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These steps are encouraging and indicate welcome Western awareness of the repression that continues to define the political climate in today’s Belarus. Nevertheless, there is still a sense that not nearly enough is being done by the international community to challenge the impunity enjoyed by Lukashenka and members of his regime.

These concerns were amplified recently when the largest prisoner swap between the Kremlin and the West since the Cold War went ahead without featuring any Belarusian political prisoners. Lukashenka himself was closely involved in the complex negotiations behind the exchange. The Belarusian dictator agreed to free German national Rico Krieger, who was being held in Minsk on terrorism charges, as part of efforts to convince the German government to release Russian secret service assassin Vadim Krasikov.

Many have questioned why prominent Belarusian pro-democracy leader Maria Kalesnikava, who had previously lived for many years in Germany, was not also freed as part of the trade. Kalesnikava was jailed amid nationwide protests following Lukashenka’s rigged 2020 election. One of the figureheads of the anti-Lukashenka protest movement, she has reportedly been suffering from deteriorating health for the past year and a half. Similar questions were also asked regarding fellow political prisoners Ales Bialiatski, who was awarded the Nobel Peace Prize in 2022, and Ihar Losik, a prominent blogger and journalist for RFE/RL’s Belarus Service.

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Four years since the sham ballot that sparked the biggest protests of Lukashenka’s three-decade reign, he appears more comfortable than ever with the idea of holding large numbers of political prisoners as hostages. This must change. With no regime-linked Belarusians in Western custody who are anything like as valuable as Krasikov was to Putin, other approaches are clearly needed to increase the pressure on Lukashenka and convince him to release political prisoners.

Economic measures can be used to target the largely state-controlled Belarusian economy, but this is more likely to have an impact as part of a long-term strategy. One alternative approach would be to engage third parties such as China, which has considerable influence in Minsk. Earlier diplomatic efforts succeeded in securing the release of US citizen Vital Shkliarau, indicating that negotiations of this nature can yield results.

Finding the right formula to keep up the pressure on individual members of the Lukashenka regime is crucial. At present, comparatively few of those involved in repressive measures are subject to international sanctions. For example, I was recently sentenced in absentia by a Belarusian court to ten years in prison alongside nineteen other independent Belarusian analysts and journalists. The judge in our case has a history of handing down lengthy sentences to prominent opposition figures, but has yet to be sanctioned.

During the past four years, only 261 Belarusians have been placed on the EU sanctions list. While the work of sanctions teams is commendable, their capacity is limited. Past experience has also demonstrated how sanctions can be sabotaged, as was the case in 2020 when Cyprus was accused of blocking the introduction of new restrictions against Belarus. There is also room to improve cooperation between Western partners, with a view to developing a more unified approach to sanctions.

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Strikingly, the quantity of Belarusians currently facing Western sanctions is far less the almost 1,400 political prisoners in the country’s prisons. According to human rights groups, tens of thousands of Belarusians in total have been detained in recent years for political reasons. Behind these arrests and prosecutions stands an army of enablers including government officials, security personnel, and judges. The vast majority of these people have yet to be held accountable by the international community for their role in the repressive policies of the Belarusian authorities.

There are some indications that Western policymakers are looking to broaden the scope of sanctions and increase individual accountability. However, while the recent round of sanctions included new measures targeting officials responsible for regime propaganda, other representatives of the Belarusian state media received international accreditation to cover the Olympics in Paris.

The West already has powerful tools at its disposal that can realistically make Belarusian officials consider the consequences of their actions. Standard personal sanctions such as travel bans and asset freezes go far beyond mere symbolism and are capable of creating problems that can have far-reaching practical implications in everyday life. However, more leverage is required in order to maintain the pressure on the regime and on the individuals responsible for specific abuses.

Looking ahead, the West needs to make the issue of political prisoners far more uncomfortable for the entire Lukashenka regime. There is no single solution to this problem; instead, a range of options should be explored including broad economic restrictions, personal sanctions, and diplomatic pressure. Crucially, sanctions should be applied to thousands of officials rather than just a few hundred. The end goal must be to significantly raise the costs of the repressive policies pursued by Lukashenka and all those who enable his regime.

Hanna Liubakova is a journalist from Belarus and nonresident fellow at the Atlantic Council.

Further reading

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The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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Based on this feedback, this blog series was started to highlight important information about targeted human rights sanctions as they relate to the Islamic Republic of Iran; major updates on Iranian perpetrators who have been sanctioned for human rights abuses and why; and any other information that may be relevant to affected communities. Input is welcomed from readers, particularly in Iranian civil society, for questions and topics that should be addressed.

This page will be subsequently updated with a Persian translation of the post. 

Background

Despite the numerous sanctions issued against individuals linked to the Islamic Republic of Iran, an “illicit global network of shell companies, banks, and exchange houses” allows many of them to evade the consequences. This is partly due to the complications involved in identifying the true owner of an asset, the “beneficial owner.” A beneficial owner is a natural person—i.e., an individual, as opposed to a legal person or entity—who actually owns or controls a legal entity. 

Why is transparency over beneficial ownership important?

Targeted sanctions generally—though not always—involve freezing the assets of designated individuals or entities. Identifying property, including legal entities, they own or control is, therefore, a key component of sanctions enforcement. 

Increased transparency over beneficial ownership, as well as leaked documents, have yielded examples that highlight why beneficial ownership information is critical for sanctions enforcement. Leaked documents show that Russian oligarch Roman Abramovich changed the beneficial ownership of trusts shortly after the start of Russia’s 2022 full-scale invasion of Ukraine—seemingly to avoid asset freezes. His seven children are now the beneficial owners of at least $7 billion. When Luxembourg established a public database of beneficial ownership in 2019, investigators used it to map the local activity and businesses of Calabrian crime group ‘Ndrangheta; uncover additional evidence of allegedly corrupt dealings undertaken by former-Argentinian President Mauricio Macri’s family while he was in office; and identify the beneficial owners of properties throughout Europe bought by companies registered in Luxembourg, such as those of an Indonesian businessman accused of human rights abuses and tax evasion.

Such transparency can help investigators identify Iranian-linked assets globally, but especially in jurisdictions where they are known to have traveled. While there are critical privacy considerations that must be taken into account,  obstacles to accessing the information must be limited to ensure as much transparency as possible. This can ultimately increase the effectiveness of targeted sanctions through the identification of all relevant assets which can be promptly frozen, and, where the appropriate legal standards are met, seized.

When do jurisdictions restrict the legal entities of designated persons?

Asset freezes vary depending on the jurisdiction, but they generally prevent designated persons from accessing their property, such as bank accounts, real estate, and other real property, and ban others from engaging in financial transactions with those designated persons. When it comes to legal entities—which may have multiple owners and stakeholders, only some of whom are designated—jurisdictions generally require that designated persons’ ownership or control reaches a certain threshold.

• Australia: The Australian government prohibits dealing with “controlled assets,” which are those owned or controlled by a designated person or entity, but there does not appear to be public guidance or a definition for determining ownership or control.
• Canada: When a property is deemed controlled by a designated person, Canadian persons are prohibited from “dealing in” it. In 2023, Canada amended its Special Economic Measures Act and Justice for Victims of Corrupt Foreign Officials Act to include provisions under which a designated person is considered to control an entity when it meets one of three criteria: if they have at least 50 percent ownership or voting rights; they have the direct or indirect ability to “change the composition or powers of the entity’s board of directors”; or, it “is reasonable to conclude” that they are directly or indirectly able to direct the entity’s activities. 
• European Union: If an entity is owned or controlled by a designated person, then the funds and economic resources of that entity must also be frozen. Ownership involves possession of over 50 percent “proprietary rights” or a majority interest. Control is determined according to a non-exhaustive list of criteria, which includes the right or exercise of power “to appoint or remove a majority of the members of the administrative, management or supervisory body”; the right to use all or part of the entity’s assets; and the sharing of financial liabilities of the entity, or guaranteeing those liabilities. 
• United Kingdom: An entity is subject to an asset freeze and restrictions on “some financial services” when it is owned or controlled, directly or indirectly, by a designated person. Like Canada, the United Kingdom requires one of three criteria to be met to establish ownership or control: when the person directly or indirectly holds more than 50 percent of the shares or voting rights; when they have the right to directly or indirectly appoint or remove a majority of the board of directors; or when it’s “reasonable to expect” the person would be able to “ensure the affairs of the entity are conducted in accordance with the person’s wishes.”
• United States: The US government uses the “50 Percent Rule”: when one or more “blocked” (i.e., designated) persons own an entity “by 50 percent or more in the aggregate,” then that entity is itself considered blocked. While the United States does not evaluate control under this rule, it may designate the entity itself if it is determined to be controlled by a designated person.

How are jurisdictions changing beneficial ownership frameworks?

To prevent designated persons from hiding their ownership of assets, jurisdictions have strengthened corporate transparency and reporting requirements on beneficial ownership. The Financial Action Task Force (FATF)—an intergovernmental organization tasked with combatting money laundering and terrorist and proliferation financing—released updated guidance on beneficial ownership in 2023. It recommended that countries establish a beneficial ownership register or alternative mechanism to document ownership information. 

• Australia: The Australian government has committed to beneficial ownership reform between January 2024 and December 2025 as part of its Third Open Government Partnership National Action Plan. This will include implementing a public beneficial ownership register, for which the Treasury previously undertook a consultation process in 2022.
• Canada: As of January 22, 2024, all corporations governed by the Canada Business Corporations Act are required to file beneficial ownership (or “individuals with significant control,” or ISC) information. Businesses have been required to maintain their own ISC registers since June 2019 but were not previously required to file them with the government. Some of the information in the filings—such as full legal names, the description of the significant control, the dates of significant control, and certain addresses—will be available through an online search on Corporations Canada, the country’s federal corporate regulator.
• European Union: The EU uses the Beneficial Ownership Registers Interconnection System (BORIS) to link the national registers of member states Iceland, Liechtenstein, and Norway. This was set up in line with a 2015 European Parliament and Council directive, as amended in 2018. Access to some information is restricted according to national laws. In November 2022, the Court of Justice of the European Union annulled provisions of a directive that granted public access to beneficial ownership information. A new version of the directive would instead grant access to the register to persons with a “legitimate interest” in the beneficial ownership information, like journalists or civil society. In January 2024, the European Council and Parliament reached a provisional agreement that includes provisions to make beneficial ownership rules “more harmonised and transparent,” for example, by clarifying rules to prevent beneficial owners from “hiding behind multiple layers of ownership of companies.” Notably, the beneficial ownership threshold was set at 25 percent.
• United Kingdom: The UK has three registers: for “people with significant control,” for trusts, and for overseas entities. Overseas entities were required to register with Companies House, the country’s corporate regulator, and tell them who the beneficial owners or managing officers were by January 21, 2023. Still, in February 2023, it was reported that almost half the companies required to do so had not. An act in the final stages of legislative approval will include reforms to Companies House, such as identity verification for certain personnel, more effective investigation and enforcement powers, and enhanced personal privacy protections.
• United States: Effective January 1, 2024, as required under the 2021 Corporate Transparency Act, certain “reporting companies”—including US-based corporations and limited liability companies, as well as foreign companies registered to do business in the US—must report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). This information will be stored in the Beneficial Ownership Information database. The Department of the Treasury issued a final rule that makes money services businesses, casinos, and “other non-bank financial institutions that have anti-money laundering obligations” eligible for access to the beneficial ownership registry. 

Celeste Kmiotek is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

Lisandra Novo is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

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China’s direct exports to Russia since Moscow’s invasion of Ukraine have fallen only twice, both during times Chinese firms feared sanctions risks. Chinese exports first dipped in the initial days of Russia’s invasion in early 2022 amid sanctions concerns, but Chinese corporates reestablished these links, often at the urging of Chinese officials. Second, China-to-Russia shipments have declined in recent months, likely owing to stricter Western sanctions imposed in December 2023 and to Lunar New Year production pauses. This downtick is likely only temporary, and the bilateral relationship at the highest level remains strong, as the meeting between Chinese leader Xi Jinping and Russian President Vladimir Putin in Beijing in May indicates.  

Chinese imports from Russia have risen consistently throughout the conflict, largely owing to surging global commodity prices and the redirection, whenever possible, of Russian hydrocarbon exports from Europe to China.

Russia’s crude oil exports to China rose significantly after Moscow launched its full-scale invasion in February 2022. Still, Russia’s exports of other mineral fuels to China—such as natural gas, coal, and other hydrocarbons, including diesel—have grown more rapidly in percentage terms. Pipeline natural gas trade increased on the Power of Siberia pipeline as upstream production ramped up, while Russia’s coal exports to China also rose sharply. 

While Russia’s exports help finance its war effort, its imports of industrial goods are vastly more important for sustaining the economic, political, and military dimensions of its war effort, at least in the short term. Russia’s imports prevent shortages, maintain political support for the war by stabilizing living standards, and, in some cases, facilitate military capabilities. China’s exports to Russia, including of machinery, vehicle-related items, and dual-use technologies, have underpinned the Kremlin’s ongoing war effort.

Chinese automobile manufacturers, due to a mixture of massive subsidies and genuine innovations, have become global exporters. China has essentially replaced the West in vehicle trade across Russia, Central Asia, and Belarus, as a comparison of each country’s total 2021 imports versus China’s 2023 exports to those same countries suggests.

Vehicle imports by country

Russia receives Chinese vehicle-related shipments both directly and indirectly, via transshipments from third countries. While Kyrgyzstan routinely undercounted imports even prior to the war, it is not spending a quarter of its gross domestic product on auto imports from a single country. Additionally, Kazakhstan reported importing nearly $7.8 billion in autos from all sources in 2023, more than double what it imported in 2021. Many Chinese vehicle-related exports notionally bound for Central Asia are in fact headed to Russia. 

Chinese vehicle-related direct and indirect exports to Russia seem to be significantly bolstering the Kremlin’s war effort. Some Chinese-made vehicles, such as excavators, have been employed directly on the front lines. In most cases, however, Chinese vehicle-related items serve as logistic enablers, allowing Russia to avoid bottlenecks and repurpose its existing truck fleet to the front lines.

Trucks, which ease goods shortages and bottlenecks for the civilian sector and enable battlefield logistical support, are illustrative. In 2021, Russian total imports of heavy-duty trucks reached 12,785 units, for a total cost of $1.04 billion, with more than half of these shipments derived from Western sources. By 2023, conversely, China alone exported 42,562 units of these heavy-duty trucks to Russia, to the tune of $2.1 billion. Russia’s surging trucking imports are driven by wartime needs, as well as the collapse in domestic auto production, which has only recently stabilized. Here, it has found a willing supplier in China.

Chinese firms are also enabling Russia to maintain its existing civilian and military vehicle fleet. Chinese exports of vehicle spare parts to Russia and its neighbors nearly tripled since 2021, rising from $383 million to $1.12 billion. Again, while some fraction of this trade was commercial, it’s noteworthy that much of it—more than $415 million in 2023—was routed through Kyrgyzstan, which is importing 642 percent more than it did in 2021. Russia’s access to Chinese-made vehicle spare parts may have removed severe operational constraints that otherwise would have limited its recent military offensives. 

While China’s direct and indirect vehicle-related exports to Russia have been instrumental for the war effort, other exports have been even more critical for Russia’s defense industrial base. The United States, European Union, United Kingdom, and Japan imposed strict export controls on the “Common High Priority List,” a list of fifty products that Russia may seek to obtain for use in its military sector. Since then, Russia has sourced these materials directly from China and, almost certainly, from procurement agents across Central Asia. The extent of Western companies’ participation in this trade, especially via Central Asia, is an important question for policymakers to consider.

Chinese exports to Russia of high-priority goods exhibited the same pattern seen throughout the conflict. First, there was a surge in exports in the last months of 2021, due to year-end production surges (and potential stockpiling by Moscow); followed by a sharp drop in the first months of the war; a rise throughout mid-2022, as Beijing began to back Moscow’s war effort more vigorously and openly; and a decline beginning at the end of 2023, due to stricter Western sanctions (as well as the Lunar New Year).

Conversely, a look at China’s exports of dual-use goods to Central Asia and Belarus shows a nearly continuous increase since the war started.

Some of these export shipments could be legitimate. On the other hand, it is very prudent to examine if China’s shipments of dual-use goods to Central Asia and Belarus, which more than doubled in 2023 from the prior year, are simply being re-exported on to Russia. Western sanctions officials should continue to monitor Chinese dual-use exports to third-party countries, especially in Central Asia, that may serve as transshipment points and evaluate these transactions on a case-by-case basis. 

In sum, trade between China and Russia has risen sharply since the beginning of Moscow’s full-scale invasion of Ukraine, facilitating the Kremlin’s war effort. Direct trade, including in vehicles, machinery, and dual-use components, aids Russian forces in Ukraine and eases shortages in the Russian economy. Indirect trade, especially via Central Asia and Belarus, serves as a supplement for the already-considerable commercial ties between the world’s two most powerful autocracies. When examining China-Russia trade, analysts must consider the totality of their interactions, including indirect linkages via Central Asia.

Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center and its Indo-Pacific Security Initiative. He is also an editor of the independent China-Russia Report. This analysis reflects his own opinion.

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Uno, due, tre. As the Group of Seven (G7) summit kicked off Thursday in Apulia, Italy, US President Joe Biden presented three big steps to help Ukraine in its ongoing fight against Russian aggression. First, G7 leaders agreed to send Ukraine fifty billion dollars that will be paid for by future interest from blocked Russian assets. Second, Biden and Ukrainian President Volodymyr Zelenskyy signed a bilateral, ten-year security agreement. Third, a raft of new sanctions on Russia, unveiled Wednesday, are intended to further isolate Russia from the global financial system. Below, Atlantic Council experts dig into what these three steps mean and will do.

• Charles Lichfield (@clichfield1): Deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center
• John E. Herbst (@JohnEdHerbst): Senior director of the Atlantic Council’s Eurasia Center and former US ambassador to Ukraine
• Ian Brzezinski (@IanBrzezinski): Senior fellow at the Atlantic Council’s Scowcroft Center for Strategy and Security and a former US deputy assistant secretary of defense for Europe and NATO policy
• Kimberly Donovan (@KDonovan_AC): Director of the Economic Statecraft Initiative within the GeoEconomics Center and a former US Treasury official

From Russia with interest

• On the immobilized Russian assets, considering that the G7 “was acrimoniously divided over what to do as recently as February, this is an extraordinary achievement,” says Charles, who has been at the forefront of research on this issue. Moreover, he adds, “we should appreciate how elegantly today’s compromise navigated the red lines of France, Germany, and other European Union member states,” all while providing a “game-changing amount.”
• The Kremlin is “fulminating that it will strike back by expropriating Western assets in Russia,” says John. “Maybe,” he adds, but that would cause more long-term headaches for Moscow as “Russia needs Western investment far more than Western investors need Russia.” 
• John lauds the “superb work” of the Biden administration on this deal, but says that it should now push forward on a plan to confiscate all of the Russian assets, totaling nearly $300 billion, for Ukraine’s use. “While we should celebrate this day’s accomplishment, we must not rest on our laurels.”
• Charles, meanwhile, argues: “Let’s take the win and accept that confiscation remains off the table until a multilateral solution can be found.”

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An indefinite ‘bridge’ to NATO?

• The new US-Ukraine security agreement has “much good in it,” says Ian. But within the mention of the bilateral deal being a “bridge to Ukraine’s eventual membership in the NATO alliance,” there are “extensive inferences that Ukraine is far from ready for NATO membership.” He adds, “Nothing is further from the truth. This has to be most disillusioning to Ukraine.”
• “To reverse this disillusionment and convince Ukraine that this bridge to NATO is not a route to indefinite delay, the Alliance must take tangible steps to integrate Ukraine into its operations and decision making,” says Ian.
• Specifically, Ian adds, that means detailing Ukrainian personnel to NATO headquarters and giving it observer status at the North Atlantic Council, just as Sweden and Finland had while their memberships were pending. He points out that Ukraine has much to share with the Alliance in this capacity: “No country has more experience and expertise to share when it comes to fighting Russia.”

Sanctions squeeze

• The US Treasury’s latest round of sanctions targeted critical aspects of Russia’s financial infrastructure and “is already having an effect,” says Kim, as Russia’s central bank and stock exchange halted trading in US dollars and euros.
• “The havoc created in Russia’s financial markets by this week’s new US sanctions is just the latest indicator of who has the whip hand in the economic relationship between Russia and the West,” says John. 
• The US Treasury’s expansion of secondary sanctions from those dealing with Moscow’s military industrial base to the wide range of Russia-related sanctions is also notable, explains Kim. “This means that banks that are still transacting with sanctioned Russian entities in places such as China and India are exposed to the risk of secondary sanctions.” 
• Furthermore, the US Treasury clarified that the foreign branches of designated Russian banks, such as VTB in China and India, are sanctioned. The Atlantic Council’s GeoEconomics Center called out this sanctions gap in the latest edition of the Russian Sanctions Database published in May, Kim notes. “This action should restrict how Chinese companies do business with Russia, but we’ll have to see, as much of the transactions occur in renminbi, not US dollars.”

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Click to jump to an expert analysis:

John Herbst: Putin’s bad late spring continues

Charles Lichfield: The beauty of compromise

Daniel Fried: After some wobbling, this was a week of solid Western backing for Ukraine

Rachel Rizzo: Amid G7 political uncertainty, Meloni is emerging as a bulwark of support for Ukraine

Ian Brzezinski: The US-Ukraine security deal can’t just be a bridge to indefinite NATO delay

Kimberly Donovan: New US sanctions are already impacting Russia—will China feel them too?

Olga Khakova: Ukraine’s allies should keep up the momentum to rebuild its energy sector

Putin’s bad late spring continues

Good news arrived from Italy today because of the superb work of the Biden administration. The G7 finally agreed to Deputy National Security Advisor Daleep Singh’s ingenious initiative to offer Ukraine this year a fifty-billion-dollar-low interest loan collateralized by frozen Russian state assets. US Treasury Secretary Janet Yellen’s strong intervention with reluctant G7 partners­—France, Germany, Italy, and Japan­—helped turn this initiative into G7 policy, which is critical for Ukraine as it fights intensifying Russian attacks on its energy infrastructure. This loan follows the renewal of US aid, the prompt dispatch of US war materiel to Ukraine after the renewal, the decision by the United States and several of its allies to permit Ukraine to use their weapons in Russia, and the subsequent halting of Moscow’s offensive in the north. In other words, Russian President Vladimir Putin’s bad late spring continues. This latest blow to the Kremlin underscores how important strong US leadership can be.

This leaves Putin’s coterie fulminating that it will strike back by expropriating Western assets in Russia. Maybe, but prudent firms­—like France’s Total­—have already written off investments in Russia; and if Russia wants to further mortgage its future by taking this step, it will make even more unlikely the return of foreign capital after its aggression in Ukraine flops and it tries to rejoin the community of nations. Put another way, Russia needs Western investment far more than Western investors need Russia. The havoc created in Russia’s financial markets by this week’s new US sanctions is just the latest indicator of who has the whip hand in the economic relationship between Russia and the West.

This tactical victory against Russian aggression is sweeter because it is also a defeat for Putin’s partner, Chinese leader Xi Jinping, who tried to bully the reluctant G7 members to deter them from embracing this policy. It might also provide a lesson to India, Saudi Arabia, Indonesia, and others who needlessly embarrassed themselves by supporting this failed Chinese effort.

While we should celebrate this day’s accomplishment, we must not rest on our laurels. The Biden administration should follow up its big win by building support for the initiative launched by Philip Zelikow, Lawrence Summers, and Robert Zoellick to seek the transfer of nearly all the roughly $300 billion in frozen Russian state assets to Ukraine.

—John E. Herbst is the senior director of the Atlantic Council’s Eurasia Center and a former US ambassador to Ukraine.

The beauty of compromise

The G7 has struck a deal on bringing forward the value of interest income made off Russia’s immobilized assets. Given that the group was acrimoniously divided over what to do as recently as February, this is an extraordinary achievement.

While it remains unclear exactly how, the United States will be involved. As one of the strongest supporters of the approach, Washington saw itself providing the biggest contribution to a sovereign loan of fifty billion dollars or more. But the European Union (EU) sanctions legislation, which keeps the bulk of the assets blocked, has to be renewed every six months, and the United States could not convince the twenty-seven member states of the EU to switch to a different approach. Reportedly, the United States will still now participate—though the full details of the plan have not yet been made public. Washington may use the five to eight billion dollars allegedly still in the United States to make a smaller loan, while the United Kingdom, Canada, and the EU make a bigger loan. Or perhaps the parties have agreed to keep working on a risk-sharing formula in case EU sanctions are lifted before the United States and other lenders have been paid back.

Fifty billion dollars is over half of Ukraine’s total expenditures in 2023—a game-changing amount. Still, supporters of confiscation are already calling today’s achievement “step one.” But we should appreciate how elegantly today’s compromise navigated the red lines of France, Germany, and other EU member states, while still providing a substantial amount. Let’s take the win and accept that confiscation remains off the table until a multilateral solution can be found.

—Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

After some wobbling, this was a week of solid Western backing for Ukraine

Western backing for Ukraine has firmed up in the wake of the miserably delayed vote for additional assistance by the US Congress in late April. On June 12, the United States issued its most effective sanctions against Russia in two years, a well-thought-out set of measures by the departments of Treasury, State, and Commerce that struck at Russia’s military industry; energy production; evasion of technology controls by firms in China, Turkey, the United Arab Emirates, and elsewhere; and more. One interesting measure was the expansion of authority for sanctions against non-Russian banks and other firms that support Russia’s military industry (“secondary sanctions” that European governments have loudly opposed but now seem to tacitly accept). It’s about time the United States took that step, and it needs to follow through, but it’s a welcome step all the same.

In another welcome move, the G7 has finally agreed (at least in principle) on an arrangement to use immobilized Russian sovereign assets, estimated at around $280 billion, to back Ukraine. In a swift and bold move days after the all-out Russian invasion of Ukraine in February 2022, the G7 locked down Russian assets but has ever since debated whether to use those funds to help Ukraine and, if so, how. Some argued for simply taking Russia’s money and having Russia pay directly for its war against Ukraine. But many in Europe resisted taking that step as too aggressive, even given Russia’s own aggressive war.

Extended European discussions produced a soft consensus to use the interest on the Russian assets. But that would generate only about three billion dollars per year, a sum not commensurate with Ukraine’s need. The United States came up with a creative (and complex) solution: Use twenty years’ or so worth of that interest to back funds to Ukraine, a scheme that could generate a sum of about fifty billion dollars. After much effort, the G7 has reached consensus on that plan. While details have yet to be worked out, fifty billion dollars is nothing to sneer at. The United States was right to close the deal on this compromise and also right in what seems to be its intention to use the principal, the full $280 billion.

​​In a third action, the United States and Ukraine have signed a bilateral memorandum of understanding (MOU) providing for ten years of security cooperation. This is the most recent of a series of bilateral MOUs between Ukraine and the countries supporting it in its fight for national survival. It’s not NATO membership, but the US and other security MOUs are arguably part of Ukraine’s “bridge to NATO,” as the Biden administration has put it.

