smaller economies by implementing wider measures against a whole country. They do this by blocking access to the critical financial tools that smaller economies rely on. In theory, sanctions should allow bigger economies to force smaller countries to stop doing certain things, like violating human rights or developing nuclear weapons.

There are a few success stories. Financial sanctions were used successfully to dissuade Libya from developing chemical and biological weapons in the late 1990s and early 2000s. The problem is, that was the exception. Sanctions rarely work.

Yes, financial sanctions do inflict a certain amount of pain on a smaller economy. But there are several reasons why they don’t usually achieve their intended outcomes. First, there are often many ways around sanctions. If the U.S. says, for example, that American companies can’t do business in Cuba, Cuban companies can go to almost the whole rest of the world to get what they need. Sanctions have had only limited success in Cuba, Iran, and Syria.

Second, the sanctions often inflict a lot of pain on ordinary citizens by ruining the economy. That’s a problem for elected leaders, but many sanctioned governments simply don’t care about what happens to ordinary citizens. The sanctions, then, punish the innocent citizens of a country without changing the behavior of the government. This is the tragic case of the sanctions against Venezuela.

Finally, western governments have taken a light tough with sanctions, so that they inflict some limited pain, but not enough to really make a difference. As Russia escalated its international aggression from 2008 onward, it found that it could comfortably live with the limited financial sanctions imposed by the west.

The initial round of American and European sanctions against Russia appeared to be following this same ineffective path. The U.S., U.K., and Europe all took different measures to punish a handful of Russian entities like banks, businesses, and government officials. But this was uncoordinated and unlikely to really hurt.

The first sanctions were also full of exemptions. In some of the most unprincipled moves of the crisis, Italian luxury goods makers and Belgian diamond merchants successfully argued to be exempted from sanctions , so they could continue to make the Moscow rich look beautiful.

But then, everything changed on February 27. The European Union, led by new German Chancellor Olaf Sholz , had a change of heart . The EU was now all-in on sanctions. The U.S., Canada, Australia, Japan, U.K., and Switzerland all worked with the EU to unleash the most punishing set of financial sanctions ever.

Here’s a partial list of measures. First, Germany cancelled the Nord Stream 2 gas pipeline, a decade-long project that was to open shortly. The company that operates the pipeline had to lay off its staff and now might face bankruptcy.

Most Russian banks were also cut off from SWIFT, the payments system that allows international banks to communicate with each other. This will leave many banks unable to process cross-border transactions.

Export controls will prevent Russia from importing machinery, parts, and microchips for its military and technology sectors. This not only applies to goods originating in the west, but also to any item that has American technology embedded in it. This will choke off much of Russia’s manufacturing sector. The E.U. and U.S. both closed their airspace to Russian aircraft, effectively cutting off travel between Russia and the west.

Russia has a class of oligarchs: wealthy businesspeople who made their money in close coordination with the government. Switzerland, famously neutral and famously protective of its banking sector, agreed to freeze assets of oligarchs on the sanctions list—a previously unthinkable prospect.

In addition to their Swiss bank accounts, the oligarchs have luxury apartments in London, New York, and Miami; they have mega yachts in ports around the world; and their kids go to exclusive boarding schools and universities in Europe, America and Canada. All of that will be targeted. Joe Biden made a point to say in his annual address to Congress that America will be going after the “ill-begotten” gains of the oligarchs around the world.

The hardest-hitting sanctions, though, were slapped on Russia’s central bank. Russia’s central bank was banned from doing business with major international banks, limiting its ability to stabilize the Russian currency, the rouble.

Russia has the world’s fourth-largest foreign-currency reserves. Reserves are simply money that’s held in either gold or stable foreign currencies, like U.S., Canadian, and Australian dollars; euros; pounds; yen; and Chinese yuan. Countries hold reserves of foreign currency so they can prop up the value of their own currency in the event of a rapid decline in the exchange rate. It’s complicated, but reserves of foreign currency can protect a country’s economy in a crisis.

Western countries grouped together to freeze those reserves. So even as the value of the rouble falls, Russia can’t sell its foreign dollars or euros to stabilize the value of its own currency.

In the second week of the war, Joe Biden announced that America would not directly buy oil or gas from Russia, and many global oil conglomerates have voluntarily stopped buying from Russia. However, this is only a partial measure. Unfortunately, the biggest possible sanction of all is off the table . Russia supplies Europe with 40 percent of its natural gas, gas that’s used to heat homes, generate electricity, and power industrial processes. Europe can’t afford to give that up. As a result, Europe continues to send Moscow foreign currency in exchange for oil and gas, even during the war.

Will this all of this work? Russia knew that certain financial sanctions were coming, and they were prepared, to a certain extent. Russia is not a democracy, so the pain inflicted on ordinary Russians is unlikely to change minds at the very top.

It’s unlikely, but it is possible. Early reports are that most experts, including those in Moscow, were surprised by the strength of the sanctions, especially against Russia’s foreign exchange reserves. A total economic collapse can’t be ruled out. That, combined with diplomacy, declining morale in the Russian military, and difficulties on the battlefield might be just enough to stop this bloody conflict one way or another.

Gas: No good options

I just hope, behind the scenes, somewhere, they are making contingency plans for Europe to get fuel from other sources next winter. Europe is scrambling to build more import stations for liquefied natural gas, but there’s only so much liquefying capacity in the world. They produce gas in Europe, but the pipelines that cross the mountains aren’t robust.

Renewables are possible, but it’s not as reliable as gas—and many residential and industrial furnaces can’t run on electricity anyway. Nuclear is a clean option, but it has a long lead time. Even before the war, inflation was already high, especially for fuel. This energy situation in Europe is going to get a lot worse before it gets better.

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Expression: Change of heart