Much depends on the battlefield, and the news is mixed: Ukraine seems to have halted the Russian ground offensive against Kharkiv, but the Russians could attack elsewhere. Russia is battering Ukraine’s energy infrastructure, but Ukraine has hit Russian military infrastructure in occupied Crimea and elsewhere. Still, it’s been a week of solid Western backing for Ukraine.

—Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. His last position in the US government was as sanctions coordinator at the Department of State.

Amid G7 political uncertainty, Meloni is emerging as a bulwark of support for Ukraine

As leaders from the world’s G7 countries gather in Puglia, it’s hard to ignore a few big elephants in the room. First, French President Emmanuel Macron’s trouncing in the recent European Parliament elections by Marine Le Pen’s party led to his potentially politically fatal decision to dissolve parliament. Second, German Chancellor Olaf Scholz’s Social Democratic Party faced a similar result from the center-right Christian Democrats, and a map of Germany’s European Parliament voting results shows that the country is still clearly divided between east and west, with the former solidly in the Alternative for Germany (AfD) camp. Finally, US President Joe Biden arrived in Puglia after a months-long battle on Capitol Hill to pass the latest tranche of Ukraine aid and as the November election looms. 

Who seems to be left out of all the political drama? Italian Prime Minister Giorgia Meloni, whose Brothers of Italy party took home a solid win in the European Parliament elections and who is taking the opportunity to bask in the limelight of transatlantic leadership. In fact, she said Italy is going into the summit with the “strongest government of them all.” She’s not wrong. It’s a surprising turn for Italy’s famously mercurial internal politics: Not only is she seen as a leader on the world stage, supporting Ukraine and NATO, but her leadership is also expected to hold through the entirety of her term. Meloni is using this moment to chart a new course for Italy, including by bringing leaders from outside the G7 to the summit, such as Narendra Modi of India, Cyril Ramaphosa of South Africa, and the pope for his first G7 appearance. She is also solidifying the country’s place at the center of a new relationship between the West and Africa, as well as supporting the EU’s plan to provide a fifty-billion-dollar lifeline to Ukraine using frozen Russian assets. 

Not only is this good for Meloni, but having a bulwark of support amid uncertain political futures in much of the West is good for Ukraine, too.

—Rachel Rizzo is a nonresident senior fellow with the Atlantic Council’s Europe Center.

The US-Ukraine security deal can’t just be a bridge to indefinite NATO delay

The just-announced US-Ukraine security agreement has much good in it, if the US government chooses to execute it in a manner that enables Ukraine to defeat Russia’s invasion quickly, decisively, and on Kyiv’s terms. 

However, the language presenting “a bridge to Ukraine’s eventual membership in the NATO alliance” is yet another repeat of the Alliance’s sixteen-year-old assertion that membership is not a matter of if but when—this time backed by extensive inferences that Ukraine is far from ready for NATO membership.

Nothing is further from the truth. Ukraine meets all the requirements spelled out in Article 10 of the Washington Treaty. It’s a European state. Its democratic credentials are codified in repeated elections found to be free and fair—even when subjected to Russian interference. No country has sacrificed more blood in the defense of transatlantic security in NATO’s history.

That Ukraine would sign up to such language reflects its own disillusionment in the face of US resistance to its aspirations for NATO membership—a disillusionment that was reinforced by Biden’s recent assertion to TIME that peace in Europe does not require Ukrainian membership in NATO.

To reverse this disillusionment and convince Ukraine that this bridge to NATO is not a route to indefinite delay, the Alliance must take tangible steps to integrate Ukraine into its operations and decision making. For too long, Ukraine has remained an outsider to the Alliance amid empty promises of eventual inclusion.

Ukraine should be invited to assign personnel to NATO headquarters and command structures and to sit as an observer at the North Atlantic Council, the Alliance’s top decision-making body. The latter privilege was afforded to countries such as Sweden and Finland, after they were invited to join NATO but before they became members. While that privilege gave those allies a voice in NATO deliberations, it came with no vote and no veto in Alliance decisions and no Article 5 security guarantee.

Ukraine has much to add to the Alliance in those capacities. No country has more experience and expertise to share when it comes to fighting Russia.

These proposals would resonate powerfully in Ukraine and would receive broad support across the Alliance. Even if there is resistance, just by pressing them forward, the United States, as the leader of NATO, would significantly bolster the credibility of its—and the Alliance’s—promise to fulfill Ukraine’s well-deserved transatlantic aspirations.

—​​Ian Brzezinski is a senior fellow at the Atlantic Council and a former US deputy assistant secretary of defense for Europe and NATO policy.

New US sanctions are already impacting Russia—will China feel them too?

The US Treasury’s latest round of sanctions targeted critical aspects of Russia’s financial infrastructure, including the Moscow Exchange (MOEX) and National Clearing Center, among others. These new sanctions are already having an effect. The Central Bank of Russia and MOEX halted trading in US dollars and euros in response to the announcement.

Treasury’s announcement also came with an expansion of secondary sanctions. The secondary sanctions authority that was announced in December was specific to Russia’s military industrial base. The expanded definition of secondary sanctions now includes any Russian individual and entity designated pursuant to Executive Order 14024, which accounts for most of the US Russia-related sanctions. This means that banks that are still transacting with Russia in places such as China and India are exposed to the risk of secondary sanctions. It will be interesting to see how China, and specifically Chinese financial institutions, respond to the latest US actions, considering how Russia has become economically and financially reliant on China over the past two years.

Further, Treasury clarified that the foreign branches of designated Russian banks, such as VTB in China and India, are sanctioned and added their entity names and addresses to the Specially Designated Nationals list. We called out this sanctions gap in the latest edition of the Russian Sanctions Database that we published in May. This action should restrict how Chinese companies do business with Russia, but we’ll have to see, as much of the transactions occur in renminbi, not US dollars. 

—Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center and a former senior official with the US Treasury Department’s Financial Crimes Enforcement Network.

Ukraine’s allies should keep up the momentum to rebuild its energy sector

The G7 agreement to deliver fifty billion dollars for Ukraine, generated by the interest from seized Russian assets, embodies the West’s reinvigorated willingness to deploy bold, innovative solutions to hold Russia accountable for its immeasurable crimes against Ukraine, particularly when Moscow’s damages (direct and indirect) account for at least $56 billion in losses to Ukraine’s energy sector. 

Some of this interest could be used for air defense against the further destruction of power plants and for rebuilding the energy sector—half of its 18 gigawatt capacity has been blown up. Unsurprisingly, energy dominated the conversations this week at the Ukraine Recovery Conference in Berlin, as energy supply security and affordability underpin every facet of Ukraine’s society and will be the backbone to the success of Ukraine’s rebuilding and recovery. Reliable energy access is vital for citizens’ survival but is also a lifeline for large industries and small and medium-sized enterprises, which have shown inspiring resilience and tenacity in the face of an unrelenting assault. 

It’s crucial to appreciate the novelty, speed, and monumental diplomatic lift of building consensus over such agile solutions. Such a cadence should continue for all work on protecting and rebuilding Ukraine—especially its invaluable energy sector. Most urgently, allies should:

• Overcome speed bumps in the procurement of gas piston and gas turbine power plants, transformers, and other technical equipment 
• Support Ukraine’s further progress on decentralization reforms 
• Empower municipalities in their role in replacing lost power generation 
• Accelerate investments in efficiency solutions to reduce peak demand 
• Lift restrictions on how Ukraine can deploy Western weapons to defend its critical energy infrastructure

—Olga Khakova is the deputy director for European energy security at the Atlantic Council’s Global Energy Center.

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The G7 has an unusually long guest list for the 2024 summit: thirteen world leaders, including the pope. The 2021 summit had four guests, the 2022 summit had six, and the 2023 summit had nine. The bulge in the number of guests reflects the nature and scale of challenges on the G7’s agenda, from wars in Europe and the Middle East to regulating artificial intelligence (AI) to countering China’s manufacturing overcapacity to addressing climate change. Notably, five of the 2024 guests (India, Brazil, South Africa, Saudi Arabia, and the United Arab Emirates) are members of the developing country grouping known as BRICS. While the G7 is trying to show these countries that it can still work together on global challenges, the guests are also eager to indicate that BRICS is not an “anti-West” coalition—yet.

How did the United States outpace the rest of the G7 in gross domestic product (GDP) growth after the pandemic? There’s no one answer. Extraordinary fiscal stimulus, flexible labor markets, productivity growth, and technological leadership, including in AI, all played a role. But the bottom line is that the United States is the fastest-growing advanced economy in the world—and it is not particularly close. To put the US surge in perspective, in the third quarter of 2023 the United States had the same GDP growth as China: 5 percent. That statistic would have been improbable just a few years ago. 

Enforcing sanctions and other economic measures against Russia will be one of the main objectives of the G7 summit. Last year, Russia reported a 28.3 percent drop in total exports from 2022. Russian media outlets cited sanctions as an important reason for this decline, specifically the December 2022 European Union (EU) ban on Russian crude oil sold above the G7 price cap. However, Russia has mitigated some of the price cap’s effects by reorienting oil exports to Asia, mainly to China and India. Last month, G7 finance ministers and central bank governors issued a joint statement in which they reiterated their commitment to enforcing the price cap. At the upcoming summit, G7 members should commit to strengthening enforcement with third countries such as China and India to further reduce Russia’s commodity revenues and ability to fund its war in Ukraine.

Inflation across the G7 reached its lowest point since April 2021 by January this year. In the lead-up to the summit this week, the US Federal Open Market Committee held rates steady and emphasized the importance of returning inflation to 2 percent. This follows the first rate cuts last week from the Bank of Canada and the European Central Bank. For Germany and the United Kingdom, both of which experienced a technical recession at some point in 2023, looser monetary policy is long-awaited. Meanwhile, the Bank of Japan faces a more complicated task in managing deflation. But the US Federal Reserve’s 2 percent inflation target still appears to be a distant objective—meaning the United States’ much-anticipated loosening may be put off a bit longer. 

At last year’s G7 summit, the leaders pledged both to “drive the transition to clean energy economies of the future through cooperation within and beyond the G7” and to coordinate their approaches to de-risking. The past year suggests that it may be difficult to make progress on these somewhat contradictory objectives. With Chinese manufacturing overcapacity flooding markets, G7 countries have ample incentive to follow the Biden administration in levying higher tariffs on Chinese goods, especially those that compete with infant green energy industries, such as lithium batteries and electric vehicles. The European Commission did just that on Wednesday, proposing higher tariffs on Chinese electric vehicles. What may be beneficial to their domestic industries is not necessarily beneficial to the green transition overall, and coordination on these approaches will be difficult. G7 nations have proven their ability to coordinate since Russia’s invasion of Ukraine, but they are still economic competitors. 

Have you ever wondered why it takes your bank account two to five days to show a transaction? Banks and other financial institutions are connected to each other and to a central bank through a payments network, a complicated pipeline consisting of messaging and settlement infrastructure that enables money to move. Usually, your paycheck or rent payments go through a service that is not instantaneous. However, in the past decade, some payments networks have become close to immediate, which allows users to see their transactions settled in less than a day—sometimes in as little as a few seconds.

This type of infrastructure is usually referred to as a fast payments system. There are many economic benefits to fast payments, since they are accessible around the clock to users and can improve businesses’ liquidity, reliability, and usability. While the biggest networks of fast payments are outside of the G7, the group’s member countries have also undertaken measures to create a fast payments system. As the graph above shows, the United Kingdom and Japan have been early adopters of fast payments systems; France, Italy, and Germany enabled their fast payments systems as part of the EU in 2018; and the United States and Canada trail on adoption. The development of a fast payments system is a marker of maturity, innovation, and modernization of the payments infrastructure in a country.  

Can the G7 figure out a way to provide fifty billion dollars to Ukraine using immobilized Russian assets? This is perhaps the biggest litmus test of the success of the summit’s success. The issue of the assets has been a hot topic since the day they were blocked over two years ago. As we have long said, the fact that the majority of the money was in Europe (in Belgium’s Euroclear) was going to be the determining factor. For two years, there’s been little agreement on how to make the best use of the money. Earlier this year, there was small progress, with Europe agreeing to use the windfall profits so at least the yearly interest earned on the bulk of the $280 billion could be given to Ukraine. But for many who wanted full confiscation of the assets, that wasn’t enough. Enter the US-led plan to pull forward future interest earnings over the next twenty years. It’s a creative financial solution that is gaining momentum in the G7. The difference it could make is shown above.

Contributions from: Charles Lichfield, Mrugank Bhusari, Ryan Murphy, Josh Lipsky, Sophia Busch, Ananya Kumar, Alisha Chhangani, Kimberly Donovan, and Maia Nikoladze.

Research support from: Clara Falkenek, Gustavo Romero, and Konstantinos Mitsotakis. 

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At this dangerous moment, with air assaults continuing and a renewed land offensive likely in Ukraine, both sides of the Atlantic need to put their backs into support for Kyiv, whose success in its war of survival is critical to transatlantic security and remains possible. The most important part of that work is for the United States and European countries to provide more and better weapons with fewer caveats—a process that is already underway. But it also means exerting more economic pressure on Russia’s wartime economy. 

Sanctions and other forms of economic pressure alone are not going to force Putin to abandon his war objectives. But they can continue to weaken the Russian economy, lower Russian income, complicate production, and intensify the distortion of a rapidly militarized economy with an increasingly starved civilian sector. The Russian economy, like the Soviet economy, has little natural resilience. Nor does it allow space for entrepreneurship on a large scale. Under sustained pressure and extreme military spending, it will be prone to decay, like its Soviet predecessor. Group of Seven (G7) countries imposed sanctions against Russia after its initial invasion in 2014 and much stronger measures after Russia launched its full-scale war in 2022. Both sets of sanctions have had an impact. But as recent Russian economic statistics show, the impact of these efforts is plateauing as Russia gets better at evading and mitigating them. Sanctions are a dynamic game, and the United States and its G7 partners need to be as agile in addressing Russia’s responses to existing sanctions as Russia has been in adapting to the sanctions themselves. 

“Sanctions are like antibiotics: Repeat usage builds up resistance,” Deputy National Security Advisor Daleep Singh explained in remarks on May 28. The necessary and appropriate response, then, is to intensify them to produce the desired effect. Happily, there are viable options to intensify the economic hit on Russia. None is without some risk or complication—options that promise all gain and no pain don’t actually exist. But the United States and the European Union (EU) should follow and choke off the money, show they mean it when it comes to enforcement, and hold sanctions evaders accountable.

Steps to do this could include:

1. Give the Russian oil price cap more teeth

Oil remains Russia’s number one export earner. The Russian oil price cap sought to limit the price of Russian oil sold on world markets to sixty dollars per barrel while not limiting the quantity of sales. The price cap was designed to reduce Russian income without spiking world oil prices, which would have happened if sanctions took Russian oil off the markets. And it worked, especially in the first year, lowering Russian revenues from oil sales by about 40 percent in the first nine months of 2023. The enforcement occurred through banning Western services, such as insurance and shipping, to oil shipments above the price cap.

Over the past year, however, Russia has adapted to the sanctions, procuring a “ghost fleet” of tankers to transport oil at prices above the price cap and offering its own insurance and other services to buyers. This ghost fleet has enabled Russia to demand its buyers pay prices closer to market value—and above price cap prices—because buyers cannot cite the price cap as an impediment to their paying higher prices.

It is time for the G7 to adapt the price cap accordingly. The G7 should back the price cap with the threat of secondary sanctions on those companies engaged in or supporting sales of Russian oil above the price cap by, for example, purchasing Russian oil above the price cap or shipping it. These secondary sanctions could be announced with a grace period of, for example, four months. During this time, current customers of Russia that are buying above-cap oil could rework their purchasing agreements with Russian suppliers, and US and EU enforcers could gather material on potential targets should they not do so. It’s also time to curtail the ability of banks, wherever they are based, to support the sale of Russian oil above the price cap. This can be done by narrowing the scope of licenses intended to facilitate financing for oil trade.

Any steps to check Russian revenue through oil sales would have to be gamed out to lower the risk of unintended consequences, such as a spike in prices. The Biden administration has been sensitive to any such steps, going so far as to press the Ukrainians not to strike at Russian oil refineries. This was an ill-considered admonition and was badly received by the Ukrainians, who rightly regard Russian refineries as legitimate military targets and have conducted effective attacks on them.

But the principle that informed the initial price cap still applies: As long as the price cap is significantly above Russia’s cost of production, Russia will have an incentive to keep up exports and will suffer a major loss of revenue if it does not. Russia’s cost of production can be estimated in various ways, but generally is regarded at well under sixty dollars per barrel. The risk of spiking world oil prices by more aggressively enforcing a cap on Russian oil exports thus seems acceptable.

2. Cut off Russia’s energy future

Russia has also been adapting to the sanctions by developing new capacities to help export oil and gas that don’t rely on its traditional pipeline network. This includes liquefied natural gas (LNG), where the Biden administration late last year sanctioned Russia’s Arctic LNG 2 project as a particular target. While Russia is the world’s fourth-largest LNG exporter, global production (and US production in particular) is rising. LNG supply shortages seem unlikely in the near term.

Russian officials have also discussed building new pipelines in the country’s east, particularly to China. US sanctions should push back on these efforts to develop new energy export avenues. Measures could include forcing all LNG service companies out of the sector, using the threat of secondary sanctions, and imposing additional sanctions on new export flows. As with increases in oil sector sanctions, these might have to be phased in and accompanied by licenses to avoid unintended consequences—for example, with Japan’s interest in LNG kept in mind.

3. Push Western firms to crack down on diversion of their products to Russia

Many Western companies have fully withdrawn from the Russian market, and even those that remain have generally adopted programs to comply with Western sanctions. However, reporting continues to find Western component parts pervasive across Russia’s military machinery: One recent study found that 95 percent of the non-Russian components in Russian weapons recovered in Ukraine were from Western firms, with only 4 percent from Chinese firms. Many of these Western components were likely produced in China and other manufacturing hubs and then disappeared into a network of shadowy middlemen.

After the 9/11 terrorist attacks, the US government pushed global banks to overhaul the way they complied with sanctions, and the banks generally developed an extensive infrastructure to spot and stop terrorist and other rogue money moving through the financial system. The United States and its partners should undertake a similar effort with the manufacturing and tech sectors, working collaboratively to strengthen compliance and reduce the diversion of Western-made components flowing to Russia. Through warnings and public enforcement actions, such as civil and criminal penalties that make examples of selected companies that show flagrant irresponsibility, the United States and Europe could put pressure on firms to take seriously the “Know Your Customer” (and “Your Customer’s Customer”) principle.

4. Drop the hammer on third-country evaders

Reports abound of exports of banned technologies to Russia through third countries, including through Georgia, Central Asian countries, and Turkey. US officials have been traveling widely and urging greater cooperation, and the United States has for some time sanctioned third-country evaders. Beyond getting Western companies to strengthen their export controls compliance protocols, the United States should increase pressure on countries that serve as platforms for re-exports to Russia, including an aggressive campaign of secondary sanctions on firms that re-export prohibited goods to Russia.

5. Consider a shift to “embargo-minus” rather than “targeted sanctions-plus”

Since the initial Russian invasion in 2014, the United States and Europe have gradually imposed financial sanctions on Russia’s big state banks and some selected private banks, along with a large number of sectoral sanctions and sanctions on Russian companies. This creates a complex sanctions regime where a lot of trade is banned but a lot of other trade remains allowed, leaving gray areas and loopholes for Russia to exploit and complicating enforcement.

The United States and Europe should consider imposing a general embargo on both trade and financial transactions with Russia, except for defined categories of white-listed trade, such as medicine, permitted energy, and other transactions. Such a system—phased in with grace periods and perhaps starting with a general financial embargo—would have to be flexible enough to account for unanticipated problems by issuing supplemental licenses.

6. Face the China challenge

While apparently not directly sending weapons to Russia, China has emerged as Russia’s greatest economic backer since its full-scale invasion of Ukraine, providing general economic support and dual-use equipment and technology to support Rusia’s war effort. These efforts have weakened the impact of—and could undermine—US and European sanctions. Aware of this, the Biden administration has imposed sanctions on smaller Chinese companies engaged in sanctions violations, hoping for a change in Chinese policy but to little apparent avail. During his trip to Beijing in late April, US Secretary of State Antony Blinken reportedly pressed his Chinese interlocutors to back off their economic support for Russia, and the administration may hope that a frank warning will result in China changing course.

If not, the United States should take action, such as imposing sanctions on a larger Chinese bank or company involved in supporting Russia’s war machine. Chinese financial transactions with Russia are likely happening outside the reach of US sanctions, meaning outside of the US dollar and US financial system. Therefore, these sanctions would initially serve more as a messaging tool than a mechanism to immediately turn off the transactions.

But messaging is important, especially when dealing with China. Sanctions targeting a large Chinese financial institution or significant company facilitating material support to Russia would lead other countries and companies to de-risk from these sanctioned entities to reduce their sanctions exposure. It would mean US secondary sanctions in China. Such steps risk Chinese retaliation or unintended consequences. But a sanctions carve-out that allows China to back up Russia’s military machine, which is what a lack of action effectively amounts to, would pose a bigger risk: that of failure of US and European support for Ukraine and a message that the West is not serious about its own policy.

7. Take Russia’s money to pay for Russia’s war

In a bold move immediately after the full-scale invasion, the G7 immobilized around $300 billion of Russian sovereign assets. It has since debated what to do with the funds and has been slow to get beyond general agreement that they will remain immobilized. Many in the United States have advocated seizing all the immobilized funds and using them for Ukraine (the passage of the REPO Act gives the US legal backing to do so with the funds in its jurisdiction, which is reportedly at least five billion dollars). The EU, where the vast bulk of the Russian assets are located (in Belgium), had limited itself to using the interest on the immobilized Russian principal for Ukraine. While a welcome step, that interest comes to around three billion dollars per year, an inadequate amount given the scale of Ukraine’s needs in the face of Russia’s ongoing war.

The G7 now seems to be closing in on a compromise proposal to take the interest on the Russian assets for twenty years rather than just one year, a proposal that could provide a pot of $53 billion. Those funds could be used as collateral for a loan or grant to Ukraine from the United States or a group of willing countries. Meanwhile, efforts to capture agreement on using the entire principal would continue.

That seems to be a smart compromise that provides one way to have Russia rather than European or US taxpayers pay to help Ukraine. The upcoming G7 summit in Italy would be the time and place to reach agreement. That will not be easy: Some Europeans seem stuck in a mode of thinking that has not yet internalized Russia’s war of aggression against Ukraine and its ongoing aggression against other European countries through disinformation, assassination, and sabotage.

Seizing sovereign assets is a big step. But the G7 crossed the line of absolute immunity for sovereign assets when it immobilized the Russia’s assets more than two years ago. While other countries, such as China and Saudi Arabia, may have hated that step and may be privately warning of retaliation should Europe or the United States go further and take Russian assets or proceeds, they have not pulled funds out of US, European, or UK financial markets. The G7 needs to see through what it began in February 2022 and find a way to use Russian funds to pay for Russia’s war of aggression and national extermination against Ukraine.

Neither these nor any serious economic steps against Russia are risk-free or simple; if they were, they would have been introduced already. Each will require resources to identify targets, anticipate potential risks, and enforce. Manufacturers won’t like the scrutiny or demands that they monitor their products’ ultimate destinations. Third countries will not appreciate the pressure to cut down on diversion of exports to Russia. The United States and allied governments should consider their choices not as alternatives to a zero-risk ideal but against the backdrop of the considerable stakes and their own repeated and accurate statements of how important it is to help Ukraine defeat Russia in this war.

Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. His last position in the US government was as sanctions coordinator at the Department of State. Peter Harrell, a former State Department and National Security Council senior director, contributed to this article, for which the author gives thanks.

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In 2017, the Trump administration imposed sanctions on Gertler, accusing him of “opaque and corrupt mining and oil deals” that cost the DRC more than $1.36 billion in revenues from 2010 to 2012 alone. Gertler has repeatedly denied any wrongdoing and, through a representative, said that he would abide by sanctions. The news that the Biden administration may ease these sanctions should be viewed positively, as an indication that US sanctions can achieve both economic and geopolitical goals.

Eased sanctions, whether a formal delisting or the issuing of a general license to Gertler, would allow for the sale of currently sanctioned entities. Following the easing of sanctions in this case, US firms could gain access to new investment opportunities by investing in mining projects that currently have links to Gertler, leading to economic growth in the United States and the DRC. In addition, the DRC has an opportunity to showcase the improvements that the country is making in the fight against money laundering and terrorist financing. While some senior officials, human-rights defenders, and anticorruption fighters have valid concerns about easing sanctions on Gertler, the decision could be a win for the DRC and the United States.

The choice—and the history behind it

Both the Trump and Biden administrations have gone back and forth over the tightening and easing of sanctions on Gertler. That has drawn much attention, but what hasn’t is the fact that the United States has quietly used sanctions effectively in this case to get its way.

In 2019, The Sentry—an investigative organization that aims to hold to account predatory networks that benefit from violent conflict, repression, and kleptocracy—conducted a six-month-long study on the effectiveness of sanctions in Africa in the twenty-first century. The study found that better strategies for achieving identified goals in each sanctions program must be developed if sanctions effectiveness was to improve. The Sentry study set the stage for the Treasury 2021 Sanctions Review, which drew conclusions on how to modernize US sanctions and make them more effective. Treasury recommended a “structured policy framework” that “links sanctions to a clear policy objective.” The Biden administration has made no secret of its desire to improve access to critical minerals, diversify its supply chains, and work with US partners to achieve those goals. Since 80 percent of the DRC’s cobalt output is owned by Chinese companies, US policymakers should be seeking ways to reduce barriers to entry in the DRC’s mining sector and to actively promote investment there. 

As the United States seeks to gain greater access to critical minerals and diversify its supply chains away from Chinese influence, Biden administration officials hope that granting Gertler a general license to sell his holdings in the DRC would increase US or Western firms’ willingness to invest in the country. That’s because those firms have been largely boxed out as Gertler, according to the US Treasury, used his closeness with government officials to secure below-market rates for mining concessions for his companies. Beyond Gertler, the business environment of the DRC ranks 183 out of 190 on the World Bank’s Doing Business indicators. Easing sanctions, through a coordinated US government effort that seeks to maximize this move, could send an important signal to Western investors that the DRC is open for business. Western firms could lift their bottom lines while stimulating the DRC economy by paying market rates.

The potential delisting of Gertler and his companies is a good example of an instance in which sanctions—or, in this case, the easing of sanctions—are being used in support of a specific policy objective.

Delisting would be good—but more must be done

Building on a potential delisting, the Biden administration should work with Congress to expeditiously pass the bipartisan BRIDGE to DRC Act—which helps the United States secure access to critical-mineral supply chains and sets human-rights and democracy benchmarks for strengthening the US-DRC relationship. These moves could be further timed or calculated to magnify the impact of ongoing foreign assistance programs led by the United States Agency for International Development or other US government agencies.

The United States should coordinate additional moves to support the DRC. In October 2022, the Financial Action Task Force, the standard-setting international organization that seeks to strengthen the global financial system, placed the DRC on its list of jurisdictions under increased monitoring—also known as the “grey list”—for the country’s dismal record in fighting money laundering and terrorist financing. While many African countries are on the grey list, the impact is considerable, as it limits capital inflows, makes investors wary of doing business, and leads to reputational damage and a reduction of correspondent banking relationships, among other consequences. The US Treasury should look to bolster the DRC government’s approach to anti-money laundering and combating the financing of terrorism (AML/CFT) by equipping the country with the knowledge, know-how, and capacity that it needs.  

Regardless of whether the delisting happens or whether the BRIDGE Act becomes law, the DRC must do more to help itself. News of a failed coup attempt in Kinshasa on May 19 certainly does not help, especially since—according to local reports—the assailants were linked to exiled DRC politician and US citizen Christian Malanga, who was killed by the country’s security forces in a firefight. Three US nationals were allegedly also involved in the attempt to overthrow the government of President Felix Tshisekedi.

The DRC must continue to take concrete steps to improve the business environment and reduce its political and economic risk factors. Since 2022, the DRC built on its high-level political commitments to improve its AML/CFT regime, finalize its three-year national AML/CFT strategy, and improve its macroeconomic performance—boosting its credit rating. The DRC has an opportunity to continue to make progress in its fight against corruption, money laundering, and terrorist financing that threaten the stability of the country from Matadi on the Atlantic seaboard to Goma in the Great Rift Valley.

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A win in the heart of Africa

Delisting Gertler would not only help the United States get its way, but it would show that its sanctions policy in Africa can be effective; its industrial and national security policies can be successfully implemented; and that all of this can be done in a manner that can help an African partner generate greater economic growth, jobs, and the foreign investment it seeks.

The United States can’t do it alone. It must also partner with the DRC in a serious manner to help strengthen the DRC’s framework to combat money laundering and terrorist financing, improve Kinshasa’s image, and reduce barriers to investment such as perceived political and economic risk.

The DRC occupies a central role on the African continent and with its economic potential could serve as a future hub for transportation, logistics, mineral processing, and more. If the DRC wins, all of Africa benefits—as do the United States and the West.

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center. He previously served in the US Treasury Department and US State Department with a focus on Africa policy.

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It is an honor to provide testimony to the US-China Economic and Security Review Commission on the topic of outbound investment from the United States to China, its potential to create national security concerns, and ways in which to address these concerns in a balanced and effective manner. In this testimony, I provide:

• Descriptive data that show the United States is the primary overseas investor in China, mostly through venture capital, though the volume of these flows has declined substantially in recent years.
• An overview of the four key components of the executive order on regulating certain types of US investment to China that I believe are most important to maintain, primarily at the strategic design level.
• A review of three key questions/challenges in implementation that remain after reading the advanced notice of proposed rulemaking (ANPRM) that was released in August 2023, along with recommendations for how to address these challenges.

My core recommendations are as follows:

1. That the Commission should affirm the importance of maintaining any outbound regulation as a notification/prohibition regime rather than a screening apparatus.
2. That the Commission should endorse a sector-based approach to outbound investment regulation. List-based approaches, notably the NS-CMIC list, can be judiciously used to complement sector restrictions, but the bulk of the outbound regime should rest on narrow sectoral restrictions.
3. That the US Congress should consider providing a statutory basis for the NS-CMIC list and extending its reach to include non-public subsidiaries of NS-CMIC listed companies as well as to non-public companies that are determined to be part of China’s military-industrial complex.
4. That Congress should refrain from adding non-national security-related tests, such as supply chain diversity or local employment considerations, to any legislation related to outbound investment regulation.
5. That Congress recommend that Treasury’s final rule for implementing E.O. 14105 include an intangible benefits test to scope covered investments as described above and that any legislation regarding outbound regulation include the same provision.
6. That Congress recommend that Treasury’s final rule for implementing E.O. 14105 further clarify “routine intracompany actions,” and ensure that the rule does not allow for material expansion or operational pivots into covered activities. Any legislation regarding outbound regulation should include similar clarity.
7. That Congress, in addition to adopting recommendation 3, further modify the CMIC program to authorize the designation of Chinese entities beyond the current scope to include any Chinese entity operating in sectors important to US national security, as defined through a regulatory process. These sectors may be broader than the three sectors identified for the purpose of the current implementing rules for E.O. 14105 but should be relatively narrow and stable. A subset of the Critical and Emerging Technologies List (CETL) is a good place to start.

Level-setting the scale of US outbound investment to China

US outbound non-passive investment flows to China have declined substantially in recent years, likely due to policy changes in the United States as well as the Chinese Communist Party (CCP)’s crack down on Chinese tech companies.

Greenfield investment

According to available data, in recent years greenfield investment in China has declined dramatically – both from US investors and the rest of the world. Figure 1 comes from fdiMarkets, the pre-eminent data source for greenfield investment. This chart illustrates that greenfield investment from any foreign source – not just the United States – has declined from a peak in 2018 of roughly $120 billion to under $20 billion in 2022. Note that fdiMarkets uses announcement data rather than realized investment, so many FDI experts believe their numbers are likely to be a bit inflated. Clearly, global investors are avoiding greenfield investment in China, likely due to a mix of push and pull factors. US sources of greenfield investment totaled $8.69 billion in 2020.

Mergers and acquisitions (M&A), private equity (PE), and venture investment (VC)

Pitchbook data can provide more insight into non-greenfield US investment to China. As Figure 2 illustrates, Pitchbook data reports a high watermark of US investment in companies headquartered in mainland China, Hong Kong, or Macau in 2018. Investment volumes have declined every year since 2021; in 2023, US outbound investment to China was 30 percent of its 2021 value. To compare volumes across greenfield and these other forms of investment, US investment through M&A, PE, and VC was about three times as large as global greenfield FDI to China in 2022. A key feature of US investment in China is that a large portion of these flows happen through VC. However, an important caveat is that Pitchbook’s data relies on systematic web crawling and is unable to capture investments that have not been reported in regulatory filings, news articles, or press releases. Because US investors are not currently required to notify outbound investment – at least until E.O. 14105 is implemented – we simply do not know the full universe of US investments into China. Indeed, the reporting component of the E.O. will be very important to better understanding the full scale of US investment to China, and better allow policy makers to scope any regulation appropriately given the true volume of such investments. A costly and burdensome regulatory process to address a tiny concern is not in the long-term interest of the United States.

A deeper dive into the sectors that E.O. 14105 currently contemplates regulating suggests that US participation in these areas is quite small and almost exclusively concentrated in VC, as Figure 3 reports. Furthermore, this investment is almost entirely in the semiconductor industry; in 2020, investments in all other sectors amounted to only about $700 million.

Furthermore, the US is the most important global source of investment to China. Figures 4 and 5 present capital raised in China from investors headquartered in places other than China and the US in all industries (Figure 4) and in key national security technology industries (Figure 5). The United States supplies greater than half of all inward FDI to China and is even more dominant in the relatively small volumes of FDI into national security technology. Moreover, we do not see the United States’ relative position as major supplier of FDI to China diminishing, even as the US government has indicated it will place more restrictions on these kinds of flows.

Taken as a whole, these figures suggest that the size of U.S. investments in Chinese companies of concern is relatively small, but also that the United States is the primary global investor in these sectors. Even small deal values can generate national security concerns if US investors provide capital and expertise to a small set of key entities. However, the available data suggest that the scale of the concern – and particularly outside of the semiconductor industry – is modest. The data also suggest that an effective approach to this potential national security problem needs to address VC, since that is the dominate mode of US investor participation in these core sectors of concern.

Assessing E.O. 14105 – Addressing US investments in certain international security technologies and products in countries of concern – and its proposed rules

The executive order, for which we expect draft rules to be released within the next several weeks, is directionally an appropriate step forward in addressing national security concerns that arise from US investment in sensitive, national security-relevant technology in China. Four of the likely design features outlined in the related ANPRM that are important to maintain are:

1. A notification and prohibition regime rather than a case-by-case review. Initial policy conversations around an outbound regulation envisioned a screening process typically referred to as “reverse CFIUS.” However, the administrability of outbound case-by-case review would be much more complicated than is inbound. This is because The US government has better visibility into the capabilities and national security vulnerabilities of US businesses – which are the targets of inbound investments – than of such capabilities and vulnerabilities of businesses based in China. Additionally, the US government has more leverage over companies that wish to invest in its market – and therefore need its ongoing regulatory approval – than it has over companies that operate in foreign markets over which the US government does not enjoy regulatory authority. In the absence of such investigatory capability or compellence power, a screening mechanism would likely be very challenging to implement effectively. A notification and prohibition regime has the added benefit of providing industry and investors with bright lines about what investments are allowed and which are prohibited, which makes compliance and developing forward-looking business strategies more possible.
   
   Recommendation 1:  The Commission should affirm the importance of maintaining any outbound regulation as a notification/prohibition regime rather than a screening apparatus.
   
   
2. A (narrow) sector-based approach rather than an entity/list-based approach. Some in Congress have suggested that a sector-based approach is inadvisable because, while a sector-based prohibition regime would prevent US persons from investing in Chinese sectors of concern, it would not prevent investors from other countries from doing so. To make restrictions more biting, and to make them apply to investors beyond the United States, some have suggested a list-based approach in which the US government would regularly update a list of Chinese entities that are connected to the Chinese defense and/or surveillance industrial base and impose asset blocks on these entities through the Specially Designated Nationals (SDN) List.
   
   It is my view that this approach creates many problems. First, overuse of the SDN list generates substantial incentives for economic actors to further shift their activities out of the US dollar. While dollar dominance enjoys substantial persistence due to network effects, there is mounting evidence that country governments and related economic actors are increasingly finding ways to avoid US dollars – and thereby the reach of US financial sanctions – through cross border payments systems that do not use the dollar as an intermediary, and by shifting economic activity into other currencies. Dollar avoidance not only erodes the power of financial sanctions more generally, but it also makes it harder for the United States to track patterns in investment flows globally. This, in turn, makes enforcement of existing sanctions and disruption of money laundering activities more challenging. Thus, the unintended negative consequences of a list-based approach are high. Furthermore, the designation process is investigatively burdensome and exposes the US government to litigation. As a civil action, SDN packages need to provide substantial evidence that a designated entity is a national security threat, and designated persons can sue the US government to be removed from listing. Because of this legal structure, an SDN approach would be unable to address risks associated with US investments in Chinese entities working on more speculative but high consequence technologies. This is the exact type of national security concern – that is, early-stage investments and assistance through knowhow in pre-commercialization stages – that the US government identified as a gap in authorities because US export controls are not able to capture these kinds of emerging technologies well.
   
   Recommendation 2: The Commission should endorse a sector-based approach to outbound investment regulation. List-based approaches, notably the NS-CMIC list (more below), can be judiciously used to complement sector restrictions, but the bulk of the outbound regime should rest on narrow sectoral restrictions.
   
   
3. A focus on non-passive investments. There has been a flurry of policy entrepreneurship and innovation around addressing national security concerns related to US investments in Chinese military/surveillance technology. The current E.O. develops a regulatory structure around non-passive investment (colloquially, often referred to as “money plus,” meaning money that comes with control, knowhow, or other forms of more active engagement with the Chinese entity obtaining the investment. Others have argued that such an approach does not go far enough, and instead desire to completely remove all US money from the China market, including passive investment through securities. Indeed, proponents of a list-based approach argue that designations would stop flows of all kinds of US investments to listed entities, not just foreign direct investment (FDI) orVC. While preventing any US money from entering the China market may be symbolically satisfying, this kind of divestment is least likely to have an appreciable effect on decreasing China’s capacity for indigenous development and deployment of advanced technology for military and surveillance purposes. This is because money is fungible and the global equity market capitalization outside of the United States is roughly $62.8 trillion. Moreover, US share of global capital markets is projected to decline from about 42.5 percent today to about 27 percent in 2050.
   
   Thus, the bar for preventing such passive investments much be higher than restrictions on non-passive investments since the benefit-cost ratio of such actions is lower. Already, the non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) List allows the US government to prevent passive investment in designated entities that are identified as part of China’s military industrial complex, even if they are not state-owned. These authorities exist through E.O. 13959 and amendments. Currently, these restrictions only apply to relevant Chinese companies that are publicly traded.
   
   Recommendation 3: The US Congress should consider providing a statutory basis for the NS-CMIC list and extending its reach to include non-public subsidiaries of NS-CMIC listed companies as well as to non-public companies that are determined to be part of China’s military-industrial complex.
   
   
4. A focus on national security objectives rather than broader “economic security” or supply chain resilience concerns. Discussions on outbound investment regulations began in earnest after Senators Bob Casey and John Cornyn circulated a preliminary version of their draft legislation – the National Critical Capabilities Defense Act – in 2021. As the name implies, this early version of an outbound regulation concept was rooted not only in national security but also broader objectives around supply chain resilience. Over time, and through substantial and rigorous policy discussions, supply chain resilience components were eliminated from draft legislation on this matter and from the E.O. that was ultimately released. I view this as sound policy.
   
   As discussed in greater detail in a 2022 policy report I co-authored with Emily Kilcrease, supply chain concerns are largely due to features of the domestic and global economy that make supplier diversity and localized production commercially unviable. In that report, we recommended that the US government address supply chain resilience concerns through industrial policy and other actions that could incentivize re-shoring and friend-shoring to trusted suppliers. The Congress’ actions on supporting the semiconductor, EV, infrastructure, and other related industries and supply chains through legislative action such as the CHIPS and Science Act and the Inflation Reduction Act are far better able to address the underlying market challenges that have created supply chain fragilities in the first place.
   
   Moreover, by focusing squarely on national security and related technology, the United States is better able to act in a coordinated fashion with partners and allies. The Summer 2023 G-7 communique on economic resilience and economic security is indicative of the positive returns to such multilateral engagement, as leaders affirmed the legitimacy and importance of targeted outbound investment measures to protect “sensitive technologies from being used in ways that threaten international peace and security.” The European Commission’s January 2024 package on economic security, which includes monitoring and evaluation process for considering outbound controls, further illustrates the benefits of multilateral engagement around narrow, technology-related regulations on outbound investment.
   
   Recommendation 4: Congress should refrain from adding non-national security-related tests, such as supply chain diversity or local employment considerations, to any legislation related to outbound investment regulation.
   
   Outstanding design issues for an outbound investment regime
   At time of writing, the draft rules for the outbound E.O. have not yet been released. However, the advanced notice of proposed rulemaking surfaced several issues that a final rule will need to address.
   
   
5. Aligning covered investments more closely to the concept of intangible benefits. As discussed above, it is my assessment that it is correct to focus on non-passive investments. To do so well, the final rules will need to differentiate between purely passive investment and capital that confers some form of intangible benefit. Currently, there is no such test. Instead, the draft rules scope jurisdiction to investment that either rise above a control threshold or confer some form of special rights. But this rights-based approach may not be appropriate for a country with weak rule of law and shareholder protection such as China where control and influence are often exercised in more informal and extralegal ways. Such an approach may also lead to rule circumvention as investors interested in maintaining or expanding China presence simply shift their activities in China away from traditional FDI and VC structures and into uncovered forms of participation such as venture debt, business consulting, and/or university-to-university research collaborations. A final rule may better ensure that all relevant forms of intangible benefits are covered by constructing an intangible benefits test, in which a transaction would be covered if any one of the following conditions is met:
   
   • The US investor has a role in “substantive decision making” regarding the invested entity, leveraging this concept as it exists in the CFIUS context (see 31 CFR 800.245);
   • The US investor conducts one of a range of specified activities with respect to the invested entity, including the provision of management expertise;
   • The US investment conveys control of the invested entity to the US investor, with “control” set as a clearly defined percentage threshold; or
   • The US investment conveys a defined set of management or governance rights short of “control.”
     
     Recommendation 5: That Congress recommend that Treasury’s final rule for implementing E.O. 14105 include an intangible benefits test to scope covered investments as described above and that any legislation regarding outbound regulation include the same provision.
     
     
6. Coverage of growth transactions and operational pivots. Under the current text, it is unclear how the new outbound authorities will apply to follow-on transactions that are made after an initial investment, both in scenarios where the initial investment was made prior to the effective date of the new authorities and those made after the effective date. The ANRPM envisions exempting “routine intracompany actions,” providing an explicit exemption for the “intracompany transfer of funds from a US parent to a subsidiary located in a country of concern.” This text would allow for a US company to sustain an existing operation in a country of concern and to undertake the necessary financial transactions to do so. However, it also appears that this provision allows for a company to expand its investment without constraint if the funds to do so are made available via an intracompany transfer of funds.
   
   Material expansion of existing investments is likely inconsistent with the policy intent of the E.O. If so, the final rule should include clear standards for which intracompany transfers will be considered “routine” and therefore exempt from notifications or prohibitions and which will trigger new obligations under the notification/prohibition regime. The Chips Act guardrails set clear standards around material expansion, with respect to the investments in China of companies receiving Chips Act funding, that could be leveraged for the purposes of this rulemaking as well, at least for covered semiconductor investments.
   
   Similarly, the rule should anticipate scenarios in which a US person invests in a Chinese entity that is not a covered transaction at the time of investment, but, through a change in business strategy, pivots to operate in a covered national security technology or product. This is not a hypothetic exercise: for example, a US person could invest in a Chinese facial recognition software company that plans to develop its products for commercial use, but subsequently the Chinese entity could change its orientation to instead focus on selling its products to the Chinese government for surveillance use. This is of particular concern for cases in which the US person holds a non-controlling interest in the entity, and therefore cannot exert influence to prevent problematic changes to business plans. The final rule should clarify whether US persons are required to notify such investments and/or if the rule would require divestment if entity into which the US person invested subsequently operated in a prohibited national security technology or product.
   
   Recommendation 6: That Congress recommend that Treasury’s final rule for implementing E.O. 14105 further clarify “routine intracompany actions,” and ensure that the rule does not allow for material expansion or operational pivots into covered activities. Any legislation regarding outbound regulation should include similar clarity. 
   
   
7. Differences in corporate supply chain expansion vs. venture & technology startups. As outlined in the section above on trends in outbound investment from the United States to China, there are two types of investment that the US government is most worried could create national security concerns. First are corporate investments, usually made either to execute a global supply chain strategy or to serve the China market. The second are VCinvestments in early-stage companies operating in emerging technologies that may be used for military or surveillance purposes. E.O. 14105 attempts to address both kinds of investments in the same manner, but the differences in the incentives for and structure of corporate operational versus venture investments are substantial. In particular, venture investments are more speculative in that early-stage investment is made before it is clear what the commercial use for a nascent technology will be. Additionally, divesting from a venture capital position is very challenging as early-stage investment is all but frozen until an eventual liquidity event – usually after fifteen or more years of holding the investment position.
   
   Thus, venture investments present three key challenges to policy makers that are usually absent or less relevant to corporate operational investments:
   
   
   • The speculative nature of their technologies’ capabilities and use make it harder to draw narrow bright line distinctions between permissible and impermissible investments.
   • Funding structure flexibility provides VC investors with more opportunities to design their investments in ways that avoid generating reporting obligations or prohibition requirements.
   • Venture positions are illiquid over the medium term, making divestment more challenging.
   
   
   • Given this, it is advisable for the US government to consider additional ways in which forward guidance can help shape the commercial incentives of VC investors in ways that disincentivize early-stage investment in Chinese entities involved in the development of technology that may not be consider national security technology or products at the time of investment but that have a high likelihood of future national security implications. As outlined in greater detail in a report co-authored with Emily Kilcrease, it is advisable for the US government to undertake a set of actions designed to reshape investor expectations about the long-term financial payout to, and the reputational risks associated with, early-stage investments in technologies that are likely to develop into national security technologies or products.
     
     The goal of such actions is to better align investor incentives such that they are less willing to participate in particularly problematic start-ups, thus reducing the need for the US government to be prohibiting transactions or issuing divestment requirements in a heavy-handed manner. Already, the Congress has made steps in this direction by introducing legislation requiring the disclosure by previously exempted investors of their holdings in China and other adversarial jurisdictions. Additionally, the Congress can codify an expanded version of the NS-CMIC list to commit to preventing US persons from investing – even passively – in a set of designated Chinese entities that operate in a narrow set of particularly concerning national security technology areas. Doing so will communicate to VCs that their early-stage investments will not be rewarded by big payoffs during future liquidity events because US investors will be unable to participate in initial public offerings for these companies or private placements. Thus, the value of this approach is its deterrent effect on shifting the calculus of early-stage investors against participating in Chinese startups with technology that are likely to have use cases of particular concern for national security.
     
     Recommendation 7: That Congress, in addition to adopting recommendation 3, further modify the CMIC program to authorize the designation of Chinese entities beyond the current scope to include any Chinese entity operating in sectors important to US national security, as defined through a regulatory process. These sectors may be broader than the three sectors identified for the purpose of the current implementing rules for E.O. 14105 but should be relatively narrow and stable. A subset of the Critical and Emerging Technologies List (CETL) is a good place to start.
   
   
   

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VII. The Global South and the limits of cooperation

VIII. Russia’s diminished ability to use energy as a weapon

Chart 2: Russia’s share of EU energy imports

IX. What is to be done? Recommendations for policymakers

X. Conclusions

In the two-plus years since Russia’s full-scale invasion of Ukraine, the United States and its allies have imposed approximately two thousand sanctions on Russian corporations, financial institutions, and individuals. But while the sanctions have been broad, sweeping, and in some cases unprecedented, the discussion about their level of efficacy is still ongoing.

This is particularly true for the industries that comprise the lifeblood of the Russian economy—the oil and gas sectors. While Russia’s hydrocarbon revenues have been significantly affected by Western sanctions, this impact has varied significantly across sectors.

Assessing the real impact of sanctions on these vital industries, and calibrating them to have the maximum impact on Vladimir Putin’s ability to continue financing and waging his war of aggression, will require policymakers to understand these nuances—to understand what has worked, what has not, and why.

Primarily, this requires an understanding of how the effect of sanctions has varied between the oil and gas industries. It also requires an examination of other relevant factors, most notably the role of China, other Asian markets, and the Global South in mitigating the negative impact of sanctions. It also requires an understanding of the role liquified natural gas (LNG) has played in Putin’s efforts to evade sanctions.

The impact of sanctions: A brief overview

The impact of Western sanctions differs not only between the oil and gas industries, but also between natural gas and LNG. There is also a significant divergence between the negative impact of sanctions on the Russian oil and gas industries on one hand, and the impact on state budget revenues on the other.

It should be stressed that the decoupling of Gazprom from the European gas market was mostly caused not by the Western sanctions—the European Union (EU) did not introduce an embargo against Russian natural gas as such—but, rather, by Gazprom’s self-imposed cutoff of piped-gas supplies to most EU member states.¹

The Russian natural-gas industry, primarily Gazprom, has struggled with the consequences of decoupling from the EU market, as it lacks a viable business model to compensate for the loss. The oil industry, on the other hand, has managed to weather the sanctions better, albeit with significant loss of revenue due to heavy price discounts in Asian gas markets and sharp increases in the cost of shipping oil to Asia.

The party that has suffered the most from Western sanctions, however, is Russia’s state budget, which saw its revenues from oil and gas decline 24 percent in 2023 compared to 2022.

This has forced the authorities to consider serious tax hikes on the oil and gas industry to compensate for the losses and enable Putin to finance the war in Ukraine. Such a move would hurt investment and could result in subsequent output decline.

While piped-gas exports to Europe have decreased dramatically, Russia continues to export significant amounts of LNG to the EU unabated, resulting in significant revenue. Unlike Gazprom’s piped-gas exports, however, LNG exports are largely untaxed, meaning the government does not receive direct revenues from them. But for reasons that will be discussed in greater detail below, the Russian state has other means to extract rents from LNG exports to finance the war—notably through windfall taxes.

Sanctions and decoupling from European oil and gas markets have also significantly reduced Russia’s ability to use energy as a tool of political pressure against Western democratic countries. However, as will be discussed in greater detail below, this capability has not been eliminated entirely.

In what follows, this report will discuss each of these trends in greater detail, beginning with Gazprom, which has suffered the most serious consequences from Russia’s standoff with the West and faces nothing short of a full reinvention of its entire business model.

Gazprom in limbo: No substitutes for the lost European market

Russia’s natural-gas giant Gazprom has suffered enormously from cutting ties with Europe, formerly its largest market. As noted earlier, the termination of gas supplies to Europe happened not because of sanctions, but due to voluntary actions by Russia. In mid-2022, Gazprom cut off gas supplies to Europe through most of the export-pipeline routes, clearly aiming at creating political and economic problems for EU countries ahead of the 2022–2023 winter season.

The Kremlin’s hopes didn’t materialize. Despite rising gas prices, the EU managed to successfully navigate the winter and, in the process, find alternative long-term sources of gas imports. This allowed Europe to free itself from most Russian piped-gas imports, without even imposing sanctions on Gazprom.

Gazprom’s lost revenue and profits turned out to be enormous.

According to the company’s own reporting, Gazprom’s revenue fell by 41 percent year-over-year in the first half of 2023, while sales profits fell by 71 percent and gas production by 25 percent. In the first quarter 2024, Gazprom reported a net loss of almost $7 billion in 2023, marking its first annual loss in more than 20 years. Moreover, Gazprom’s upstream gas-production base is now isolated because infrastructure connecting its main western Siberian fields with alternative Asian markets is lacking. Gazprom also failed to build any LNG plants in western Siberia, which, before the imposition of sanctions, would have enabled the company to reroute natural gas to alternative markets.

Gazprom does not disclose the estimated construction costs of new pipeline infrastructure to China, but it would probably require at least $100 billion given the company’s experience constructing the existing Power of Siberia pipeline. That pipeline, which connects western and eastern Siberia and also delivers gas supplies to China, is considerably shorter than a proposed new pipeline, known as Power of Siberia-2, which would pipe gas from western Siberia to China. That raises the fundamental question of whether Russian gas supplies to China will ever be profitable.

Gazprom refuses to publish any data on gas-supply prices to China via Power of Siberia, but data published by Reuters, citing obtained internal materials of the Russian government, suggests that the average annual price of piped gas supplied to China was $297.30 per thousand cubic meters (tcm) in 2023 and will be $271.60 in 2024. Prices for 2023 were also not published, but the officially disclosed volume of supply was 22.7 billion cubic meters (bcm), and the cost of Chinese imports of piped gas from Russia was $6.4 billion. Thus, the average 2023 gas-supply price from Russia to China was $282/tcm (in 2020–2022, the price was well below $300/tcm).

This means that Russia is, in fact, most likely selling gas to China at a significant loss. When the contract to deliver gas to China via the Power of Siberia pipeline was signed in 2014, the average gas-supply price was set in the range of $350–380 per tcm. Even at that price level, Gazprom had requested that the Russian government effectively zero out all major taxes for the Power of Siberia project—claiming that the project would not be profitable unless near-total tax exemptions were provided. The exemptions were granted and, as a result, the mineral-extraction and property taxes were forgiven for fifteen years until 2035. In reality, the price of gas supplies to China via Power of Siberia never even reached $300/tcm, and many analysts believe they do not generate any profits.

That suggests that Russian gas supplies to China may not become profitable for the foreseeable future. China is clearly not expected to need additional gas supply until after 2030, and that appears to explain why Beijing is not interested in granting Gazprom any kind of price premium for new gas-supply contracts. Moreover, China has alternatives: domestic Chinese gas production, LNG, and imports of piped gas from Central Asia.

Speaking at the Eastern Economic Forum in September 2022, Vladimir Putin admitted that “our Chinese friends are tough bargainers,” which is why agreeing with Beijing on gas-supply price parameters “is never so easy.” More than a year later, there is still no indication that an agreement on gas supplies via the proposed new Power of Siberia-2 pipeline project is imminent. This is despite Putin’s promise made in September 2022 (and reiterated in March 2023 during a summit with Xi Jinping in Moscow) that Russia and China are “close” to signing a gas contract for Power of Siberia-2.

The lack of agreement on Power of Siberia-2 reflects the fundamental dilemma Gazprom faces: China is just not ready to buy Russian gas at a price that will be profitable for Moscow.

Moreover, the shipment distance for gas produced in western Siberia and shipped via the proposed Power of Siberia-2 pipeline will be significantly lengthier than that of Power Siberia-1, which means that Gazprom would need a significantly higher sales price than even $350/tcm to make any money from gas exports to China. At the very least, gas exports to China will not deliver any notable revenues to the Russian state budget.

Gazprom’s overall business model has been shattered by its decoupling from the European gas market. Most of the company’s profits came from the EU and, with its significantly lower gas prices, Russia’s domestic gas market just can’t deliver comparable profits. Building new gas-pipeline infrastructure to China, as discussed above, would require enormous capital investments, without offering obvious profits. Building a pipeline to deliver gas to India and other South Asian countries doesn’t seem viable given the complicated mountainous terrain and geopolitical challenges with potential transit countries like Afghanistan. Moreover, Gazprom suspended the construction of planned new LNG projects due to lack of access to critical Western technology.

In this situation, Gazprom attempted various measures aimed at containing gas output, expanding domestic gas demand, and seeking customers elsewhere, but with marginal results. It is not difficult to cut gas production given that the bulk of output comes from matured western Siberian fields, with a significant share of low-pressure gas from depleted reservoirs that require booster measures to increase well productivity. In many cases, it is simply enough to cancel additional booster activities to minimize production.

But finding alternative gas markets with comparable profitability to that of the lost European market will inevitably prove challenging. Russian Deputy Prime Minister Aleksandr Novak has formulated an ambitious program aimed at boosting Russian domestic natural-gas demand, including an accelerated program of gasification for Russian regions, the expansion of small-scale LNG, and boosting natural-gas use as engine fuel for the transport sector.

At the same time, Gazprom, through its lobbyists in the State Duma, is actively lobbying for the full liberalization of natural gas prices for domestic Russian consumers, with an exemption for households. But even with such a policy change, Russia’s domestic gas market is not capable of delivering profits even remotely comparable to those Gazprom received from the EU in the past. Also, significant growth in domestic gas prices will impede Russia’s fragile economic recovery, which is why the government will most likely intervene and cap Gazprom’s domestic gas price if it goes too far.

Gazprom is also actively trying to find new export consumers or to boost exports through existing pipelines. But these efforts have also met with little success. For example, Gazprom has signed a new contract with Uzbekistan, but it amounts to just 3 bcm per year, with scant prospects for growth. Since the full-scale invasion of Ukraine in February 2022, Gazprom has also been trying to set up a “gas hub” scheme with Turkey. This is effectively a “gas laundering” operation that involves mixing Russian gas with Azerbaijani or Iranian gas and then reselling the rebranded product to Europe via Turkey. But the project has been stalled due to wrangling between Moscow and Ankara over who would control the hub and trading schemes, as well as over concerns about the EU’s response.

All this leaves Gazprom in limbo for the foreseeable future. The domestic gas market and potential alternative piped-gas export markets will not be able to make up for those lost from the EU market, and the development of LNG exports so far remains blocked due to lack of access to critical Western technology.

This has ramifications for Russia’s budget, as Gazprom was a major source of tax revenue before the invasion of Ukraine. In 2021, the last year when Russia published detailed reporting on budget revenues, Gazprom’s share of federal budget revenues exceeded 7 percent, but it was estimated to be only about half of that share in 2023.² These revenues are not recoverable in the foreseeable future, as Gazprom’s “super profits” from the European gas market were taxed heavily and LNG exports are largely exempt from taxation.

The oil industry: Surviving in difficult Asian markets

The Russian oil industry has weathered sanctions much better than Gazprom has, largely because it doesn’t suffer from the infrastructure limitations that exist in the gas industry. Russian oil can still be shipped via seaports to Asian markets, albeit with discounts and at a higher cost. Additionally, the industry is benefiting from a lighter tax burden that was introduced in response to falling oil prices. However, the government is planning to gradually raise taxes.

Oil output has contracted only slightly as compared to the pre-war period, by 1–2 percent. Russia currently produces about 10.5 million barrels per day (mbd) of crude oil, as opposed to just over 11 mbd before the war.

However, it should be noted that there are no verifiable and detailed public data on actual Russian oil output. We are therefore forced to rely on official aggregated figures. The general assumption among experts is that Russia has reduced its oil output in the past year by approximately 500,000 barrels per day (kbd) according to an agreement on oil-supply cuts within the Organization of Petroleum Exporting Countries Plus (OPEC+), which includes ten non-OPEC members including Russia. The exact figures remain unknown because the Russian government classified oil-production data following the full-scale invasion of Ukraine. But generally, in contrast to the gas industry, Russia has continued to produce oil more or less at pre-war levels.

The Russian oil industry has, however, suffered from significant revenue and profit losses due to the EU oil embargo. From December 2022 through March 2023, for example, Russia’s average monthly Urals crude-export prices have fallen to $48–50 per barrel due to the steep price discounts demanded by Asian consumers.

Russian oil exporters have managed to reduce these Asian discounts. In the second quarter of 2023, Urals oil prices rebounded to $55–58 per barrel. They exceeded $60 per barrel in July 2023 and reached $80 per barrel in September 2023. Overall, Asian price discounts for Urals oil have been reduced to $10–12 per barrel. Since November 2023, after the US Government has exerted some sanctions enforcement pressure on oil shippers and traders, discounts for Russian oil shipped to Asia grew again – they now stand at about $17 per barrel, but the average price of the Russian Urals oil export crude was around $68 per barrel in April 2024, well above the G7 oil price cap .

Oil-price level is not the only parameter influencing the profitability of Russian oil exports to Asia. Another is the significantly higher cost of shipping oil to Asian markets. For instance, there’s a reason why Russia barely exported any crude-oil volumes to India before the full-scale invasion of Ukraine. It takes approximately a month for an oil tanker to travel from Russia’s Black or Baltic Sea ports to India. In contrast, it takes just a few days to ship oil to Genoa or Rotterdam. Shipping oil to India also involves passing through additional bottlenecks, such as the Suez Canal or Bab al-Mandeb Strait, where tankers risk delays due to traffic and incur additional demurrage and insurance costs. Per the author’s estimates (as exact figures are unavailable), the extra costs of shipping Russian oil from Novorossiysk or Primorsk to India vary in the range of $10–15 per barrel, significantly reducing the efficacy of exports to India and other Asian destinations.

Russia has also established a so-called “shadow fleet” of oil tankers with obscure ownership and jurisdiction. It also sought to use third-country intermediaries and traders to sell oil to Asian destinations or even resell it to Europe, circumventing sanctions. But while such schemes may yield revenues for some Russian-affiliated shell companies, these revenues are not very large (just a few dollars per barrel). These profits also do not add revenues to the Russian state budget because oil exports are taxed according to officially available crude-oil price numbers and these shadow operations abroad are not visible to the Russian tax authorities.

In 2023, Russia adopted a new mechanism of gradually increasing the oil-export price used for taxation, in an apparent effort to force oil companies to negotiate lower discounts with consumers. However, all these accounting tricks do not change the fundamentals of the situation, and paying too much attention to them is a distraction. Russian oil-export revenues throughout 2023 have largely been determined by the overall dynamics of the international market, and the declining discounts for Russian crude resulted from markets becoming significantly tighter due to the Saudi-led OPEC+ oil-output cuts announced in the spring of 2023.

Due to rebounding export prices, Russian oil revenues have normalized in the third quarter of 2023, following a sharp plunge early in the year. Nevertheless, it is also clear that rerouting oil exports to Asia has created additional cost burdens for Russian oil exporters. Another significant issue involves the relations between Russian oil majors and the Western oilfield-services companies working in oil-reservoir management, such as Baker Hughes, Halliburton, Weatherford, and SLB. Some of these announced they were leaving Russia following the full-scale invasion of Ukraine.

It is beyond the scope of this report to discuss which of these oilfield-services companies have kept their word and actually left Russia. What is important is that they possess unique technologies for oilfield-reservoir management and enhancing the productivity of oil wells, which can’t be substituted by Russian, Chinese, or other third-party technologies and know-how. Most of the oilfield stock of Russian oil companies is matured and depleted fields with difficult reservoirs in western Siberia, the Urals, and other regions. Therefore, using cutting-edge Western technology remains critical to maintaining the productivity of oil wells and overall levels of oil output.

At the end of the 1990s and the beginning of the 2000s, the massive outsourcing of Russian oilfield services to these Western companies led to dramatic increases in productivity. For example, the average Russian oil well increased production from approximately fifty-five barrels per day in 1995 to more than seventy-five barrels by the mid-2000s, a productivity growth of more than one-third. Should Western oilfield services completely depart Russia, this may result in comparable loss in average well productivity and, as a result, overall oil production. There are, however, strong indications that at least some of the Western oilfield-service companies continue to work with the Russian oil industry, reneging on their promises to leave.

The G-7 oil-price cap is not working

It is clear that the oil-price cap the Group of Seven (G7) imposed on Russia in September 2022 is not working. Russia has continued to easily sell oil exported via the Eastern Siberia-Pacific Ocean oil pipeline to China at a price well above the $60-per-barrel limit, effectively ignoring the price cap. Moreover, the Russian Finance Ministry reports that even the price of Urals crude shipped through Black and Baltic Sea ports has exceeded $60 per barrel. As said above, as of March 2024, Russia continued to export crude oil priced well above the $60 cap. When the oil-price cap was introduced, the G7 countries lacked sufficient capacity and legal authority to monitor the thousands of shipping, trading, and insurance transactions Russian oil-exporters use—particularly those outside the G7’s jurisdiction.

As a US Treasury Department press release put it, the Treasury Department simply hoped that “nonparticipating countries’ goal is to get the lowest price for buying oil, and the price cap will give them additional leverage in their negotiations with Russia.” However, this did not happen. When market prices went up, Russia was able to sell its crude above the price cap, switching mostly to traders, shippers, and insurers operating outside the G7 regulatory jurisdiction. Widespread price-cap evasion schemes are thriving due to a loose regulatory framework that does not require insurers and shipowners to know any pricing information about the oil shipped.

It is questionable whether the G7 will be able to enforce its oil-price cap at all, given these circumstances. At the very least, G7 countries will need to significantly beef up their sanctions-enforcement capacity. Hundreds of additional employees will be needed to monitor the thousands of transactions related to Russian crude-oil exports to ensure compliance with the oil-price cap. Unless these additional staffing measures are taken, and are accompanied by relevant legal action against companies involved in breaching the oil-price cap, enforcement will just not happen. It remains an open question whether the G7 countries will ever be able to do anything about Russia’s “shadow tanker fleet” or other shell companies engagement in trading, shipping, and insurance transactions, which are operating fully outside the G7 regulatory jurisdiction. It was the EU oil embargo, and not the price cap, that truly worked against Russian oil exports.

LNG: A lifeline for Putin

While the EU nearly stopped purchasing piped gas from Gazprom following the full-scale invasion of Ukraine in February 2022, Russia’s LNG exports to Europe in 2023 surged by about 38 percent as compared to the pre-war year of 2021; the EU imported about 22 bcm of Russian LNG in 2023. Remarkably, after the United States, Russia is Europe’s largest supplier of LNG.

Despite Russia’s increasing presence on the LNG market, Gazprom is not involved. The key Russian LNG exporter is Novatek, the country’s second-largest natural-gas producer. In 2022, Novatek exported more than 76 percent of the LNG produced by its Yamal LNG project to Europe. Overall, Russia currently exports more than 50 percent of its LNG to Europe, compared to just 39 percent in 2021.

These exports are not a major source of budget revenue for Russia as Novatek’s LNG production and exports are largely untaxed, enjoying a twelve-year exemption from mineral-extraction taxes and export duties. Nevertheless, such massive LNG exports to Europe are a major source of revenue for Russia, totaling up to 10 billion euros per year, and can be used by Putin to finance the war against Ukraine. For example, the Russian government has raised the profit tax on Novatek from 20 percent to 32 percent for 2023–2025. The draft budget for 2024 also contains hints that the authorities may impose certain one-time payments on oil and gas companies, including Novatek, in 2024. The European Union is not currently considering sanctioning Russian LNG, which means that the revenue flow will likely continue uninterrupted in 2024.

Novatek also managed to continue with a massive project called Arctic LNG-2 (ALNG-2), despite some initial difficulties accessing critical Western technology due to sanctions. Western companies such as Linde, Technip, and Baker Hughes left the project after February 2022, but Novatek managed to either assure the supply of previously contracted equipment or to find alternative Chinese suppliers. However, after sweeping US sanctions were introduced against the ALNG-2 project in November 2023, the project was effectively brought to a halt, which undermines Russia’s plans to expand LNG exports in the coming years and show the effectiveness of individual sanctions against specific oil and gas projects.

The Russian budget: No more super profits

Despite rebounding oil prices and the G7 oil-price cap not working, Russian oil and gas budget revenues were significantly down in 2023, contracting by 23.9 percent year-over-year. By comparing pre-war figures from 2021, the contraction of oil and gas revenues becomes even more visible. While the average oil price in 2021 and 2023 is comparable, oil and gas budget revenues have fallen precipitously. In 2021 they were 6.8 percent of GDP and accounted for 35.6 percent of total budget revenues; in 2023 they were just 5.3 percent of GDP and 30.9 percent of total budget revenues (see Table 1).

While oil-export revenues recovered in the second half of 2023, as discussed above, gas-export revenues appear lost for the foreseeable future. LNG revenue exports are not sufficient to compensate for the loss of piped-gas exports to the EU. Moreover, rerouting of oil shipments to Asia reduces the profitability of oil exports. It is, therefore, reasonable to expect that Russian oil and gas revenues will be significantly depressed due to Western sanctions and Gazprom’s decoupling from the European gas market. And barring a sharp rise in oil prices, these super profits will not return.

Russian budget revenues from oil and gas fell 55–58 percent in the first two quarters of 2023 as compared to the same period in 2022. In the third quarter of 2023 they recovered to nearly 2022 levels, although this is largely due to higher international prices resulting from output cuts announced by Saudi Arabia in the spring of 2023. Had Saudi Arabia maintained its previous levels of oil production, Russian revenue losses would have been significantly higher.

According to the 2024 federal budget projections, Russian government is nevertheless forecasting 29.8-percent year-over-year growth in oil and gas revenues in 2024, despite not projecting a significant rise in oil prices. The draft budget projects average oil prices for 2024 at $71.30 per barrel. The government has hinted that it may impose a one-time windfall tax on the oil and gas industry, although the nature of this tax remains unclear. Such a tax, combined with the increased cost of oil shipments to Asia and the loss of productivity due to the lack of access to Western technology, will have a negative impact on upstream capital investments, putting additional pressure on the industry.

The Global South and the limits of cooperation

After February 2022, Russia placed a lot of hope in developing energy cooperation with China, India, and the Global South. More than two years in, these hopes appear to be in vain. Investors do not appear interested in entering the Russian oil and gas sector, and the switch to Chinese technology and equipment has proven significantly more costly than working with Western companies.

Russia had high hopes that exiting Western oil and gas majors would be replaced by investors from the Global South. But thus far, there have been no significant oil and gas investments from China, India, or the Middle East since February 2022. This is largely due to fears of secondary sanctions and excessive wartime regulations, which increase the risks of investing in Russian assets.

Notably, Chinese and Indian companies were not rushing to invest in Russia even before the full-scale war. According to data from the Russian Central Bank, the total accumulated foreign direct investment (FDI) in Russia from all Chinese investors across all sectors totaled just over $3 billion at the end of 2021. For investors from India, the total was just $600 million. And no new FDI from the Global South has been recorded since.

Moreover, some Chinese companies even suspended certain operations in Russian oil and gas and related industries. The Chinese petroleum and chemicals firm Sinopec, for example, suspended talks with the Russian petrochemical company Sibur regarding a major investment and gas-marketing venture in the spring of 2022.

Switching to Chinese technologies and equipment to replace the departing Western technology companies has also proven costly. Novatek, for example, has reported a 17-percent (nearly $4-billion) increase in capital expenditures for the Arctic LNG-2 project due to switching from Baker Hughes turbines to Shanghai Electric equipment. Similar cost increases and losses in productivity can be reasonably expected across the Russian oil and gas industry.

China, India, and the countries of the Global South seem more interested in taking advantage of the current situation and buying Russian energy at a discount than they are in investing in Russia’s oil and gas industries.

Russia’s diminished ability to use energy as a weapon

Decoupling of Western markets from Russian oil and gas has seriously undermined Moscow’s ability to use energy as a weapon against Western democracies. According to the European Commission, the Russian share of EU imports of petroleum oils fell to 3.5 percent in the fourth quarter of 2023, down from 24.8 percent in the fourth quarter of 2021. The share of piped natural gas fell to 12.7 percent from 48.0 percent across the same period. This all significantly reduces Russia’s leverage over European countries through oil and gas supplies.

Some EU countries, most notably Hungary and Slovakia, continue to buy Russian oil and gas. Not surprisingly, these countries remain the least favorable to keeping sanctions against Russia and aiding Ukraine. In Slovakia, this became even more visible when the pro-Putin politician Robert Fico became prime minister after the October 2023 elections, but Hungary and Slovakia remain outliers in the EU.

Central Asian energy exporters, on the other hand, are much more vulnerable to Russia’s energy blackmail. Kazakhstan, which exports about 80 percent of its crude oil through Russian territory and seaports via the Caspian Pipeline Consortium, is particularly vulnerable. Establishing an alternative export route to Europe will be difficult for Kazakhstan, as it would require investing in and developing a tanker fleet in the Caspian Sea. In 2022, Russia threatened to shut down the Caspian Pipeline Consortium on regulatory grounds in an apparent effort to assure Kazakhstan’s loyalty amid the international backlash over Ukraine.

What is to be done? Recommendations for policymakers

How can Western policymakers make sanctions against Russia’s oil and gas industry more effective?

First, it is important to understand that Russian oil-export revenues have been rebounding recently not because the EU oil embargo is ineffective. In fact, the embargo is working. It has led to a sharp increase in costs of shipping Russian oil to consumer markets in Asia (more than $10 per barrel, according to the author’s estimate). It has also led to price discounts, which remain at levels above $10 per barrel. The key factor contributing to increasing Russian revenues from oil exports is the spring 2023 OPEC+ decision to cut oil output. Therefore, one key focus for Western policymakers should be to put diplomatic pressure on OPEC members and other oil-producing states to increase oil output.

The EU should also tighten sanctions against Russian oil transshipment through its territorial waters. This would further complicate the logistics of rerouting Russian oil to Asian markets. This matters, because the bulk of Russian oil is still exported via Baltic and Black Sea ports, as direct pipeline infrastructure to Asia is insufficient and its expansion requires huge investments.

The G7 oil-price cap on Russian oil is clearly not working. Several steps would, at least partially, increase the efficiency of the price cap, including

• increasing the number of professional staff permanently dedicated to monitoring Russia’s export-oil shipments (currently, the job is mostly done by outside experts, journalists, and investigators, while the tens of thousands of transactions involved require regular monitoring and analysis to uncover price-cap evasion schemes);
• introducing secondary sanctions against third-country insurers, traders, and shippers who are helping Russia evade the price cap; and
• improving the mechanism of “attestation” of transactions ensuring compliance with the price cap. This involves assuring that shipowners and insurers are provided with sufficient pricing information by the buyers and sellers of the Russian crude to make sure that the oil is sold below the price cap.

Regarding piped-gas imports from Russia, the European Union should keep asking the EU member states that are still buying gas from Russia for specific plans to phase out Russian imports. Countries like Italy, which continue to receive certain volumes of Russian piped gas, are promising to end Russian gas imports quite soon, others, like Hungary and Austria, continue unrestricted imports of Russian gas, reaching and even exceeding pre-war import levels. At the same time, these countries have made little progress in renewable-energy production or reducing gas demand. EU unity on singling out Gazprom’s gas supplies is essential to continue minimizing Putin’s export revenues.

The EU should also unequivocally reject the import of natural gas from the so-called “energy hub in Turkey.” This project is nothing more than an attempt to launder Russian gas supplies by mixing them with gas from other producers like Azerbaijan and Iran. Turkey should be sent a clear message that laundering Russian gas will not be tolerated. Any contracts for gas supplies via Turkey to the EU should be concluded directly with suppliers, and not through opaque intermediary schemes that might assist Russia.

The EU also needs a comprehensive policy on LNG imports from Russia. These imports may be necessary in the short term to fill the gap left by the cessation of Russian pipeline-gas imports. Nevertheless, the surge of Russian LNG imports to the EU in 2022–2023 is not normal and generates significant revenues for Russia (which may also be used to finance the war through emergency windfall taxation). The EU needs a clear schedule to phase out Russian LNG imports. It should also accelerate its efforts to develop offshore natural-gas production, particularly in the Mediterranean and Black Seas, as an alternative to Russian gas in the medium and longer term.

The G7 countries should also conduct a comprehensive critical oil-and-gas technology review. Such a review would identify critical technologies Moscow still has access to that may assist Russia in sustaining its oil and gas exports and evading Western sanctions. It could also provide policy recommendations for additional sanctions, including secondary sanctions against third countries where appropriate.

Conclusions

It is reasonable to conclude that sanctions have had a significant impact on the Russian oil and gas industries and the budgetary revenues that come from them. And it is wrong to conclude that sanctions are not working—they are. However, much more work must be done to enhance the effectiveness of sanctions.

Also, for the purpose of setting realistic goals and expectations, it is important to understand that the Russian oil and gas industries and Russia’s public finances are too strong and resilient to simply collapse under the weight of sanctions. They haven’t collapsed yet, and probably won’t in the foreseeable future. But they are suffering enormous difficulties due to sanctions and decoupling from the Western energy markets. Over time, this is likely to result in further loss of investment, output, efficiency, and revenue.

Vladimir Milov is a Russian opposition politician, publicist, economist, and energy expert, and recently served as an economic and international affairs adviser to the late Russian opposition leader Alexey Navalny. He is also vice president of the Free Russia Foundation, an international organization supporting civil society and democratic development in Russia based in Washington, D.C. From 1997 to 2002, Milov had worked with the Russian Government, including as Deputy Energy Minister in 2002. He was the author of the concept of breaking up and unbundling Gazprom vetoed by Vladimir Putin. Later, Milov became one of the major public critics of Vladimir Putin, working closely with late opposition politician Boris Nemtsov, and later with Alexey Navalny. He is a research associate at the Wilfried Martens Centre for European Studies in Brussels, vice president of the Free Russia Foundation (Washington, D.C.). Milov is currently based in Vilnius, Lithuania.

The Eurasia Center’s mission is to promote policies that strengthen stability, democratic values, and prosperity in Eurasia, from Eastern Europe in the West to the Caucasus, Russia, and Central Asia in the East.

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On May 9, Transatlantic Security Initiative senior fellow Elisabeth Braw was quoted in CBC on the Russian shadow fleet and its effect in circumventing the sanctions.

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The deep-seated reservations held by large European Union (EU) member states and institutions like the ECB about seizing the reserves are well publicized. Irrespective of whether we think these are justified, they are a key constraint to how the funds might be utilized in the short term to help Ukraine win the war. To win, it is necessary to restore the defense capabilities of Ukraine and the EU, including their ability to produce weapons and ammunition jointly. As we fight, Europe is a deep rear that can provide us Ukrainians with uninterrupted supplies of weapons for a joint victory.

The problem is that the EU27’s current proposals on using the interest income from the blocked assets cannot provide enough funds to meet our needs. Their estimate is $3.6bn per year, which in no way solves the problem. Even more so now that it seems clear they won’t apply this retroactively to profits accumulated in 2022 and 2023.
The EU is now facing a serious challenge to increase defense spending to at least 2 percent of GDP, if not more. We Ukrainians also need them to keep supporting us to have any chance of winning a war which is existential for them too. There are only two ways to do this quickly and efficiently: cut social spending or borrow the missing resources. Both make it challenging for the European leaders which have supported Ukraine to win re-election, and are therefore against our interest too. It remains challenging to sell the idea of “belt-tightening” to a fed-up European electorate, which has grown accustomed to a comfortable life over the past thirty years since the threat from the Soviet Union disappeared. So we need to get creative.

This is where $280 billion of Russian reserves can be used more intelligently—and more lucratively in the short term—without crossing red lines which our European partners are afraid of. To boost macrofinancial support and military assistance to Ukraine, the European Commission needs to start working on a “confiscation without confiscation” project.

In order to implement this, the EU27 should decide that a significant share of the blocked assets of the Russian Federation be reinvested in a safe financial instrument, long-term EU defense bonds maturing in thirty years. The raised funds, as part of the agreed strategy to reform the European military-industrial complex, can be distributed on a grant basis among the countries that agree to participate in this program. Weapons producers in France, Germany, Poland, other EU Member States, and even Ukrainian regions further from the front can all receive money to ramp up capacity and production of the weapons we need to defeat the common enemy.

With such a model, everyone wins. EU leaders restore the defense industry of their countries without having to divert funds from social spending. Moreover, they increase the number of jobs in their economies. Ukraine receives the necessary funds for waging war and strengthening its own military-industrial complex, laying the foundation for victory against our aggressor.

You may ask what will happen once the money is spent. Indeed, won’t the EU owe this money to Russia thirty years from now? Giving Ukraine the chance to push back the aggressor now makes it much more likely that, in the meantime, the EU can negotiate the lifting of sanctions with a weakened Russia. One of its demands can be that Russia relinquish its claim on this money given the damage it has wrought in Ukraine. The scheme does involve risk, but I believe it is manageable and worth taking to prevent Russia’s invasion from succeeding.

I hope that the June G7 summit in Italy will set the stage for a solution to the Russian asset question that works for everyone while rising to the challenge. Besides the EU, our other allies—the United States, Great Britain, Australia and Japan—could implement similar schemes of for the smaller amounts of Russian Central Bank assets blocked on their shores.

Oleg Dunda is a Member of Parliament of Ukraine.

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The Select Committee’s report, published in December with minimal fanfare, proposes that the United States reset the terms of economic relations with the People’s Republic of China (PRC), prevent US capital and technology from aiding China’s military buildup and human rights violations, and build US technological leadership alongside allies and partners. This bipartisan blueprint, though not perfect, is a useful foundation for US policy toward the PRC for the next Congress and the next administration—regardless of who wins the November elections.  

The authors of this article come from different political perspectives, but we agree that it’s time for a comprehensive economic strategy to advance US interests and deter the PRC’s ability to do them harm. Building on the Select Committee’s work, here are eight principles to inform a comprehensive playbook.

1. Be affirmative, agile, and systemic

Defense alone is not enough to prevail in the United States’ strategic competition with the PRC. The economic playbook needs to be affirmative in its outlook, agile in its execution, and systemic in its analysis. Those qualities will be required to simultaneously strengthen the US industrial base, foster innovation and new technologies, and pursue a positive economic agenda with partners and allies while taking the necessary defensive actions.

2. Get industrial policy right

Policymakers should look to history and geopolitics to develop a prudent two-pronged approach to industrial policy that focuses on strengthening the US domestic manufacturing base in targeted sectors (e.g. semiconductors) and investing in innovation and broad industrial infrastructure and training. Investment in research and development and a favorable tax and regulatory environment may be more effective than direct subsidies, which, although potentially needed in narrow circumstances, are more susceptible to industry capture and extra-economic considerations.   

3. Arrest the PRC’s market distortions and manipulations

The PRC has not lived up to the commitments it made when it joined the World Trade Organization (WTO) in December 2001. Nowhere is this more obvious than with respect to the PRC’s brazen and persistent excess capacity in electric vehicles, solar panels, steel, semiconductors, and pharmaceuticals, just to name a few. It is imprudent for the United States to afford China the same tariff treatment as other WTO members. However, merely revoking the PRC’s permanent normal trade relations status and reverting to Smoot-Hawley tariffs would be inefficient, outdated, and counterproductive. The Select Committee report puts forth a more sophisticated and effective approach by creating a new tariff column for China and renewing certain WTO safeguard mechanisms. This offers a promising foundation for a more modern and modulated trading framework with the PRC and should be put in action in close coordination with Group of Seven (G7) and Quadrilateral Security Dialogue members.

4. Stop US capital and technical knowhow from aiding the adversary

Export control measures on semiconductors and other advanced technologies put forth by the Biden administration and Congress to thwart the PRC’s military modernization are an important start. Next should come screening of outbound investments to prevent US investors from unintentionally aiding China’s military and human rights violations. This calls for a modulated approach involving both specific entities and sectors. Additionally, the US government should work with domestic and allied academic and research institutions on a principled, pragmatic, and robust cross-border research protocol to preclude the PRC’s intellectual theft and unauthorized technology transfer. 

5. Pursue a positive economic agenda with partners and allies

Punitive measures such as tariffs, investment restrictions, and export controls are necessary but insufficient for winning the strategic competition. A positive economic agenda with partners and allies is needed to incentivize the private sector—both in the United States and overseas—to diversify important supply chains away from China. The Select Committee report promotes bilateral trade negotiations with Taiwan, the United Kingdom, and Japan based on the high standards set out in the US-Mexico-Canada trade agreement. If a new free trade agreement is practically or politically challenging, the report suggests targeted agreements with trusted trade partners in areas such as the medical sector or critical minerals. As part of this effort, a comprehensive review and modernization of the Bretton Woods institutions to better reflect geoeconomic realities is urgently needed. 

6. Win the transition to the green economy

The road to the green economy rests wholly within the geopolitical and geoeconomic contest between the United States and the PRC. The United States should leverage its substantial advantages over the PRC in traditional and renewable energy and technology to address the immediate energy security needs of its partner nations while also offering them a credible energy transition toward a greener economy.

To ensure that its energy supply chains remain secure and that it remains energy independent, the United States should aggressively pursue sectoral agreements and minerals security partnerships recommended by the Select Committee report. Furthermore, the United States should remain vigilant against climate engagement with the PRC without due reciprocity and must avoid unwittingly facilitating the PRC’s declared intent to monopolize and dominate future green industries.

7. Set the trends around standards for the digital economy

As the world’s largest digital economy, the United States bears the responsibility to articulate the rules, norms, and practices of digital governance—including over artificial intelligence—that favor Western values over China’s model of censorship and control. The United States must lead on digital standards in order to keep its superiority in technology and financial markets. 

8. Modernize US policies, instruments, and institutions

Unlike defense and diplomacy, there is no identified lead US agency to engage and prevail in the economic competition with the PRC. The diverse and often discordant set of economic policies, instruments, and institutions engaged in the effort are frequently found wanting in both efficacy and efficiency. In short, US institutions are underprepared for the complexity of economic competition with the PRC. The United States has a long history of modernizing its government levers to address the challenges it confronts, from the 1986 Goldwater-Nichols legislation to reinforce the military chain of command after problems surfaced during military operations in Iran and Grenada, to post-9/11 reforms to federal intelligence and law enforcement agencies. A similar endeavor is needed to improve US economic diplomacy, coordination, and engagement.

Prevailing over the PRC in economic competition calls for total national commitment and engagement. It requires a comprehensive, nuanced, and tailored playbook utilizing not only the proverbial hammer and scalpel, but all the multipurpose tools in the toolbox. The Select Committee has done the nation a service by unequivocally identifying the PRC as an adversary and a rival, and it put forth a useful framework with pragmatic recommendations to bolster national economic security. Its report represents a useful transition from the initial chapter prioritizing industrial policy and tariff measures to the next chapter of working with allies and partners to prevail in the global marketplace.

Domestic prosperity depends on the United States leading the global economy. Now is the time to develop and execute a new US economic playbook to maintain that lead. 

Kaush Arha is a nonresident senior fellow at the Atlantic Council’s Global China Hub and previously served as the senior advisor for global strategic engagement at USAID and the G7 Sherpa for the Blue Dot Network during the Trump administration.

Peter Harrell is a nonresident senior fellow at the Carnegie Endowment for International Peace and previously served as senior director for international economics with a joint appointment to the National Security Council and National Economic Council during the Biden administration.

Clete Willems is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and previously served as deputy assistant to the president for international economics and deputy director of the National Economic Council during the Trump administration.

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The European Union (EU) has made some progress on its conservative plan to tap into the interest income but its own estimates say this will provide about $3.5 billion a year. However, Ukraine’s needs are much greater. The first tranches of the Ukraine Facility Platform agreed by the EU—the $7.9 billion direct financial aid planned in the supplemental and aid from other supporters—all combine to provide enough for 2024. But Kyiv cannot afford to again face cash flow issues similar to what it endured earlier this year.

As Ukraine continues to fight for its survival now, bringing the value of the staggered interest income into the present would at least provide much-needed visibility for funding in 2025. In late March, reports surfaced that the United States was pushing the G7 to consider a sovereign loan of $50 billion to Ukraine which would be repaid using the interest income.

Where does this $50 billion figure come from? Given that we know many of the parameters the White House is working with—from interest rates to the regular income stream they create—our team dusted off our corporate finance textbooks and tried to retrace their steps.

Scenario 1 is the current EU workstream. If we use today’s interest rates and the amount Russia’s reserves are gaining in overnight lending, Ukraine could expect to receive around $3.6 billion in 2025 as part of “windfall profits.” Of course, as interest rates fall in the Eurozone, future earnings may shrink.

Scenario 2 is what the United States is pushing for ahead of the June G7 Leaders’ Summit in Italy. Daleep Singh, Deputy National Security Advisor, has asked: Why only give Ukraine this year’s profits when you could, in fact, pull forward future interest earnings? How much money would that mean for Ukraine in 2025? We think it would look something like this:

You can quibble with our annuity formula, but the bottom line is that $50 billion dollars is an incredible influx of cash that would guarantee payments to the entire military and civil service, help with recruiting efforts, ensure financial stability, and catalyze private investment. Plus, as far as Ukraine is concerned, it would be given as a grant, not a loan.

Like everything with these assets, the idea is controversial. It requires believing that the reserves will continue to be blocked for twenty years or given over to Ukraine. Otherwise, the G7 is on the hook for repayment. Remember, the block on the assets has to be unanimously renewed every six months by the 27 member states of the EU.

That’s all the more reason this approach may be the best option to get Ukraine a significant amount of money in 2025. It’s not seizing all of the $280 billion, which the Europeans and Japanese remain opposed to, but it’s almost fifteen times more than what’s on the table from the current EU proposal, which is still far from operational. Expect to hear more on this debate as the June G7 Summit in Apulia, Italy, draws closer.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center

Mrugank Bhusari is assistant director at the Atlantic Council’s GeoEconomics Center

Sophia Busch contributed to this piece

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email
SBusch@atlanticcouncil.org

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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While most attention has so far focused on the military aspects of this new US aid package, the bill passed in Washington DC also includes an important step toward holding Russia financially accountable for the invasion of Ukraine. The Rebuilding Economic Prosperity and Opportunities for Ukrainians Act, or REPO Act, paves the way for seizures of Russian Central Bank holdings that have been frozen in the United States for more than two years, while also setting the stage for a more global approach to confiscating Russian assets.

Western countries froze approximately $300 billion in Russian assets following the onset of Russia’s full-scale invasion of Ukraine in February 2022. The Kremlin has been unable to access these assets ever since, but they still technically belong to Russia. The REPO Act could now make it possible to seize Russian assets and use them for the benefit of Ukraine. Only around $5 billion of the overall $300 billion is located in the US, but the United States is setting an important precedent by taking a leadership position in the confiscation of Russian state funds.

We should not expect any immediate action. The REPO Act obliges the White House and US Treasury Department to identify Russian assets in the US within a 90-day period and report back to Congress in 180 days. After a further month, the president is then authorized to “seize, confiscate, transfer, or vest” any Russian state sovereign assets located within the United States.

The US is unlikely to act unilaterally. Instead, United States officials have indicated they wish to move forward in conjunction with other Western governments. The issue is set to be high on the agenda during the next G7 summit, which is scheduled to take place in Italy in June. “The ideal is that we all move together,” commented US National Security Advisor Jake Sullivan on April 24. This would send a message to Moscow that the democratic world is united in its commitment to make Russia pay for the largest European invasion since World War II.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

In order to appreciate the significance of the REPO Act, it is helpful to track Russia’s reaction. Since the aid bill passed, there has been plenty of outrage in Moscow. Former Russian President Dmitry Medvedev expressed his wish for the United States to be “plunged into a new civil war,” and threatened to seize the assets of US citizens in Russia. Kremlin spokesman Dmitry Peskov warned that Russia would make the United States answer for the confiscation of frozen assets.

Meanwhile, Russian Duma Speaker Vyacheslav Volodin said Russia could now pass “symmetrical” legislation allowing Moscow to confiscate Western assets located inside the Russian Federation. Volodin was one of many Russian officials to claim that the US step was intended to “provoke” the adoption of parallel measures in EU countries. He predicted that this would be “devastating” for the European economy.

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Skeptics in the West have voiced concerns that the seizure of Russian assets could undermine the global financial system and weaken Western economies. European Central Bank President Christine Lagarde is one of numerous senior figures in Europe to express unease over the confiscation of Russian assets, arguing that it could mean “breaking the international legal order that you want to protect, that you would want Russia and all countries around the world to respect.”

This caution ignores the fact that Russian state assets in Western jurisdictions have now been frozen for more than two years without sparking any noticeable negative consequences for the international financial system. If measures against Russian assets were sufficient reason to trigger a loss of confidence in the existing financial system among other authoritarian states, they have already had ample time to react.

The statements coming out of Moscow over the past week underline the sensitivity within the Kremlin to the confiscation of frozen Russian money. While the REPO Act represents a meaningful milestone in the debate over Russian assets, it is not decisive. Nevertheless, this aspect of the aid package has attracted almost as much attention as the very significant additional military support that is now being sent to Ukraine.

It would certainly seem that members of Russia’s ruling elite are more concerned about the security of their own financial resources than the safety of the Russian soldiers fighting in Ukraine. Indeed, many observers have long argued that Putin’s top priority is safeguarding his own ill-gotten wealth and that of his inner circle. If the West is serious about defeating Russia in Ukraine, it should seek to exploit this apparent vulnerability.

Following the adoption of the REPO Act, the next stage in the process should be the promotion of similar draft laws by the European Union and G7 countries. The recent US decision on Russian assets can provide the impetus others have been waiting for. Russia only understands the language of strength, and views hesitation as an invitation to go further. Western leaders can now demonstrate their resolve by acting together to make Russia pay for its criminal invasion of Ukraine.

Kira Rudik is leader of the Golos party, member of the Ukrainian parliament, and Vice President of the Alliance of Liberals and Democrats for Europe (ALDE).

Further reading

UkraineAlert Mar 12, 2024

Mood darkens in Odesa amid Russian bombardment and Western hesitancy

By Michael Bociurkiw

The mood in Ukrainian Black Sea port city Odesa has darkened in recent weeks amid a surge in Russian bombing attacks and growing doubts over the future of Western military aid, writes Michael Bociurkiw.

Conflict Drones

UkraineAlert Apr 25, 2024

New US aid package is not enough to prevent Russian victory in Ukraine

By Peter Dickinson

This week’s US aid package for Ukraine provides the country with a vital lifeline in the fight against Russia but Western leaders must adopt a more long-term approach if they want to stop Putin, writes Peter Dickinson.

Conflict Drones

UkraineAlert Mar 31, 2024

Ukraine urgently needs air defenses as Russia decimates power grid

By Suriya Evans-Pritchard Jayanti

A new Russian air offensive has destroyed much of Ukraine’s civilian energy infrastructure in a matter of days and threatens to spark a humanitarian catastrophe if Ukraine does not urgently receive enhanced air defenses, writes Suriya Evans-Pritchard Jayanti.

Conflict Defense Technologies

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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—William Seward

Finally, the blockage imposed by a minority of “America First” House members has been broken and, after a six-month delay, crucial US military aid may be on its way to Ukraine again. An alliance of what might be termed Reaganite Republicans and Trumanesque Democrats—a coalition that helped bring success in the Cold War and after—passed a $60.8 billion assistance package for Ukraine in 311-112 vote on Saturday. Rapid acceptance by the Senate and signature by US President Joe Biden look likely to follow in short order. The Biden administration appears poised to push ahead fast with sending new weapons to Ukraine.

The House vote stops the hemorrhage of US credibility that had thrown US allies into varying degrees of alarm and demoralized Ukrainians, who are fighting for their lives. Meeting with me and US colleagues in Kyiv in late March, a senior Ukrainian government official asked rhetorically what had become of the United States on which Ukraine has pinned its hopes for survival and freedom. Katarzyna Pisarska, head of the Casimir Pulaski Foundation and one of Poland’s most effective foreign policy experts, who led a group of Polish, German, and French parliamentarians to Washington in the days before the vote, put it bluntly: “We believe in America. Watching the paralysis in the face of [Russian President Vladimir] Putin’s aggression shook us all. Passage of the assistance restores our faith.”

“Ukraine has not yet perished” are the opening words of the Ukrainian national anthem. They remain true. The Biden administration should take the successful vote on US assistance to Ukraine as an opportunity to reverse the perception, advanced by Kremlin propagandists and their friends, that Ukraine is doomed. In fact, with sufficient European and US support, Ukraine has a plausible path to success in the war.

As US government officials put it, with enough shells (especially from the multination initiative led by the Czech Republic) the Ukrainian military could blunt an expected Russian land offensive. With sufficient new air-defense systems (including from a German-led effort), the Ukrainians could limit the damage Russian strikes do to their infrastructure and cities. Using long-range weapons, Ukraine could further degrade Russian bases, supply lines, and even its hold on Crimea. An intensified flow of US weapons, including the longer-range Army Tactical Missile System (or ATACMS), which the House bill presses for by name, could shift battlefield fortunes. The Biden administration should set aside its ill-considered opposition to Ukrainian strikes on legitimate targets inside Russia. With more and better weapons and fewer restrictions, Russian casualties and damage could mount and opposition to the war, latent but evident inside Russia, could grow.

A surge of weapons to Ukraine needs to be accompanied by an uptick in sanctions on Russia. The US- and European-led sanctions effort was effective in the first year of the full Russian invasion but needs to be intensified to close loopholes and go after third countries and companies that help Russia evade sanctions. The Group of Seven (G7) debate about using the roughly $300 billion of immobilized Russian sovereign assets held in Western financial institutions to help Ukraine has only crawled forward, at a pace not commensurate with the stakes. The legal case for using those assets to help Ukraine appears solid. The G7 Summit this coming June should be a moment for action, not further discussion.

If the United States and its allies surge ahead in military support for Ukraine and new economic pressure on Russia, by the time of the July NATO Summit in Washington Ukraine’s battlefield fortunes could be better and Russia on the defensive militarily and economically. The Biden administration appears intent on using that summit to lock in robust security support to Ukraine through a series of parallel agreements by European allies and the United States, a sort of bridge to ultimate NATO membership, as administration officials privately put it. The metaphor is apt: A credible bridge from Ukraine’s wartime trial to the long-term security of NATO membership—an end state that NATO has already agreed on—would be a major success and a marked setback for Putin.

But that’s a best-case scenario. The six-month delay in the assistance package caused by a determined isolationist minority in the House has cost Ukraine many lives and much damage. Numerous reports describe a deteriorating military situation on the front lines and Russian preparations for a major land offensive. The memory of the United States dithering while Ukraine literally burned, and the arguments of the America Firsters that effectively signaled that Ukraine was unimportant and should be left to Russia, will linger.

The vote came through in the end. Governments around the world nevertheless may start hedging against the next resurgence of US isolationism and the next demonstration of unreliability. Russia and China will exploit the display of US political paralysis. Pro-Donald Trump authoritarians like Hungary’s Viktor Orban may argue, as did their predecessors during World War II, that democracy is finished and the future belongs to them.

To avoid the worst outcomes and capitalize on the good news of a successful vote, the Biden administration and European allies must lean forward on assistance for Ukraine across the board.

Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council, former US ambassador to Poland, and former US assistant secretary of state for Europe.

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As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

Ambassador Robert Zoellick, former President of the World Bank, former US Deputy Secretary of State, and former US Trade Representative: The REPO Act achieves elegant justice by using Russia’s own money to help Ukraine resist Putin’s brutal aggression. The REPO Act represents a rare combination: sound policy, good politics, and ethical values. Why would any American oppose that combination?

In a war of attrition, economic support is as vital as arms and ammunition. The REPO Act creates an opportunity for the Biden administration to press Europeans to use the assets of the Russian government to help Ukraine survive economically.

Philip Zelikow, Botha-Chan Senior Fellow at Stanford University’s Hoover Institution and former Counselor of the US Department of State: At this decisive hour in Ukraine’s war for survival, the REPO Act can finally start to mobilize the financial firepower that can help turn the tide. Enormous sums sit idle, helping no one. They will go back to the aggressor, or they will help the victims. The time has come to choose.

Some of the best international lawyers in the world have looked hard at this question. They find the REPO Act’s approach to be sound. And those who have actually analyzed the financial repercussions find positives, not negatives. So, the way is clear to act.

Jeffrey Sonnenfeld, Lester Crown Professor of Leadership Practice, Yale School of Management: It is well past time to pass the REPO Act and stop dithering over the seizure of Russia’s $300 billion in foreign exchange reserves. Ukraine desperately needs these funds: some estimates are that the costs of Ukrainian reconstruction will run easily over $500 billion, not to mention the continued heavy costs of resisting Russian aggression. The direct destruction attributed Russia’s cruel unprovoked invasion of this peaceful sovereign nation is worth well in excess of these assets. It’s impossible to see how Ukraine would possibly fund its massive reconstruction burden without a reparation payment, with the cost and risks prohibitive to both the private sector and western governments. Only the REPO Act can ensure justice prevails

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Elina Ribakova, Nonresident Senior Fellow at the Peterson Institute for International Economics: It is a brave and principled act by the US Congress. It ensures that those who do not abide by the rules of the global financial architecture and economic cooperation should not be entitled to enjoy its benefits.

Ambassador Daniel Fried, Weiser Family Distinguished Fellow at the Atlantic Council and former State Department Coordinator for Sanctions Policy: Having started a war of aggression and national extermination against Ukraine, Russia should pay for the consequences. The REPO Act provides authority to the U.S. Government to use the Russian sovereign assets that it immobilized at the start of the full Russian invasion of Ukraine in February 2022 to benefit Ukraine. The purpose is the right one. Passage will strengthen efforts to build international support for taking more Russian sovereign assets to help Ukraine resist and rebuild.

Anders Åslund, Senior Fellow at the Stockholm Free World Forum: The REPO Act is an important precedent. It makes clear that military might is not right, but that Russia has to pay war reparations for all the damage it causes through military aggression. It shows the way forward for Europe so that it does the same. A violator of so many international laws must not have its property protected from due compensation. Ukraine needs huge funds for reconstruction and Russia must pay.

John E. Herbst is senior director of the Atlantic Council’s Eurasia Center and served for thirty-one years as a foreign service officer in the US Department of State, retiring at the rank of career minister. He was US ambassador to Ukraine from 2003 to 2006.

Further reading

Issue Brief Aug 23, 2023

The case for seizing Putin regime assets

By Kristina Hook and Yonah Diamond

A coordinated asset-seizure program connected to Russian aggression and atrocities can build international consensus—increasing the effectiveness of economic responses to Russia’s war, eighteen months in.

Economic Sanctions International Financial Institutions

UkraineAlert Feb 23, 2024

Making Russia pay for the invasion of Ukraine

By Paul Grod

Using frozen Russian assets to fund Ukraine’s resistance and recovery is morally justified and would also ease the financial burden on Western economies, writes Paul Grod.

Conflict Economic Sanctions

UkraineAlert May 6, 2022

Making Putin pay: Russia must finance the rebuilding of post-war Ukraine

By Kira Rudik

Making Putin pay: Russian assets currently frozen in the West could potentially be used to finance the rebuilding of post-war Ukraine but this will require both creativity and political will from Western leaders.

Conflict Economic Sanctions

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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Jason Marczak: The US must ensure sanctions carve outs benefit the Venezuelan people, not just elites

Geoff Ramsey: The US balances democracy promotion with a ‘complex geopolitical reality’

David Goldwyn: The US is seeking a Goldilocks solution to sanctions on Venezuela

Ellen Wald: With US sanctions waivers withdrawn, expect China to dominate Venezuela’s oil exports

Jesse Sucher: Sanctions should change behavior. The US chose to reinforce that principle.

The US must ensure sanctions carve outs benefit the Venezuelan people, not just elites

Maduro’s ban on Machado is unjustified and unconstitutional, and left the US government with very little choice but to snap back the sanctions. But the truth is that, amid turmoil in the Middle East and the war in Ukraine, Venezuela policy is running up against a desire to avoid further upending delicate geostrategic balances. Washington is interested in allowing US and European energy companies to continue to operate in Venezuela, while also promoting competitive elections and ensuring that the money does not end up directly in Maduro’s pocket. As the United States offers a new path for consideration of specific licenses to energy companies interested in operating in Venezuela, it will be essential to work to ensure that dollars from oil and gas transactions are circulated among everyday Venezuelans, not kept in the hands of the elite. Any successful approach to Venezuela will have to find ways to address global energy concerns and undercut Russian and Chinese influence, while still advancing a democratic solution.

—Jason Marczak is vice president and senior director of the Atlantic Council’s Adrienne Arsht Latin America Center.

The US balances democracy promotion with a ‘complex geopolitical reality’

Yesterday’s announcement represents a compromise approach. By snapping back sanctions on Venezuela while still carving out space for Western energy companies to maintain operations, the Biden administration is trying to adjust its approach to promoting democracy and human rights in Venezuela to an increasingly complex geopolitical reality. This is a recognition that it is simply not in the US interest to sit back and watch as Russia and China deepen their footprints in the country with the largest oil reserves on the planet. At the same time, it will be crucial for the Biden administration to continue to find ways to incentivize lasting political agreements in ongoing negotiations between the opposition Unitary Platform coalition and the Maduro government. Fortunately, the US government continues to retain a degree of leverage. The White House can loosen or tighten the sanctions regime moving forward, and can float diplomatic recognition and other incentives as carrots ahead of Venezuela’s election on July 28.

—Geoff Ramsey is a senior fellow at the Atlantic Council’s Adrienne Arsht Latin America Center.

The US is seeking a Goldilocks solution to sanctions on Venezuela

The United States made a subtle and constructive diplomatic step on Venezuela sanctions on Wednesday. It has allowed General License 44 to lapse, ending the period of open access for Venezuelan crude to reach the market, including the United States, through multiple modalities. For now, Venezuela has been punished for its abrogation of the Barbados agreement.

But the US Treasury Department was clear that it welcomes, within the next forty-five days, requests for specific licenses that serve US interests. This leaves a bureaucratically cumbersome but clear path for companies to request the ability to swap Venezuelan crude for debt they are owed, for diluent or other products to relieve humanitarian distress in Venezuela, and under conditions similar to Chevron’s existing license, which minimizes the fiscal return on exports to PDVSA. 

So the path remains open to ensuring that the Maduro government is punished, but a relief valve for migration pressure inside Venezuela is available. The new policy does not discriminate against US allies by imposing harsher conditions on them than on US companies, as was the case before General License 44. In the event that there is progress on a framework for free and fair elections from Maduro in the days ahead, the potential for a further general license remains open. 

The impact on the global oil market remains to be seen. Much depends on how many private companies apply for debt or product swaps and on whether the small but significant oil projects in Venezuela apply for licenses as well. (If they do not, then we will return to the destructive “maximum pressure” policy, which had the impact of providing cheap oil for China, a product market for Iran, and humanitarian distress leading to illegal migration to the United States and elsewhere in the region.) 

Much also depends on the ability of the US Treasury to respond to those license requests swiftly. But with this one move, the United States has avoided blame for interference in the Venezuelan elections, preserved diplomatic capital for a future day, and this time managed to punish the aggressor more than the victims. Given the grim circumstances, this was the best outcome available.

—David L. Goldwyn served as special envoy for international energy under President Barack Obama and assistant secretary of energy for international relations under President Bill Clinton. He is chair of the Atlantic Council’s Energy Advisory Group and a nonresident senior fellow with the Council’s Global Energy Center.

With US sanctions waivers withdrawn, expect China to dominate Venezuela’s oil exports

Biden’s decision to withdraw the sanctions waiver for Venezuelan oil comes at a time when crude oil prices are coming off the highest prices seen this year. Just last month, Venezuela’s crude oil and petroleum product exports hit a four-year high. However, the amount of oil in question is relatively minor on the global scale and should not impact oil prices. In September 2023, the month before the Biden administration issued the waiver, Venezuela exported a total of 797,000 barrels per day (bpd) of crude oil, fuel oil, and methanol (according to TankerTrackers.com). More than 50 percent of its petroleum went to China. Other notable customers included the United States, Spain, Indonesia, and Cuba. By March 2024, Venezuela’s total exports had only increased by about one hundred thousand bpd, but it had significantly diversified its customers. Chinese exports dropped to 39 percent and notable cargoes went to India, the Netherlands, Singapore, Brazil, and Bonaire, Sint Eustatius, and Saba. (Note: Data on oil exports comes via TankerTrackers.com.)

Now that the waivers have been withdrawn, we should expect China to dominate Venezuela’s oil exports. US oil supplies should not be impacted since the total amount of Venezuelan oil and oil products imported by the United States before and after the waivers were issued was nearly identical. Venezuela will probably continue to export at the 895,000 bpd level because China will probably purchase additional cargoes that other nations stop buying now that sanctions are back in place. Overall, Venezuelan revenue may drop slightly as China will likely negotiate lower prices now that the competition for Venezuelan oil is significantly reduced. 

 —Ellen Wald is a nonresident senior fellow with the Atlantic Council Global Energy Center and the co-founder of Washington Ivy Advisors.

Sanctions should change behavior. The US chose to reinforce that principle.

When the US Office of Foreign Assets Control (OFAC) issued General License 44 in October 2023, the Biden administration warned that Maduro would need to show concrete steps toward democratic elections for the license to be extended. Evidently, there was insufficient progress, meaning the Biden administration has effectively decided that preserving sanctions’ integrity and US credibility are as important as the outcomes for Venezuela. Given the centrality of sanctions to numerous US foreign policy objectives, I’m not surprised to see a choice that reinforces the principle that the goal of sanctions is to change behavior.

International oil companies must now decide how much they enjoyed the fleeting access to Venezuelan crude. Venezuela had stood to gain an estimated $8 billion more in oil revenue in 2024 over the previous year’s earnings. One must wonder if Maduro can replicate that figure without the United States offering sanctions relief. 

Companies that do not wind down previously authorized transactions by the end of May expose themselves to US sanctions risks, and we could see a crackdown on third parties evading the reimposition of these sanctions. Some key players to watch are Indian and Chinese oil companies. OFAC is no doubt learning from its parallel enforcement efforts with respect to the Russian oil price cap.

—Jesse Sucher is a former official at the US Department of the Treasury, where he was a deputy director of the Office of Investment Security, and a section chief and investigator for the Office of Foreign Assets Control. The views and opinions expressed herein are those of the author and do not reflect or represent those of the US government or any organization with which the author is or has been affiliated.

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But central bank governors and finance ministers who met in Washington this week grappled with more than the question of when their countries will be “landing” after a period of high inflation: They also looked to manage how their countries recover, aiming for a soft landing that avoids recession.

With so much at stake, we dispatched our experts to IMF and World Bank headquarters in Foggy Bottom to decode the institutions’ plans to navigate the turbulence of the global economy.

• Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

• This week in one word: Clarity

• Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

• The Polish finance minister on his country’s “U-turn” toward European values

• See day five analysis

Watch all our conversations with central bank governors, finance ministers, and experts

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

The Atlantic Council hosted a series of special events with finance ministers and central bank governors from around the globe during the 2024 Spring Meetings of the World Bank and International Monetary Fund (IMF).

Dispatch from IMF-World Bank Week: Your cheat sheet on progress made

This week, the world’s finance ministers and central bankers came together in force for the first time since the “Marrakesh miracle,” that was the annual meetings last year—at least in the words of former IMF Managing Director Christine Lagarde—which finally resulted in progress on quota reform and a debt restructuring deal for Zambia.

But I doubt this week will go down in history as the “Washington wonder.” Tepid global growth, difficulty recovering from the pandemic (among developing countries), US-China competition (with Washington’s threat of new tariffs), and war cast a long shadow. Still, the officials were able to make real progress on both sides of 19th Street.

Yesterday, my colleague Martin outlined the IMF’s successes: The Fund adjusted its lending policy, allowing it to step in to support countries in debt distress, and called attention to the risks of large fiscal deficits.

But there are, after all, two sides to 19th Street. And on the World Bank side, countries including the United States, Japan, and the United Kingdom pledged $11 billion for some of the Bank’s guarantee instruments, which make its programs less risky—and more attractive—for private investors. The added firepower complements restructuring within the Bank to streamline the guarantee system. Hopefully, these changes will encourage private investors to fill countries’ funding needs for the green and digital transitions.

The G20 finance ministers and central bank governors also met this week, with Brazil’s Fernando Haddad giving the group homework: Find agreement on a wealth tax by the time the ministers meet again in Rio de Janeiro in July (the Atlantic Council will be there too).

Later today, as officials and their delegations start heading home, the security barriers will come down and 19th Street will open again. For the ministers, the hard work begins when they get home—and we will be watching closely to analyze whether the financial leaders make meaningful progress before the annual meetings in the fall.

This week in one word: Clarity

As the spring meetings drew to a close and leaders made their final statements, a few points became clearer.

Even though the global economy can feel hyper-interdependent at times, it is now becoming clearer just how muddled the economy is by divergence, inequality, and fragmentation. “Winners” and “losers” are seeing the economic gaps between them widen. There’s a heightened sense of uncertainty, with the threat of another political, economic, or natural shock looming.

What some may have seen as mission creep in finance—addressing energy transition challenges, the inclusion of gender and youth, and fragility—has become mission critical as macroeconomic stability and growth have become more dependent on, or disrupted by, these factors.

As a result, the timeframe for analysis—and more importantly action—has shrunk as spillovers, impacts, and risks from debt, inflation, conflict, and climate change have brought more urgency. On top of that, fiscal space has tightened, and capital flows stream away from where they are needed most. New research shows that countries in the Global South are paying out more in debt service than they are bringing in grants or loans—to the tune of fifty billion dollars. The United Nations’ annual Financing for Development report, released just before the spring meetings, reveals a more than four-trillion-dollar annual shortfall in funding to meet the Sustainable Development Goals, as I discussed this week with Assistant Secretary General Navid Hanif. 

While the World Bank and IMF have introduced reforms to optimize balance sheets, quotas, and capital adequacy to increase available financing, those changes are necessary but insufficient; that makes the World Bank announcement on Friday (that eleven countries have pledged eleven billion dollars to support the Bank’s hybrid capital and guarantee instruments) a welcome step.

Another thing that is clear after this week: the role regional multilateral development banks and international financial institutions (beyond the Bretton Woods institutions) play in addressing today’s challenges. This role isn’t new; I wrote about their role in COVID-19 response and recovery a few years ago. But there is again a need for private capital and philanthropic funding in a revamped international architecture that meets the moment.

And while more resources are key, it has become even clearer that more consideration needs to be paid to how funds are actually disbursed and delivered. As UN Undersecretary General and UNOPS Executive Director Jorge Moreira da Silva noted in our conversation, more than half of existing IDA funds have yet to be allocated. Furthermore, while analysis and policies are important, implementation matters and warrants additional attention.

Leaders across the global economy must ensure that even as they drive supply, they don’t forget about demand—from bankable projects to business environments, and from building capacity to domestic resource mobilization. This is the macro- and micro-challenge of the road ahead.

Côte d’Ivoire’s Nialé Kaba on the future of World Bank leadership: Why not an African?

On Thursday, Côte d’Ivoire’s Minister of Economy, Planning, and Development Nialé Kaba sat down with Rama Yade, senior director of the Atlantic Council’s Africa Center, to discuss the country’s economic priorities—among them, fostering sustainable growth. The two, conversing in French, spoke at an event that took place at the Atlantic Council’s IMF broadcast studio.

Côte d’Ivoire’s economy is predicted to rank fifth this year among the fastest-growing economies in Africa. Kaba said that the country would continue to make economic reforms to “enhance competitiveness, attractiveness, and economic performance.”

Kaba touched upon the IMF’s support to Côte d’Ivoire, which includes $3.5 billion under the Extended Fund Facility and Extended Credit Facility, in addition to a newly agreed upon 1.3 billion through the Resilience and Sustainability Facility. The minister also noted the importance of reform efforts at the Bretton Woods institutions, pointing to changes in how the IMF and World Bank select their leaders. “Perhaps one day the World Bank could be led by an African. After all, why not?”

Kaba also discussed topics closer to home. On Côte d’Ivoire’s agricultural sector, the minister said she’ll be looking to focus on the “local transformation of our raw materials.” Côte d’Ivoire is the world’s leading producer of cocoa, and Kaba said there is a need for investors to “settle and employ local labor.”

Touching on more global matters, Yade asked about the relationship between Côte d’Ivoire and China—specifically how a decrease in Chinese investments in Africa would affect the economy. Kaba was clear in her position that while China has been a primary investor, Côte d’Ivoire remains “strongly connected to Europe and also to the United States.”

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The Polish finance minister on his country’s “U-turn” toward European values

“Poland is back to Europe… we’ve made a ‘U-turn’ from what I call a ‘Hungarian path,’ which is out of the European values,” Andrzej Domański, minister of finance for Poland, argued at an Atlantic Council event on Friday.

Domański gave his remarks in discussing how Poland’s economy—which has proven resilient after avoiding recession in periods of mounting global economic challenges—fits within the greater European economy.

When analyzing the reasons why Poland’s economy recovered relatively quickly after the pandemic and after the initial wave of impacts from Russia’s full-scale invasion of Ukraine, Domański pointed to Poland’s economic diversification. “We don’t have one sector that would be overwhelming the whole economy. I believe this is one of the factors that is behind our resilience.”

Following that, when discussing Poland’s plan for the energy transition, Domański said that Poland can take “two obvious directions: one of them is renewables, and the second one is nuclear energy.”

Domański also discussed the ongoing priorities of the Polish government in further bolstering the economy. On the topic of security, Domański vowed that Poland “will not cut spending on defense” and that it will “will not stop helping [its] Ukrainian friends.”

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• Dispatch from IMF-World Bank Week: What will this week’s legacy be?

• Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

• Is the global financial system fit for climate change?

• The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

• “Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

• See day four analysis

Dispatch from IMF-World Bank Week: What will this week’s legacy be?

There were plenty of reasons for a dour mood to spread across the spring meetings this week.

One such reason is that higher-than-expected inflation readings in the United States dampened expectations of Federal Reserve rate cuts, driving up long-term rates around the world. The Financial Times even spoke of relegating the low-interest period of the 2010s to the dustbin of history. Countries are beginning to realize that they may not have the means to service their debt, support their aging populations, pay for the green transition, help Ukraine, and finance military rearmament all at the same time.

The dour mood was reinforced by the Israel-Iran exchange of direct attacks and Russia’s destructive air campaign in Ukraine. Higher oil prices and further supply-chain disruptions consequently topped the IMF’s downside risks to the forecast. Calls from the Biden administration to triple aluminum and steel tariffs provided a reminder of the risk of future trade conflicts and increasing economic fragmentation.

Less discussed, but similarly mood-souring, was the topic of the stronger dollar, which might have negative consequences for emerging and developing countries with growing fiscal deficits.

The International Monetary and Financial Committee chair released a statement today that was among the most bland in recent history, repeating well-known positions about the IMF’s role in the global economy and committing to the implementation of recent decisions, but falling well short of new initiatives.

But when determining this week’s legacy, there are reasons for a better mood to prevail. The IMF did propose a tweak to its debt policies, allowing the Fund to lend to countries even if they’re still in debt restructuring negotiations with big bilateral creditors (think China). The IMF also, in its World Economic Outlook, finally zeroed in on the “significant risks” that large countries’ fiscal deficits pose to the global economy. And there are signs of momentum ahead: Liechtenstein is on track to join the IMF as member number 191, in a year marking the eightieth anniversary of the Bretton Woods institutions. Whatever mood the delegates are in when they depart Washington, their work will carry on.

Paolo Gentiloni on how the war in Ukraine is impacting Europe—and how the EU can help fill Kyiv’s “financial gap”

In a discussion at the Atlantic Council on Thursday, Paolo Gentiloni, the European Commissioner for Economy, expressed a surprisingly positive outlook about the European economy, as the European Union (EU) continues to face post-pandemic and security challenges. 

In discussing the IMF’s latest World Economic Outlook, which slightly downgraded forecasts for the eurozone, the former Italian prime minister said he sees “the conditions for an acceleration of the economic activity for the second part of this year, and probably more in 2025.” His conviction rests, he said, on “better-than-expected” declining inflation, shared “strong labor markets” across the Atlantic, and an increase in purchasing power in several European countries “not impacting inflation, but consumption, which would trigger a better level of growth.” The EU’s goal was ultimately to “avoid a recession and major energy crises.”  

When assessing Europe’s economic-rebound prospects, Gentiloni urged to not “compare the impact of the Russian invasion in Ukraine, in Europe, with other parts of the world,” highlighting its disproportionate impact on “Europe and the Global South.” Russia’s invasion “disrupted part of the European business model” reliant on “cheap gas” and exports, which particularly affects Europe’s largest economy, Germany. The geopolitical risk remains “the largest risk” threatening Europe, he said, while there is no “substantial risk from a financial stability point of view” or “divergences in level of growth among different European countries.” Gentiloni said he is “quite optimistic that [Europe is] out of the most difficult part” of its “economic situation.” 

Amid the growing debate about Europe’s future competitiveness, Gentiloni said that the topic fits into wider discussions on “how the model we built the European Union [on] in the last decades should be probably transformed.” To achieve its ambitions, Europe must “find common funding” beyond the NextGenerationEU (which is expiring in 2026) to further attract private investments and complete the green transition, “avoiding the idea that slowing down or taking a different direction will solve our problems, because the global competition on clean tech is there,” Gentiloni said.  

Drawing on a quote from former European Commissioner Pascal Lamy, Gentiloni remarked how “the EU cannot be the only herbivore in a world of carnivores” and argued that the “solution is to compensate economically, socially those that are most affected and to win the battle of the cultural narratives.”

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Is the global financial system fit for climate change?

We know what the future is set to look like: By 2040, according to the Intergovernmental Panel on Climate Change, we will be living in a 1.5 degrees warmer world, with consequences that are already being predicted by science. That’ll be the case unless extraordinary action is taken.

The private sector is now waking up to this reality. Industry is beginning to recognize that climate risks raise financial risks. Homeowners are finding it harder to insure their houses. Water levels are rising, disrupting ports that play a large role in the global economy. Outdoor workers cannot work safely in heat waves, which are striking with alarming frequency.

The economic costs of inaction cannot be postponed and passed on to future generations.

There must be a new ambition for adaptation and resilience finance. Currently, progress on catalyzing investments in climate solutions is often slow and scattered, and it also often lacks scale. The solution: Redefining the economic and financial order.

To begin imagining what that new order should look like, we sat down with climate finance experts, who helped us spread our Call for Collaboration between the public and private sectors that we launched at COP28 last year. Catch up on that conversation, held on the sidelines of the IMF-World Bank Spring Meetings, below.

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The South African finance minister’s plans to champion an African perspective during its 2025 G20 presidency

South African Minister of Finance Enoch Godongwana joined the Atlantic Council’s IMF Broadcast studios on Wednesday to outline his country’s economic priorities, including its vision for the Group of Twenty (G20) agenda during its presidency in 2025.

In the conversation with Atlantic Council Africa Center Senior Director Rama Yade, Godongwana said that South Africa is focused on being not the biggest economy but the strongest. “What we must focus on is that we are the most industrialized economy on the African continent, and to what extent we can build on that, to build competencies, that makes us the strongest economy on the African continent,” he said. Sharing his optimism about economic growth on the African continent, Godongwana cautioned that a slowdown in growth in South Africa’s trade partners, such as China, may lead to a spillover effect not only on South Africa’s economy but that of the South African Development Community region.

Regarding South Africa’s upcoming presidency of the G20, the minister said that South Africa is developing an agenda that will include some of Brazil’s current priorities—and others from previous presidencies—and that South Africa “will inject an African perspective into that agenda” after consultation with countries on the African continent.

Turning to South Africa’s membership and ambition within the BRICS group, the G20, and the IMF and World Bank, the minister argued that there is no tension for South Africa within these groupings, but that they have been helpful in addressing challenges that the country faces. Responding to a question about a possible BRICS currency, the minister stated that there “is no document from the BRICS that talks about a BRICS currency in our declarations.” Godongwana stated that there is a push, regionally in Southern Africa and within the BRICS, to accept local currencies and to use alternative payment systems beyond the dollar when conducting international trade. But BRICS, he said, is not about undermining the current system—but changes in the current system are needed.

Speaking during the IMF-World Bank Spring Meetings, Godongwana discussed reforms he’d like to see the Bretton Woods institutions make, including governance and funding changes at the IMF and the World Bank. The minister argued for a change in the selection of heads of the IMF and World Bank and called for non-American and non-European candidates to be considered for the top leadership positions of the organizations. Speaking to investors, Godongwana stated that he welcomed investment into South Africa and the African continent that respected countries’ sovereignty and geopolitical strategies.

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“Congo is open for business,” argues DRC Minister of Finance Nicolas Kazadi

DRC Finance Minister Nicolas Kazadi joined the Atlantic Council’s IMF broadcast studios on Wednesday to outline his country’s economic priorities, including its intent to create more opportunities for investment.

Kazadi argued that “Congo is open for business” and “the mining sector specifically is driven by foreign investment.” In March this year, the Congolese government began to implement a 2017 law requiring all subcontracting companies to be majority Congolese-owned. The minister explained that while Congo encourages investment, the country wants to ensure that private investors share the prosperity with local partners and build local capacity. “We don’t even need a law for that, it is a matter of principle” to help local Congolese businesses grow, argued Kazadi.

In the mining sector, the finance minister said that Congo is looking for investments along the full energy value chain, “trying to raise awareness in our youth, support them as they invest in the ecosystem that we are trying to build in partnership with the big private sector,” he said. Kazadi said that “Congo is trying to bring more transparency along the value chain to raise the standards” to avoid situations in which products do not meet international environmental, social, or governance standards that can impact the image and business environment of the country. He said that he hoped companies working in the Congo would help charge a “local transformation of critical minerals” that would change the economy “completely,” bringing the gross domestic product “from billions to trillions,” he said.

Speaking during the IMF-World Bank Spring Meetings, Kazadi discussed Congo’s upcoming sixth review of its Extended Credit Facility program and reforms he’d like to see the Bretton Woods Institutions make, including changes to the channeling of Special Drawing Rights. He expressed a readiness to work with international financial institutions on addressing the development challenges facing his country.

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• Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

• European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

• “The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

• The Global South’s reform agenda for the IMF and World Bank

• See day three analysis

Dispatch from IMF-World Bank Week: The issues we haven’t heard about—yet

IMF headquarters was abuzz today following the announcement of Managing Director KristaIina Georgieva’s new global policy agenda, outlining the economic challenges of the day and what the IMF plans to do about them.

The three priorities she chose for the Fund to tackle: rebuilding fiscal buffers, after public debt edged upward to 93 percent of GDP; reviving medium-term growth, which has deteriorated since the global financial crisis; and renewing its commitment to its members, with more quota resources to go around.

All of the above are worthwhile things to do. But, at least from where I was watching in the IMF HQ1 Atrium, Georgieva didn’t seem to mention anything about two of the most pressing issues of the day when she presented the global policy agenda this morning.

The first issue is China’s industrial overcapacity and its global impacts. The EU has launched or is expected to soon launch anti-subsidy investigations looking into Chinese electric vehicles, wind turbines, and medical devices. But the news that really spread like wildfire at the spring meetings was that, just a couple blocks away, the White House announced an investigation into China’s shipbuilding practices. President Joe Biden also called for tripling tariffs on Chinese steel and aluminum products, the starting gun for more protectionist measures to come—and a major risk to global growth.

The second issue is the divergent monetary policies being put forth by the US Federal Reserve and the European Central Bank, pushing up the dollar’s value in foreign-exchange markets. The topic did come up during the G20 press conference following the group’s meeting of finance ministers and central bank governors today. A strong dollar will undermine low-income countries’ growth prospects—something the IMF must pay attention to.

The silence on these risks to global growth shows the Fund should pay more attention to the issues at the core of its mandate to coordinate members’ economic policies as they are being shaped and implemented. Doing so early—rather than reactively helping countries deal with the fallout of poor international cooperation—would avoid negative spillovers on the global economy.

European Investment Bank president urges multilateral cooperation on Ukraine’s reconstruction and climate financing

On Thursday, Nadia Calviño—who this year took over as president of the European Investment Bank (EIB)—spoke to the Atlantic Council at the IMF-World Bank Spring Meetings, where she talked about the EIB’s priorities, including encouraging investment in Ukraine for reconstruction, rallying climate financing, and helping the European Union achieve its strategic priorities.

Calviño explained that the EIB is working with other multilateral institutions and with local Ukrainian partners to identify Kyiv’s rebuilding priorities—including infrastructure projects and support to small and medium-sized enterprises—to “make the most of Europe’s money.” She added that the EIB is working with the European Bank for Reconstruction and Development, the World Bank, and the United Nations Development Programme to ensure that “the experts that are on the ground are providing the most efficient service… to all of us.”

Calviño said that the EIB is proud to have garnered a reputation as “the climate bank,” with over 50 percent of its investments being in green projects and having supported the development of innovative technologies. “The green agenda is really ingrained in everything we do, inside and outside the EU,” she said. She argued that the investments being made in less-developed countries were strategic in nature and critical for Europe’s future priorities.

Calviño additionally said that there’s a sense of a “shared responsibility” across the Global North in addressing climate financing needs and deconflicting those efforts. She added that a North-South dialogue is “very important” and “needs to be accompanied by facts, not just words.”

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“The role that digitalization plays for Ukraine, especially now, is critical,” says Olga Zykova

In the bustling IMF headquarters on Tuesday, I sat down with Ukrainian Deputy Finance Minister Olga Zykova to talk about the role of digital development in post-war reconstruction.

Ukraine had been busy taking many of its public services digital, even before the outbreak of the war in 2022. Zykova, who became deputy finance minister a few months into the war, told me that Ukrainian citizens have used technologies, such as the Diia app, to do everything from travel to access healthcare to buy war bonds for financing. She told me (and also Candace Kelly from the Stellar Development Foundation and Kay McGowan from Digital Impact Alliance, who also joined the expert panel) that she believes Ukraine’s efforts can be a successful example for other war-torn economies looking to rebuild their digital infrastructure.

The conversation then turned to the importance of open-source infrastructure, as the panelists discussed the collaborative advantages of open-source technological solutions which can provide developers the flexibility to adapt technologies to fit their needs across countries and situations.

We also discussed the need for a robust evaluation and impact assessment of the funding of these programs and the technologies themselves, to ensure that they reach their full potential. This call for robust impact metrics has been a consistent theme of this week, echoed by multilateral development banks, the private sector, and civil society.

Zykova also outlined Ukraine’s priorities for the IMF-World Bank Spring Meetings, calling for the creation of a sustained plan to equip Ukraine with the means to meet its reconstruction demands. She encouraged countries to not lose focus, even with lingering uncertainties about funding in Ukraine, and reiterated the importance of building resilient networks as the EU approaches its elections.

Reconstruction in Ukraine represents many of the existential questions ahead for the World Bank and IMF this decade—how to shore up democratic resilience, build consensus across an increasingly fracturing global order, and use technology to reduce inequality and achieve lasting prosperity.

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The Global South’s reform agenda for the IMF and World Bank

International media has until now paid little attention to statements of the Group of Twenty-Four (G24). The committee represents developing countries within the IMF and World Bank, playing a similar role to the Group of Seventy-Seven, a coalition of developing countries that comes together at UN gatherings. As Global South countries have become more vocal in their demand for reforms of the Bretton Woods institutions, the G24’s statements have become more important. The group should be considered counterparts to the Group of Seven (G7) in discussions about changes, especially in the context of the International Monetary and Financial Committee (IMFC)—an important body in the governance of the IMF.

On April 16, the G24 met and issued a communiqué summarizing the positions of developing countries on many issues on the reform agenda.

Regarding the IMF:

• The G24 welcomed the equi-proportional increase in quota but stressed the need for a quota realignment to reflect involving realities of members. (Developing countries in aggregate have increased their weight in the global economy but feel underrepresented in the Fund’s quota and voting-share distribution.)
• It urged the Fund to eliminate the surcharge on its base lending rate which has resulted in high borrowing costs to members in need of substantial IMF support.
• It proposed considering sales of IMF gold to increase the financial resources of concessional lending facilities such as the Poverty Reduction and Growth Facility.

Regarding the World Bank:

• The G24 acknowledged the Bank’s efforts in implementing the Evolution Roadmap, sponsored by the Group of Twenty to optimize its balance sheets and increase its financing capability and efficiency.
• However, the G24 cautioned that the commitment to allocate 45 percent of annual financing to climate-related projects should not be at the expense of financing for basic development challenges like combating poverty and hunger.
• It called for a capital increase for the World Bank and multilateral development banks in general—especially a strong replenishment of the resources of the International Development Association (providing grants and low-interest loans to low-income countries) in its twenty-first round of funding, which is currently underway.

In the view of many in developed countries, the demands articulated by the G24 may resemble a wish list containing many items difficult to command sufficient agreement to be adopted—for example, the quota reform. Nevertheless, developed countries should take these demands seriously and engage constructively with developing countries to find a reasonable way forward. Failure to do so would undermine the legitimacy and effectiveness of the IMF and World Bank—institutions that should play important roles in sustaining global growth and supporting less-developed countries.

• Dispatch from IMF-World Bank Week: A tale of two headquarters

• Mixed developments on sovereign debt restructuring

• The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

• Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

• Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

• Back to the basics: High turnover rates for central bank governors do not help with inflation

• Spooking the spirit of Bretton Woods

• See day two analysis

Dispatch from IMF-World Bank Week: A tale of two headquarters

In many ways, the story on day three of these spring meetings feels like a tale of two headquarters: Both style and substance differ between the boisterous World Bank on one side of 19th Street and the more buttoned-up IMF on the other.

The Bank’s atrium has been decorated with hundreds of colorful drawings by staff members’ children, depicting a “livable planet”—the newly added objective to the Bank’s vision statement. The Fund’s atrium, on the other hand, hosts an interactive “let’s grow together” board where delegates can affix stickers to the types of training and institutional strengthening they need. Both spaces strive to inspire and provoke thought, but the vibes are quite different.

Substantively, the Bank is abuzz with chatter about its “evolution,” touting progress such as a new guarantee platform, the corporate scorecard, and the series of reforms initiated last year to improve its impact. People at World Bank HQ are also energetically making the case that the Bank’s “money and knowledge” are vitally needed now, as a “great reversal” in development—explained in a new report—has resulted in one in three low-income countries becoming poorer than they were on the eve of the pandemic.

At the Fund, it’s about “resilience amid divergence” (as I discussed this afternoon with my fellow World Economic Outlook ‘decoders’ from the Atlantic Council): cautiously celebrating the fact that better-than-expected resilience in the US economy, coupled with stronger labor markets and cooling inflation in many places, is driving steady global growth. But that celebration doesn’t paper over the fact that debt, higher-for-longer interest rates, and conflict are undermining growth and impeding recovery in many developing countries.

Where Bankers, Funders, delegates, and guests seem to be speaking the same language is around “leverage” (the need to use the Bretton Woods institutions’ funding to crowd in additional financing) and “demographics” (with certain population trends raising macroeconomic and social-development pressures and opportunities, which I’ll be talking about at the IMF on Friday).

PS: If you’re wondering which of the headquarters has the better store for some spring meetings swag, it’s the World Bank’s.

Mixed developments on sovereign debt restructuring

This was a big week for those working to help vulnerable middle- and low-income countries overcome debt crises. For years now, there has been a slow-moving discussion about how to improve the framework for sovereign debt restructuring. And on that front, there has been both good news and bad news in recent days.

First, the good news: Three years or so since Zambia defaulted on its international bonds, it has just reached a restructuring deal with its bondholders which has been accepted by the official bilateral creditors. However, Zambia is not out of the woods yet. It still has to negotiate debt deals with its commercial creditors—basically international banks including many Chinese stated-owned banks such as the China Development Bank, Industrial and Commercial Bank of China, etc. It is not clear if this problem will hold up the actual implementation of the agreed debt restructuring measures—highlighting the complexity of the sovereign debt restructuring process.

The second piece of good news is that the IMF Executive Board has just approved some adjustments to the Fund’s Lending into Official Arrears (LIOA) policy—basically allowing the Fund to lend to a member in distress even though that member is in arrear in servicing its debt to an official bilateral creditor. The just-approved adjustments would give the Fund more flexibility in making use of the LIOA policy when a creditor country (i.e. China) has not been forthcoming in the restructuring process, delaying its timely conclusion. The key outstanding question is whether a low-income debtor country would be prepared to go along with the idea of activating the LIOA vis-à-vis China—especially those who have relied on China for trade and investment via the Belt and Road Initiative.

Then there’s the bad news. A piece of proposed legislation is moving through the New York State Legislature that would amend the state’s creditor and debtor law. Basically, the amendments would unilaterally impose a restructuring regime, for example compelling bondholders to accept a restructuring deal managed by an overseer appointed by the governor of the state of New York. As about half of international sovereign bonds have been issued under New York law, and the other half under English law, this legislation would, if passed and implemented, introduce a huge element of uncertainty to the sovereign bond market. It could potentially disrupt its smooth functioning and raise borrowing costs for emerging market and developing countries. And it could short circuit international efforts, such as the G20-sponsored Common Framework and the Sovereign Debt Roundtable, which are trying to develop international agreements to improve the sovereign debt restructuring framework.

All three stories highlight the complexity of debt restructuring negotiations. But the summary of the week’s news on that front: two steps forward, one step back.

The Spanish minister for economy outlines his country’s economic trajectory—including a predicted 20 percent drop in its debt-to-GDP ratio

Spain is positioning itself as a “growth engine” in the eurozone, argued Spanish Minister of Economy, Trade, and Business Carlos Cuerpo.

He said that in 2023, Spain “grew five times the euro area average.” That, coupled with his prediction of a 20 percent drop in the country’s debt-to-GDP ratio (with respect to the peak post-pandemic), “[configures] a good way forward” for Spain, Cuerpo said, with sustainable growth likely ahead in the medium term.

Cuerpo said that Spain is hopeful about its economic prospects, as foreign direct investment has grown, indicating “confidence of world investors in the Spanish economy.”

Cuerpo spoke with GeoEconomics Center Senior Director Josh Lipsky at Atlantic Council headquarters during the IMF-World Bank Spring Meetings. They discussed Spain’s path forward utilizing NextGenerationEU funds and its role in the conceptualization of new EU fiscal rules. Cuerpo reflected on the transformation of primary themes of discussion over the EU’s fiscal rules, beginning with the green transition, pivoting to strategic autonomy, and now focusing on economic security. “There is a common denominator [within] those discussions, which is the need for investment,” he said.

Cuerpo pointed to Spanish investment in green hydrogen, semiconductors, and battery-related initiatives through the NextGenEU funds. A midterm evaluation from the European Commission found that the Spanish GDP level increased by 1.9 percentage points in 2022, when compared with a hypothetical Spanish economy without the NextGenEU funds present. “It’s not just an opportunity for the Spanish economy,” Cuerpo said. “The impact of the plan is already a reality.”

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Despite the IMF’s revised growth forecast for Russia, the Russian economy is not doing well

You’ve heard it before. Gross domestic product, or GDP, is not the best indicator to understand Russia’s economic performance under sanctions. Nor is the exchange rate. Yet, the IMF’s decision this week to revise Russia’s growth forecast for this year upwards to 3.2 percent after another upward revision in January is one of the most talked-about findings of the World Economic Outlook. And while the widening fiscal deficit and rapid inflation remind us that the Russian economy is still under strain, it’s important to acknowledge that, at the start of Russia’s full-scale invasion, sanctions policymakers thought they could reasonably hope to plunge Russia into a prolonged recession. And in April last year, when the IMF predicted the Russian economy would grow in 2023, most thought this was wrong, but it did indeed grow by 3 percent.

How are they pulling this off? It’s not just about oil and gas export income, though higher oil prices help. Combined disclosed and undisclosed military and domestic security spending exceeds 30 percent of GDP—and therefore represents a major boon for overall GDP figures. The Ministry of Finance had to reach into its savings more than expected at the end of 2023, taking the liquid part of the National Wealth Fund down from $150 billion to $130 billion. The weak exchange rate and labor shortages are also working together to keep inflation very high, at almost 8 percent.

It’s wrong to say the Russian economy is doing well. The problem is that it has enough resources to keep funding the war.

Finance Minister Muhammad Aurangzeb outlines Pakistan’s path to economic reform and stability

On Monday, Pakistani Finance Minister Muhammad Aurangzeb emphasized the country’s need for structural reforms over a span of two to three years. In an Atlantic Council conversation with the South Asia Center’s Kapil Sharma, Aurangzeb outlined Pakistan’s strategy, arguing that efforts shouldn’t merely focus on financial stabilization: They should also lend focus to sustainable growth and inclusivity. 

“The crux of our strategy with the IMF involves not just temporary relief but laying the groundwork for enduring stability and economic resilience,” Aurangzeb said. He underlined the importance of understanding and implementing long-term policies that have been on the nation’s agenda for decades. The minister argued that the time for action on these reforms is now, especially with the looming end of Pakistan’s three-billion-dollar Stand-By Arrangement with the IMF, currently set for late April. 

Pakistan reportedly intends to ask for a larger and extended program from the IMF to support its economic reforms. To that end, Aurangzeb argued that when it comes to these economic reforms, Pakistan doesn’t need more policy prescriptions: It needs implementation. 

“Ensuring macroeconomic stability is not merely about stabilization; it’s fundamentally about inclusive growth and addressing climate impacts,” said Aurangzeb. He noted that the financial and structural reforms would help Pakistan mitigate the adverse effects of climate change and promote financial inclusivity, especially among vulnerable groups, including women. 

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Back to the basics: High turnover rates for central bank governors do not help with inflation

Inflation is front and center at the spring meetings. Reducing it is crucial for any inclusive growth and development strategy because, after all, inflation is a regressive tax on the poor, who lack the real assets to effectively hedge against inflation.  

While the global median headline inflation has declined to 2.8 percent in 2024 and many central banks have been successful in their fight against inflation—particularly the Federal Reserve (known as the Fed), Bank of England (BoE), and European Central Bank (ECB)—many developing and emerging economies are still suffering from high inflation rates, sometimes with rates higher than 20 percent. Several factors continue to contribute to these rates: rising energy and food prices; increasing sovereign debts; higher policy rates in the ECB, UK, and Fed (and thus larger capital inflows to these economies); and growing budget deficits—partly because of the higher cost of energy and of servicing debt due to higher interest rates.

An often ignored but equally or even more important factor is the independence and reputation of central banks. While the majority of countries suffering from inflation rates higher than 20 percent claim that their central banks are independent and their policies are not influenced or dictated by their central governments, in practice the so-called “independence” of these central banks is severely undermined by the high turnover rates of their top bosses.

Available data suggests that over the past decade, the median tenure of a central bank governor or president in the twenty economies with the highest inflation rates has been a mere two years. Over the past ten years, a number of central bank governors have come and gone: Seven in Argentina, eight in Turkey, six in Venezuela, and five in Iran. Just to put this in perspective, during the same period, the median tenure of the leadership in the Fed, ECB, BoE, and Bank of Japan has been five years, and these institutions have each changed leadership only once in the past decade.  

Such a high turnover rate for the central bank leadership is a clear sign of its lack of independence. It also severely undermines the most important asset of a central bank: its reputation and credibility. Economic actors, markets, and consumers in an economy look to the central bank and its leadership for direction on the future of the economy and directly equate high turnover in a central bank leadership to policy uncertainty, demolishing the reputation and policy credibility of a central bank. A central bank lacking reputation and credibility is like a chef without a kitchen.

In fighting inflation, it’ll be important to go back to the basics: religiously protecting the reputation and independence of central banks and aggressively rebuilding any losses on these fronts. After all, reputation is extremely hard to build but very easy to lose. And that is the most important tool a central bank has to fight inflation.

Spooking the spirit of Bretton Woods

It was supposed to be a week of multilateralism, breaking down barriers between borders, and preventing “fragmentation” (as the IMF often likes to say). But the United States had different ideas.

Following US Treasury Secretary Janet Yellen’s recent trip to China where she hammered home the risk of Chinese manufacturing overcapacity, the Biden administration today called for a tripling of tariffs on Chinese steel and aluminum. As if that wasn’t enough, the Office of the United States Trade Representative is beginning an investigation into Chinese unfair trade practices on shipbuilding and maritime logistics, per a White House announcement this morning.

Couple this with the European Union’s ongoing anti-dumping investigation on Chinese electric vehicles (as we’ll discuss with EU Commissioner for the Economy Paolo Gentiloni tomorrow), and suddenly the spirit of Bretton Woods is looking a little spooked. That’s one reason why the understated warning in the IMF’s World Economic Outlook yesterday about downside risks may already feel out of date.

• What the World Economic Outlook left out

• What should be done with Russia’s blocked reserves?

• Dispatch from IMF-World Bank Week: IMF report launches keep it dull

• The IMF warns the United States to get its fiscal house in order

• How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

• When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

• Read day one analysis

What the World Economic Outlook left out

The just-released World Economic Outlook (WEO) has a nice subtitle that sums up very well its key messages—”steady but slow: resilience and divergence.” Resilient because economic activity in advanced countries has been solid and precipitated a 0.2 percentage point upgrade in the IMF’s growth forecast, to 1.7 percent this year. Divergent because low-income countries (LICs) have had their growth estimates cut by 0.2 percentage points to 4.7 percent this year. They have absorbed most of the $3.3 trillion loss in global economic output relative to the pre-COVID trend. They’ve also built up onerous levels of debt so that many are in debt distress and now have to use more than 14 percent of their government budget to pay interest, crowding out other important and necessary expenditures.

Unfortunately, the outlook for the LICs looks to be even worse than the WEO’s forecast, thanks to the Iranian attack on Israel over the weekend, as well as recent upticks in US inflation data.

Going forward, the heightened risk of war following Iran’s direct attack on Israel will likely keep oil prices elevated, having risen by some 12 percent since the beginning of the year. Meanwhile, higher-than-expected inflation will delay any easing by the Federal Reserve. That has caused a renewed uptick for the dollar. The combination of elevated oil prices and a strong dollar is bad for many countries, but it is particularly devastating for LICs because most LICs have to import oil—so high oil prices coupled with a depreciating currency against the dollar represent a double whammy, undermining growth. Also hurting LICs is the fact that a strong dollar increases their debt and debt servicing burdens, and it also tends to trigger capital outflow exacerbating the stress.

These two news events will push LICs even further behind in the convergence process. In short, global economic disparities will likely increase with unfavorable social implications for the world. The WEO has not paid sufficient attention to this risk.

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What should be done with Russia’s blocked reserves?

Since February 2022, Western sanctions have blocked roughly $300 billion in Russian reserves. Thanks to high interest rates, these reserves have been generating income for their custodians, the largest of which is Belgium-based company Euroclear. The question Group of Seven (G7) members will be discussing this week is how to use that interest income.

Bloomberg’s Viktoria Dendrinou and the Council on Foreign Relations’ Brad Setser joined the Atlantic Council GeoEconomics Center’s Charles Lichfield to compare the two primary proposals: 1) Tax almost all the interest income and use the windfall as a funding source for Ukraine or 2) pull forward some of the interest income stream to provide funding more quickly, maximizing its value through financial engineering.

Although the United States wants to come to an agreement by June, Dendrinou explained that things are moving more slowly on the European side due to the greater risks posed by Russian retaliation, as Europe has more assets in Russia. This adds to fears of knock-on effects on the euro’s role as a reserve currency.

Still, Setser came back with ambitious plans to generate even more interest income by actively managing the funds. “If you put this in deposit accounts and you had access to the full $300 billion,” he said, a reasonable estimate “is nine to ten billion dollars per year.”

Dendrinou and Lichfield expressed skepticism about the feasibility of doing this from a legal perspective, as it may require changing the ownership of the assets. Looking to the future, Dendrinou tentatively suggested that there’s “probably going to be some kind of financial engineering in place” by next year’s spring meetings.

Setser, on the other hand, boldly predicted that by June, the G7 will “agree to a facility that pulls forward some, not all, future interest income so that the current sum that flows to Ukraine this year is more than the three to four billion that is currently being discussed.” G7 outcomes from this week may provide some early signs about a realistic timeline for using the interest income.

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Dispatch from IMF-World Bank Week: IMF report launches keep it dull

Each year at the spring and annual meetings, participants like me count down to the launch of the IMF’s most important flagship publications—the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). The launches are typically the high point of the week, often receiving more media attention than pronouncements from the finance ministers and central bank governors that come later on.

The GFSR unveiling has always been a jargon-laden affair. While the WEO press conferences have become increasingly staid over the years, they were once known for public debate and even sarcasm.

The most memorable launch happened in the aftermath of the 1997 Asian financial crisis, when the IMF came under fire for its tough policy prescriptions. Then IMF Chief Economist Michael Mussa had firmly defended the Fund against the attacks—which especially rankled when they came from then World Bank Chief Economist Joseph Stiglitz. At the September 1998 WEO launch, Mussa declared that “those who argue that monetary policy should have been eased rather than tightened in those economies are smoking something that is not entirely legal.”

But today’s launch events at IMF headquarters hewed to the new status quo. IMF Economic Counsellor Pierre-Olivier Gourinchas, who heads the Fund’s Research Department, offered the WEO’s case for optimism—with global growth forecast at 3.2 percent in 2024 and 2025—arguing that “the global economy remains remarkably resilient” although progress to reduce inflation has “stalled.” Notably, he called on China to address its property downturn and “lackluster” consumer demand. IMF Financial Counsellor Tobias Adrian then elaborated on the financial sector risks hanging over China at the GFSR press conference.

Mentioned only in passing were global geopolitical fragmentation, the divergence of fortune between advanced and low-income countries—the latter an important theme of this WEO—and the stalled progress in restructuring developing country debt. These uncomfortable issues were left to another day.

The IMF warns the United States to get its fiscal house in order

Unlike last year, the IMF’s World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) were not derailed by events happening a few days before publication. Last October, the Hamas terrorist attack on Israel the weekend before the Marrakesh meetings rendered the Fund’s forecasts outdated by the time they appeared.

Iran’s large-scale attack on Israel, by contrast, has not yet led markets to a fundamental reassessment of geopolitical developments, although the situation remains extremely fragile. The IMF’s spring reports therefore deliver a timely message about the factors behind a more somber medium-term outlook. With the inflation shock gradually diminishing, the Fund’s forecasters are on more solid ground assessing the challenges facing the IMF’s member countries, with fiscal pressures front and center in this year’s reports.

These are also depicted in an excellent article by Pierre-Olivier Gourinchas, the IMF’s chief economist. The degree of fiscal adjustment needed to stabilize medium-term debt ratios for many countries is striking, including the United States. The US fiscal stance is raising “short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy,” as Gourinchas put it. In other words, US fiscal policy poses a risk both to US disinflation and to global long-term interest rates unless the United States gets its fiscal house in order.

“Something will have to give,” concludes Gourinchas, an ominous reference to a long list of downside risks that are listed in the two reports. However, the good news is that the GFSR is less alarmist about financial sector developments this time, focusing instead on how to manage the “last mile of disinflation,” a considerable change in tone compared to the discussions only a year ago when the United States was on the verge of a major banking crisis.

As always, the IMF as a multilateral institution needs to be careful how it depicts geopolitical events, and there are well-calibrated references to commodity price developments and supply chain disruptions caused by ongoing conflicts. The reports, however, cannot elaborate on the precarious situation caused by Russia’s war in Ukraine and the ongoing conflict in the Middle East.

But these conflicts may increase pressures on government finances, including from rearmament needs, fiscal spending during an election cycle, and lower tax revenues due to mediocre growth rates. As a result, the advocated fiscal adjustment may remain elusive. Still, the IMF’s staff has done its duty by pointing out the underlying risks.

How much can multilateral development banks crowd in private capital? It’s not looking like much—so far.

In redefining its mission as striving for a world without poverty on a livable planet, the World Bank—under President Ajay Banga—has drawn attention to the need to mobilize capital resources to help developing countries close the climate action funding gap: A gap that currently amounts to the difference between the $100 billion committed annually by donor countries and the over $2.4 trillion needed per year by 2030.

It is clear that developed countries and multilateral development banks don’t have the capital resources to meet much of the investment gap. As a consequence, the Bank has put much effort into finding ways to catalyze, or crowd in, private capital by providing risk-sharing and guarantee facilities. With private institutional investors and asset managers holding more than $400 trillion of assets under management, the Bank hopes to draw in multiples of private capital to stretch its project dollars.

However, research by the Institute of International Finance has found that in recent years, multilateral development banks collectively managed to mobilize just fifteen dollars for every one hundred dollars committed—or one-fifteenth, decidedly not significantly multiplying the amount it has put up in its commitments.

While it is truly important and laudable for the Bank to find ways to catalyze private capital, it is better to be realistic about the potential outcome and impact of such efforts, so as not to set the stage for later disappointment. By presenting realizable targets—at least for the foreseeable future—the Bank can focus on the tremendous climate action investment gap that needs to be filled, continuously urging the international community to rise to the occasion to help meet the challenge before it is too late.

Of course, developing countries can help themselves by implementing structural reforms, especially in governance, to make themselves increasingly investable in the eyes of both domestic and international investors, attracting the needed investment flows.

When it comes to trade relationships, North America comes first, argues Mexico’s secretary of finance

Mexico’s Secretary of Finance Rogelio Ramírez de la O joined the Atlantic Council’s studios on Monday to outline his country’s economic priorities, including its relationship with the United States.

Ramírez de la O argued that Mexico is “one of the most open economies in the world for both trade and capital,” thanks in part to the country’s exports, which are reported at over 35 percent of gross domestic product. The secretary of finance said that the country benefits from its level of openness, which he stated is comparable to certain European countries—but it’s also one that “fewer economies in Latin America have.”

Last year, Mexico surpassed China as the biggest exporter of goods to the United States. Mexico is committed to North American integration because “it’s where the core of our exports activities [lie],” Ramírez de la O argued. “This doesn’t mean that anything else comes secondary, but it comes next.” Looking ahead toward the USMCA renewal in 2026, the secretary of finance reassured members about product traceability—a demand rising from concerns over Chinese products. “We’re trading mainly and foremost North American content,” he said.

Speaking on the first day of the IMF-World Bank Spring Meetings, Ramírez de la O discussed reforms he’d like to see the Bretton Woods Institutions make, including correcting current account imbalances to revisit the world trade rules architecture and advocated for revisiting financial assistance for Latin America. He expressed readiness to engage with the Group of Twenty and multilateral development fora to define a global tax framework.

Watch the event

• What’s the strategy behind this year’s smaller-scale spring meetings?

• Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

• Geopolitics is eroding the IMF’s relevance

• COVID-19’s economic impact on the poorest countries has just become clearer

• Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure
• Read preview analysis

What’s the strategy behind this year’s smaller-scale spring meetings?

The spring meetings have just gotten underway, but thus far the official events around 19th Street feel somewhat scaled down. The registration and security lines today were certainly shorter than last year. And there are notably fewer headline events, at least as far as the official World Bank side convenings are concerned.  

Perhaps it’s reflective of the Bank’s intent to bring more focus to its work—as President Ajay Banga discussed in his preview press conference. The Bank consolidated its public schedule into three days with just two “flagship events”—one on the energy transition in Africa and one on strengthening health systems. Both are decidedly linked to the International Development Association (the Bank’s concessional fund for low-income countries) whose twenty-first replenishment campaign seems to have more urgency and ambition as debt and other macroeconomic, microeconomic, and geopolitical challenges stymie recovery and growth in deeper ways.

Or perhaps it reflects an interest in putting more time into one-on-one, closed-door, dealmaking meetings—including with the private sector. Leveraging resources and mobilizing private capital is a priority for the Bank, as Anna Bjerde, managing director for operations, reiterated in our conversation this afternoon: “In a world where resources are scarce, ‘leverage’ is the name of the game,” she said.

Or perhaps it reflects the pace and impact of the “unofficial” spring meetings: The increasing number of side events with a broader array of actors around and beyond 19th Street, including our robust dual-sited slate at the Atlantic Council. These convenings are as well, if not better, placed to unpack—and discuss critically—the global geoeconomic, financial, development, and sustainability challenges and opportunities we collectively face, as well as navigate how (after eighty years) the Bretton Woods Institutions and the larger multilateral system should evolve and respond.

Dispatch from IMF-World Bank Week: Climate change is the writing on the wall

With the IMF-World Bank Spring Meetings taking place again in Washington this year, the setting is familiar—but there’s also something strikingly new. As I walked into the World Bank’s headquarters today alongside many of the world’s finance leaders and experts, I was pleasantly surprised to see that the Bank’s mission statement, posted by the entrance, had changed: “Our dream is a world free of poverty,” had smartly been amended to add “on a livable planet.”

The new statement reflects the World Bank’s goal to evolve and to equip itself fully to deliver on its mission, which I discussed today with the Bank’s managing director of operations, Anna Bjerde.

The statement also exposes a hard truth: A world free of poverty cannot be attained or sustained in a world where carbon dioxide (CO2) emissions keep rising and climate challenges keep growing at the expense of the poorest—even as low-income populations contribute a mere 0.5 percent of global CO2 emissions, according to World Bank data.

Addressing global poverty and climate change requires more cooperation among the world’s largest economies and emitters; but the recent rise of geopolitical tensions and geoeconomic fragmentation, as our Bretton Woods 2.0 Project has pointed out, has made such cooperation much harder. This year’s spring meetings are a golden opportunity to make the case for more cooperation on addressing global challenges and reducing the rising temperature—both of the planet and its geopolitics.

This July, the Bretton Woods institutions will celebrate their eightieth anniversary, amid multifaceted perils facing the global economy and the world order. The countries present at the spring meetings must face these threats head on, so that by the time the IMF and World Bank turn one hundred, their member countries can look back with pride at the hard decisions they made to secure a livable and peaceful planet for all.

Geopolitics is eroding the IMF’s relevance

Expectations for this week’s Group of Twenty (G20) and IMF-World Bank Spring Meetings have hit a floor as the geopolitical environment continues to deteriorate. Russia and Iran are intensifying their pressure on Ukraine and Israel respectively, and political divisions in the West on the conflicts are becoming more acute. China is about to trigger another trade scuffle by throwing the (financial) weight of the state behind key industries that compete for global market share. The United States and Europe are on the defensive, fiscally stretched and riven by societal polarization that is also shaped by geopolitical adversaries.

There will be ample diplomatic squabbling over communiqué language concerning the wars in Ukraine and Gaza and the usual appeals to the spirit of multilateral cooperation—but there will also be complaints over excessive subsidies, trade restrictions, and financial sanctions. Discussions over quota reallocations will be doomed by irreconcilable geopolitical differences, and progress toward a more workable global debt architecture is likely to remain gradual, even if important work is proceeding on a technical level.

The one area where some consensus may exist is in raising funds for climate and development finance. Again, Western countries are on the defensive here, given that national development budgets have generally shrunk. Leveraging the funds of multilateral lenders, which the Western countries still dominate, remains an important way to at least partly match the financial resources that China, the Gulf countries, and increasingly India channel into building diplomatic ties with the developing world.

This also explains the selection of Kristalina Georgieva from Bulgaria to serve another term as IMF managing director. Under her leadership, the fund has expanded its toolkit to lend to developing countries, generally with fewer questions asked of loan recipients than under her predecessors, likely spelling financial trouble in the future. Already, there are demands for further reductions in the IMF’s lending rates as well as additional Special Drawing Rights (SDR) issuances.

By contrast, the Fund’s core economic work has generally received less attention. During her first tenure, the institution’s work was tailored to Georgieva’s personal areas of expertise, most of which lie in the mandate of the World Bank. The Fund was largely silent on the run-up in inflation, and its global economic messages have lacked clarity as it generally shies away from calling out countries for bad economic management.

Kenneth Rogoff, a former IMF chief economist, asked in a 2022 article why the IMF has turned into an aid agency. This question has now been answered by the majority of the IMF’s shareholders, who simply seem to prefer it that way. Whatever may be achieved during this year’s spring meetings, the mandate of the once proud institution seems to have shifted from safeguarding global financial stability to becoming a source of cheap funding for climate and development purposes.

COVID-19’s economic impact on the poorest countries has just become clearer

Four years after COVID-19 shook the global economy, the World Bank has released a report that lays out in the starkest possible terms just how devastating the pandemic was for the world’s poorest economies. In a report entitled “The Great Reversal,” the Bank details how much ground many of the world’s seventy-five least-developed countries have lost: One-half of that group is seeing its income gap with advanced economies widening, and one-third is poorer today than on the eve of the pandemic.

A key reason for the failure to regain growth momentum after COVID-19 has been sharply rising debt. In a separate report on developing country debt issued late last year, the World Bank estimated that eleven of the low-income countries were in “debt distress,” and twenty-eight were at “high risk” of distress. In 2022, the year the report analyzed, low- and middle-income countries paid $443.5 billion in debt service and $185 billion in principal repayments.

The countries assessed in “The Great Reversal” are eligible for World Bank low-interest loans and grant aid from the Bank’s International Development Association. They account for 92 percent of the world’s population living without access to affordable, nutritious food and over 70 percent of the world’s extreme poor. At the same time, their economies collectively account for only 3 percent of global output.

As central bank governors and finance ministers gather this week, the question—which they have faced at every spring and annual meeting since early 2020—will be whether they are prepared to work together to address this crisis of deepening poverty and debt. Or, will they leave town having only issued more communiqués expressing their “deep concern”?

Financial markets may be calm after Iran’s attack, but watch how countries react to pressure from elevated oil prices and dollar pressure

The IMF-World Bank Spring Meetings have officially kicked off, and international financial markets have maintained fragile stability in the immediate aftermath of Iran’s large-scale attack on Israel, which included the launch of more than three hundred missiles and drones. The United States, along with several European and Middle Eastern countries, has emphasized the need to prevent further escalation. Due to the fact that Iran’s attack was less damaging than some anticipated, but with the still lingering risk of war, oil prices have given back some of the risk premiums built up last week in anticipation of Iran’s attacks, with Brent Crude sinking to just below ninety dollars a barrel—after having gained some 12 percent since the beginning of this year. In case of all-out war between Israel and Iran and disruptions of the oil flow through the Strait of Hormuz, oil prices can well exceed one hundred dollars a barrel. About a fifth of the volume of the globe’s oil consumption ships through the strait, with very few alternative routes.

Meanwhile, persistently strong inflation data in the United States has pushed market expectations for the first Fed cut later in the year, keeping the dollar strong—the greenback has appreciated by about 14 percent since the recent low in 2021. The dollar is also underpinned by safe haven flows given heightened geopolitical tension.

The combination of elevated oil prices and a strong dollar has put pressure on many countries, especially low-income countries. In particular, nearly all Group of Twenty (G20) members have seen their currencies weaken against the dollar—led by the Turkish lira and the Japanese yen, which each lost more than 8 percent since the beginning of the year. This has prevented many countries from easing monetary policies to support their economic recoveries. Watch this topic closely: The dollar’s strength, and the potential negative impact of it, could be a main topic of discussion in the G20 meeting of finance ministers and central bank governors scheduled for April 17 and 18.

• Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

• IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

• What to expect from the 2024 IMF-World Bank Spring Meetings

Dispatch from IMF-World Bank Week: The era of separating geopolitics and economics is over

As the world’s finance ministers and central bank governors descend on Washington this week—and snarl the city’s traffic—they seem to just want to be able to stick to the script.

It’s an understandable sentiment. The agenda is daunting, with issues such as sticky inflation, China’s struggling economy, and a rising risk of debt defaults. And, as IMF Managing Director Kristalina Georgieva made clear in her curtain-raiser speech at the Atlantic Council on Thursday, those are just the immediate problems. The medium-term challenges of job disruptions from artificial intelligence and the green energy transition can’t be ignored.

But as Iran’s large-scale attack on Israel this weekend reminded us, the ministers and governors will need to first address something else—the reality that geopolitical tensions and conflict have, as Georgieva said, “changed the playbook for global economic relations.”

Six months ago, on the eve of the IMF-World Bank annual meetings in Marrakesh, Hamas unleashed its brutal terrorist attack on Israel. The ministers spent the next five days being asked about the possible impacts on the regional and global economy, and nearly all of them demurred. As we at the Atlantic Council pointed out at the time, that was a mistake. It was clear from the start that war between Israel and Hamas would have economic repercussions. Sure enough, two months later, Houthi attacks linked to the war began disrupting major shipping routes in the Red Sea.

Now, Iran’s attack has cast a dark shadow over the spring meetings. Once again, many of the ministers will surely try to avoid addressing the potential fallout. Even if geopolitics is the last thing the ministers want to be discussing, they may not have a choice. It’s worth remembering that the Bretton Woods Institutions were created during a war to address the devastating economic toll of conflict. For the last several decades, it was often possible to keep geopolitics and economics separate—but that time is over. The sooner the ministers recognize the new reality, the more effective they can be.

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

With global growth predicted to remain “well below” its historical average—at slightly above 3 percent—“making the right policy choices will define the future of the world economy,” International Monetary Fund (IMF) Managing Director Kristalina Georgieva said Thursday.

“The sobering reality is global economic activity is weak by historical standards,” inflation is “not fully defeated,” and fiscal buffers “have been depleted,” she explained at an Atlantic Council Front Page event ahead of the 2024 IMF-World Bank Spring Meetings. “Without a course correction, we are indeed heading for ‘the Tepid Twenties’—a sluggish and disappointing decade.”

Yet, there is reason for optimism, Georgieva argued while previewing an upgrade to global growth forecasts the IMF will release next week: Growth is “marginally stronger” thanks to “robust activity” in the United States and in many emerging-market economies, including an increase in household consumption and business investment and the easing of supply-chain problems.

Inflation is dropping “somewhat faster than previously expected”—a trend Georgieva expects to continue in 2024. While inflation is down in the United States, new data this week show that it may be creeping back up; “that is a concern,” Georgieva said, “but I think the [Federal Reserve] is acting prudently.” In response to some predictions that inflation would come down, propelling the Fed to cut interest rates this year, Georgieva cautioned “not so fast.” If the Fed has to then reverse course and raise rates, she said, that would undermine public confidence in monetary policy.

Yet on the other hand, high interest rates in the United States are “not great news” for the rest of the world. “High interest rates mean the dollar is also stronger,” which for other countries means that their currencies “are weaker,” she explained. “It could become a bit of a worry in terms of financial stability.”

Below, read more highlights from Georgieva’s curtain-raiser speech and conversation with Atlantic Council President and Chief Executive Officer Frederick Kempe, which touched upon the “good policies” needed to achieve a soft landing across the world and concerning economic trends in China.

New Atlanticist

Apr 11, 2024

IMF head Kristalina Georgieva on how to avoid ‘the Tepid Twenties’ for the global economy

By Katherine Walla

“Making the right policy choices will define the future of the world economy,” International Monetary Fund Managing Director Kristalina Georgieva said at the Atlantic Council.

China Financial Regulation

What to expect from the 2024 IMF-World Bank Spring Meetings

Josh Lipsky, senior director of the Atlantic Council GeoEconomics Center, breaks down the issues at the top of the agenda for the spring meetings.

The post Our experts decode policymakers’ plans for the global economy at the IMF-World Bank Spring Meetings appeared first on Atlantic Council.

The post Singh, Goldin and Bhusari cited in War on the Rocks on positive economic statecraft appeared first on Atlantic Council.

China’s economic ties with developed democracies traditionally have constituted the ballast for relationships otherwise subject to tensions over human rights, security, and other contentious subjects. This has certainly been the case in Europe.

But as we mark one year since European Commission President Ursula von der Leyen’s landmark speech outlining a new vision for Europe’s relationship with China framed around “de-risking” and reducing dependencies on Beijing, economic issues are increasingly a source of friction in relations with China – and central to transatlantic alignment on China policy.

Just this week, the EU announced a new anti-subsidy probe into China’s wind turbine industry and extended its guide on China’s distortions in different sectors of its economy, further indication Brussels is preparing for more trade actions to defend key industries. This comes after a year of strengthening Europe’s economic defenses against China’s leverage, including the publication of an economic security strategy.

The de-risking approach has also become the adopted framing of transatlantic coordination on China. US Treasury Secretary Yellen echoed European messaging in her trip to China this week, as our editor-in-chief Tiff Roberts notes below, underscoring that the U.S. would not allow Chinese subsidies to hollow out US manufacturing and that Washington might place tariffs on clean energy imports from China.

Meanwhile, China’s commerce minister was on a trip to Europe where he dismissed concerns about Chinese overcapacity as groundless and denied that subsidies were responsible for China’s success in green industries.

China, not surprisingly, rejects the concept of de-risking. But Beijing is betting that EU member states’ disunity, and the enduring draw of the Chinese market, will stall Europe’s economic security measures.

And China has plenty to point to. China’s Ambassador to Germany recently cheered German businesses’ continued investment in China and claimed resilient bilateral trade reflected the “unpopularity” of de-risking. Chancellor Scholz will meet with President Xi early next week, accompanied by German business leaders, on his first trip to China since Germany released its own China strategy focused on de-risking.

As I and colleagues from the Council’s GeoEconomics and Europe Centers argued recently, European economic dependency on China is indeed beginning to retreat (see below), but Brussels has much more to do.

Europe’s progress in implementing lofty de-risking plans amidst intra-European and transatlantic differences – and a continuing stream of Chinese inducements and pressure – may be the clearest gauge of allies’ ability to remain in sync on China policy in the years ahead.

We’ve got plenty more on this and other topics below. Over to you, Tiff!

-David O. Shullman, Senior Director, Atlantic Council Global China Hub

Fellow

Dexter Tiff Roberts

Nonresident Senior Fellow

Global China Hub Indo-Pacific Security Initiative

China Chinese

Secretary Yellen, a Chinese cuisine epicurean?

To read the news, one might think Treasury Secretary Janet Yellen came to China to enjoy Chinese delicacies. “One thing stands out during Yellen’s whirlwind trip… just as how closely watched the content of her talks, what she chose to eat also gained widespread attention,” wrote the Global Times. Phoenix News reported how after arriving in Beijing, Sec. Yellen went immediately to a Sichuan restaurant.

But Sec. Yellen was there for a serious purpose: to warn Beijing that a flood of exports washing up on American shores would not be welcomed. “I think the Chinese realize how concerned we are about the implications of their industrial strategy,” and how it could “make it difficult for American firms to compete,” she said. The fear is that as the economy worsens, China will respond by pumping more cheap products onto global markets.

That’s because Beijing seems to have no clear plan how to stimulate growth domestically, a reality that became clear following the closing of the National People’s Congress last month. As GeoEconomics Center senior fellow Jeremy Mark writes, government spending plus nearly five trillion yuan of new bonds will likely go to building more infrastructure, plus developing higher-value added industries like green energy technology and electric vehicles (EVs)—both areas where China’s surging exports have spooked the US and Europe. “There was no sign that the government was prepared to channel resources to boost household spending, which is necessary if growth is to revive,” writes Mark.

Xi Jinping’s focus on “new quality productive forces,” including EVs, as well as lithium-ion batteries, and renewable energy products such as solar panels and wind turbines, “is intrinsic to China’s economic model—and therefore that calls to end it amount to wishful thinking,” writes GeoEconomics Center senior fellow Hung Tran in “Breaking down Janet Yellen’s comments on Chinese overcapacity.” This means that the US must prepare itself for trade tensions on this issue for the foreseeable future and recognize that China will address the issue on its own timeline only when “its domestic impact becomes unacceptably negative.”

China mulls economic retaliatory options in event of a Taiwan crisis

Meanwhile, volatile China-Taiwan relations are back in the news as former Taiwanese president Ma Ying-jeou makes an 11-day visit to the mainland, where he met with Xi Jinping, even as China’s leader refuses to renounce the use of force against the island. How might Beijing respond to U.S.-led economic sanctions, in the frightening event of a military conflict in the Taiwan Strait? That’s the question addressed in “Retaliation and resilience: China’s economic statecraft in a Taiwan crisis,” the second report in a series by the Geoeconomics Center and Rhodium Group, as well as in the report’s April 2 launch event.

After watching Western countries impose unprecedented sanctions on Russia following the invasion of Ukraine, “China is developing capacities that are making its economy more resilient,” in the event of a Taiwan crisis, the report notes. With over 100 million Chinese jobs tied to its exports, China is expected to be strategic in its response: “as a result of the major costs to its citizens, China is unlikely to follow a tit-for-tat approach but will target sectors where it can inflict asymmetric pain, particularly through the use of export controls or trade restrictions on critical goods such as rare earths, active pharmaceutical ingredients, and clean energy inputs (e.g., graphite).”

China Global: countering growing influence in the Pacific Islands

There is a new arena of rising Chinese influence: the Pacific Islands, made up of 16 countries and territories near the equator, including the Solomons, Samoa, Kiribati, and Papua New Guinea, the only Pacific country with a population over one million. While their economic heft is small—with a combined GDP of only $36 billion–they are geopolitically important, helping China build support in international forums such as the United Nations, and in isolating Taiwan.

Key to countering Beijing’s efforts: strengthening cooperation between members of the Quad, the security grouping that includes, Japan, India, Australia, and the US, and the Pacific Island countries, as the Indo-Pacific Security Initiative (IPSI) and Hub’s Parker Novak and IPSI’s Kyoko Imai write in a new issue brief (IPSI also held a virtual seminar on the same topic.) One important policy recommendation the authors raise: the Quad must “expand its focus beyond just traditional security issues,” and focus on cooperation on issues important to the region, including climate change, maritime management and public diplomacy that “emphasizes shared values, and does not overemphasize geopolitics.”

The Quad is just one mechanism for the US to engage with the region. Although the US is beginning to move on issues related to the Pacific Islands, such as Congress’ much belabored renewal of the Compacts of Free Association (COFA) with Palau, the Federated States of Micronesia, and the Republic of the Marshall Islands, this may not be enough, according to Hub fellow Will Piekos. He writes that “[T]he delay in ratifying the COFA reinforced the perception that the United States is an unreliable partner.” To counter this perception and compete with China, the US should “facilitate private-sector involvement to spur growth, developing partnerships with local actors and nongovernmental organizations, and helping to increase governance capacity.”

• The Global China Hub hosted an event with the GeoEconomics Center and IPSI titled, “Indo-Pacific economic security: Issues and strategies” which featured a keynote fireside chat with House Select Committee on the CCP’s Ranking Member Raja Krishnamoorthi who discussed the recommendations from their report, “Reset, Prevent, Build: A Strategy to Win America’s Economic Competition with the Chinese Communist Party.”
• The latest installment of the China-MENA podcast invited Steve Tsang, Director of the China Institute at SOAS University of London, to explore Xi Jinping’s political philosophy and how it propels a new state ideology, autocratic alliances, and what it means for the future of China and the Middle East and North Africa.
• In his latest New Atlanticist piece, “The G7 needs a permanent secretariat. The 2024 elections cycle demonstrates why,” Europe Center Research Assistant Francis Shin argues that a permanent secretariat would support the G7’s efforts to combat continuing strategic competition with China.
• The GeoEconomics Center’s Kimberly Donovan and Maia Nikoladze write about how Iran and Russia have redirected much of their oil shipments to China to evade sanctions. They suggest that Western authorities should start looking into financial linkages between heavily sanctioned regimes to begin addressing this growing issue.

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A senior administration official, speaking on condition of anonymity, outlined for me the concerning scale of Beijing’s growing support for Moscow’s war effort. “China is dangerous,” the official said, and the administration is determined to show allies evidence of Beijing’s growing role in Russia’s threats to Europeans’ security.

The official said “90 percent of the reason” Russia has been able to sustain the war effort and reconstitute its economy, despite sanctions, is due to a “massive effort” by China that ranges from geospatial assistance for Russian targeting to dual-use optics and propellants used in everything from tanks to missiles.

China-Russia trade soared to $240 billion last year from $108 billion in 2020. Research from my colleagues at the Atlantic Council’s GeoEconomics Center shows that China now exports more to Russia than the European Union did before the COVID-19 pandemic. With both consumer goods (which make up nearly half of the goods exports) and industrial supplies, China is helping keep Russia’s economy afloat.

This alarm bell has been ringing at the highest levels of the US government over the past week: US Secretary of State Antony Blinken sent the message to European allies in Brussels, Treasury Secretary Janet Yellen warned officials in Beijing, and President Joe Biden raised the issue directly with Chinese leader Xi Jinping in a conversation last Tuesday.

European Union and NATO foreign ministers, meeting in Brussels, said Blinken delivered the message in striking, explicit terms. According to the Financial Times, they saw it as a significant shift, not dissimilar to the sharing of intelligence ahead of Russia’s 2022 invasion.

For her part, Yellen said in China this weekend: “We’ve been clear with China that we see Russia as gaining support from goods that Chinese firms are supplying to Russia . . . They understand how serious an issue that is to us.”

To drive her point home, the US Treasury followed Yellen’s Friday and Saturday discussions by warning of “significant consequences” if Chinese companies provided “material support for Russia’s war against Ukraine,” an unusually sharp message.

Administration officials hope that forcefully and publicly pushing back on China, in concert with allies, will cause Beijing to think twice about continuing to aid Moscow, prompt allies to apply new pressures, and buy time for more Western arms to arrive to Ukraine. The Biden administration is growing increasingly concerned that delayed US support for Ukraine—combined with increased support for Russia from China, Iran, and North Korea—could result in a Russian offensive this summer that endangers major cities, perhaps even Kyiv.  

Administration officials believe that Russia remains vulnerable if Kyiv gets the military and economic support it needs, but that the coming months will be increasingly perilous without that support.

The worst period could come just as NATO leaders convene in Washington in July for their seventy-fifth anniversary summit, just days ahead of the Republican and Democratic party conventions. Not much time remains to ensure that Russia, with the growing support of China, does not spoil the Alliance’s celebration.    

Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter: @FredKempe.

This edition is part of Frederick Kempe’s Inflection Points Today newsletter, a column of quick-hit insights on a world in transition. To receive this newsletter throughout the week, sign up here.

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Moscow is trying to increase Africa’s dependence on its imports further by blocking the exports of Ukrainian grain. Russia pulled out of the Grain Deal that allowed Ukraine to export its grain despite Russia’s war. The Kremlin then offered Africa free grain transport to increase its sales and Africa’s reliance on Russian grain. Additionally, Russian propaganda has gained huge traction in Africa claiming that Western sanctions are to blame for the increases in grain prices and not Russia’s war against Ukraine.

By helping Ukraine sell its grain, the West can offer the African continent an alternative to Russia’s grain and decrease Russia’s profits.

New solutions are needed for Ukrainian grain exports

Ukrainian grain is key to global food security, which is why the West should protect and invest in Ukraine’s agriculture sector. Before the war, about 90 percent of Ukraine’s agricultural products were exported by sea. By blocking the Black Sea ports at the beginning of the war, Russia brought exports to a standstill, raising global food prices. Moreover, Ukraine’s grain production dropped by 29 percent in 2022-2023. The US and EU should help Ukraine modernize its infrastructure and create alternative shipping routes both through land and sea.

Since exiting the Grain Deal in July 2023, Russia has damaged about 200 facilities in Ukrainian ports. While the current grain arrangement allows Ukraine to export about 22 million tons of grain, Russia constantly attacks the ports and shipments, damaging infrastructure, destroying and stealing shipments, and taking human lives. Despite the risks, Ukrainians are trying to quickly rebuild and modernize the ports. And, even with the current arrangement, Ukraine can further increase sea exports of grain. The West should invest in the rebuilding and modernization of existing Ukrainian ports and connecting infrastructure, such as roads and railways, which could allow an increase of exports by a quarter, at least. This positive economic statecraft measure will also attract private investors to the Ukrainian agricultural and infrastructure sectors, helping Ukraine to make up for lost production and build new capacity.

To make up for sea export losses, Ukraine, with the European Union’s help, also developed land routes that allowed the shipping of grain. This solution, however, was temporary, since Polish farmers blocked the border and destroyed around 160 tons of Ukrainian grain. These protests are undermining Polish support for Ukraine and further damaging global food security. The EU needs to intervene and negotiate a deal for Ukraine to continue shipping grain through Poland. While this is in the works, the EU should help increase the capacity of other EU routes for Ukrainian grain to Africa, such as through Romania and Slovakia.

Positive economic statecraft can help Africa ensure food security

Multilateral organizations, including the World Bank and the Group of Seven (G7), have been trying to mitigate the effects of the food crisis in Africa. Among other projects in Africa, the World Bank provided $2.75 billion to the Food Systems Resilience Program for Eastern and Southern Africa which helps countries in Eastern and Southern Africa tackle growing food insecurity. The G7 also committed billions to mitigate food insecurity. These actions, however, are not enough, as nearly 50 million people are expected to go hungry in West and Central Africa this year. Moreover, millions in southern Africa are threatened with hunger due to extreme drought.

The West should employ positive economic statecraft tools to deal with war-caused food security issues. That should include working with its allies and partners in the African Continental Free Trade Area (AfCFTA) which can help increase food security, by increasing the availability of affordable fertilizer. Positive measures can also help African countries to develop their own agriculture sectors. Africa has over 65 percent of the world’s uncultivated land, which shows the continent can sustain its food needs if the infrastructure is in place. Supporting existing organizations, such as the Alliance for Green Revolution in Africa (AGRA), can allow applying local expertise to build government and private capacity to expand agricultural sectors on the continent.

Positive economic statecraft, such as increasing Ukraine’s exports to the continent and supporting African initiatives like AfCFTA and AGRA will help Africa increase food security. These measures will also help Ukraine make up for export losses from Russia’s war and allow African countries to decrease reliance on Russian grain exports.

Yulia Bychkovska is a former young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @YuliaB.

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Czech and Belgian law enforcement agencies reported in late March 2024 that Kremlin-linked Ukrainian oligarch Viktor Medvedchuk was behind a Prague-based Russian propaganda network centered around the Voice of Europe outlet. Medvedchuk is accused of masterminding the distribution of anti-Ukrainian narratives in the European media and paying European Parliament members to promote Russian interests in their legislative activities.

This latest corruption scandal is a painful reminder that the EU and US remain at significant risk of Russian electoral interference in the lead-up to elections later this year. For the EU specifically, the scandal further demonstrates that it must put its own house in order if it is to credibly demand Ukraine do the same during the latter’s ongoing EU accession negotiations.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

The oligarch at the center of the scandal, Viktor Medvedchuk, has close ties to Russian President Vladimir Putin, who is godfather to Medvedchuk’s daughter. Throughout the three decades following Ukrainian independence in 1991, Medvedchuk was a prominent figure in the country’s political life and a vocal advocate of Russian interests.

Medvedchuk’s personal relationship with Putin helped earn him a reputation as the Kremlin’s unofficial representative in Ukraine. This led US intelligence agencies to identify Medvedchuk as one of Moscow’s top choices to head a puppet Ukrainian administration in the event of a successful invasion.

When Russian troops crossed the border in February 2022, Medvedchuk initially went into hiding. However, he was detained by the Ukrainian authorities two months later, and was eventually traded for a large number of Ukrainian POWs in one of the most controversial prisoner exchanges of the war.

Regardless of his exile and loss of Ukrainian citizenship, Medvedchuk remains an important ally to Putin. His leadership of the Voice of Europe influence operation indicates Europe’s continued vulnerability to the Kremlin’s weaponized corruption. Whereas Ukraine, the US, UK, Canada, Australia, and New Zealand all imposed sanctions on Medvedchuk and his associates some time ago, the European Union did not do so. As a result, Medvedchuk was still able to do business in Europe.

As a result of this apparent oversight, several of Medvedchuk’s EU-based assets are thought to have remained untouched until his involvement with Voice of Europe was uncovered. This gave him a degree of maneuverability with his EU-based financial assets that appears to have facilitated his allegedly illicit activities.

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In the wake of the recent revelations, the Czech authorities have imposed sanctions on Medvedchuk and other Kremlin-linked associates. Meanwhile, Belgian law enforcement agencies have opened probes into alleged bribes paid to serving MEPs from France, Germany, Belgium, the Netherlands, Poland, and Hungary, with the Polish authorities also launching an investigation.

While these measures are welcome, it is not clear why EU authorities did not act earlier to counter the Kremlin’s weaponized corruption. Many now fear the current scandal is just the tip of the iceberg in terms of Russian efforts to infiltrate democratic institutions and the media throughout the Western world. Looming elections on both sides of the Atlantic have added a sense of urgency to this debate.

In theory, the European Commission’s “freeze and seize” task force is meant to coordinate with the rest of the Russian Elites, Proxies, and Oligarchs (REPO) task force, which features the relevant national sanctions authorities from G7 member states and Australia. The fact that the EU’s sanctions listings still do not fully align with that of its REPO allies, especially on somebody as prominent as Medvedchuk, raises serious concerns over the effectiveness of this coordination.

The European Union should be setting an example when it comes to combating corruption. When recommending that the European Council open official EU accession negotiations with Ukraine in late November 2023, Commission Vice President Věra Jourová cautioned that Ukraine still had a long way to go in developing anti-corruption regulations, even as she praised the significant progress made by the Ukrainian authorities so far. Inevitably, questions are now being asked about the credibility of the EU’s own anti-corruption policies.

Recent claims of a major Russian influence operation operating in the heart of the EU should serve as a wake-up call for policymakers throughout the West. With the Kremlin clearly preparing for a long-term geopolitical confrontation, the need for vigilance will only grow. In response to this threat, transatlantic institutions should prioritize bolstering their ability to resist Russia’s weaponized corruption, while making sure the Kremlin’s agents are subject to the maximum available restrictions.

Francis Shin is a Research Assistant at the Atlantic Council’s Europe Center.

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Executive summary

Introduction

Chinese economic statecraft in a Taiwan crisis: Tools and applications

Access to Chinese markets

China in the global economy

China’s capacity to circumvent financial sanctions and G7 economic statecraft

Using international Renminbi networks to circumvent sanctions

Current scope of Renminbi internationalization

Policy constraints on expansion of Renminbi financial networks

Responding to G7 economic statecraft in a crisis

Assessing China’s capacity to respond to G7 statecraft

The impact on trade and FDI

Financial statecraft and consequences

Preventing escalation in economic warfare

Appendix 1: China’s formal economic statecraft toolkit

Authors

Acknowledgment

Executive summary

Beijing has watched carefully as Western allies have deployed unprecedented economic statecraft against Russia over the past two years. Our report from June 2023 modeled scenarios and costs of Group of Seven (G7) sanctions in the event of a crisis in the Taiwan Strait. However, that report largely left unanswered a critical question: How would China respond?

This report examines China’s ability to address potential US and broader G7 sanctions, focusing on its possible retaliatory measures and its means of sanctions circumvention. We find that reciprocal economic statecraft measures would exact a heavy financial toll on the G7, China itself, and the global economy. Crucially, however, we also find that China is developing capacities that are making its economy more resilient to Western sanctions.

We consider the use of economic statecraft tools in two main scenarios: a moderate escalation over Taiwan limited to the United States and China that remains short of military confrontation, and a more severe scenario with G7-wide restrictions targeting Chinese firms and financial institutions. For each, we consider China’s potential responses to adversarial economic statecraft in terms of retaliatory action (including restrictions on economic activity within China and China’s potential actions abroad) and attempts to circumvent G7 sanctions.

We arrive at seven key findings:

1. China’s economic statecraft toolkit is quickly expanding. In the past five years, China has used a range of formal and informal statecraft tools, including tariffs, import bans, boycotts, and inspections, to punish firms and countries for their stances on Taiwan and other sensitive issues. In anticipation of the potential for more extensive foreign sanctions, China has also been legislating to equip itself with an expanded toolkit to respond. This scope of options distinguishes China from Russia, which had prepared for additional sanctions in a less organized fashion, and presents a significantly more difficult challenge for Western economic statecraft.
2. China’s statecraft toolkit is heavily weighted toward trade and investment rather than financial statecraft. We assess that in a moderate scenario where US exports to China are curtailed, more than $79 billion worth of US goods and services exports (such as automobiles and tourism) would be at risk. In a higher-escalation scenario involving G7-wide sanctions against China, around $358 billion in G7 goods exports to China could be at risk from the combination of G7 sanctions and Chinese countermeasures. On the imports side, we estimate that the G7 depends on more than $477 billion in goods from China which could be made the target of Chinese export restrictions. Regarding investment, at least $460 billion in G7 direct investment assets would be at immediate risk from the combined impact of G7 sanctions and retaliatory measures by Beijing. By comparison, China has limited financial tools available to directly influence G7 economies. What restrictions China imposes on capital outflows are likely to be driven more by financial stability concerns rather than attempts to coerce.
3. China will face steep short- and medium-term costs if Beijing deploys economic statecraft tools. China would face high economic and reputational costs from using economic statecraft tools, especially in a high-escalation scenario. While export restrictions would be one of China’s most impactful economic statecraft tools, it would also be among the costliest options for China. Over 100 million jobs in China depend on foreign final demand, and nearly 45 million of these jobs depend on final demand from G7 countries. In a high-escalation scenario, most of these jobs would at least temporarily be put at risk. Even in a moderate-escalation scenario, China’s viability as a destination for foreign investment would dramatically decline, with implications for China’s exchange rate and domestic financial stability.
4. China may prefer to avoid tit-for-tat retaliation for strategic reasons. As a result of the major costs to its citizens, China is unlikely to follow a tit-for-tat approach but will target sectors where it can inflict asymmetric pain, particularly through the use of export controls or trade restrictions on critical goods such as rare earths, active pharmaceutical ingredients, and clean energy inputs (e.g., graphite). China’s political objectives in a Taiwan crisis are unlikely to be served with a completely reciprocal response to G7 sanctions.
5. China will likely attempt to divide the G7 and thereby limit the impact of sanctions. In scenarios where the United States alone imposes sanctions on China, Beijing has more opportunities to circumvent sanctions using targeted retaliatory measures against the United States, but not other G7 countries. The G7 has varied relations with and commitments to Taiwan, and a significant proportion of firms, particularly in Europe, continue to see China as a critical export destination. In addition, China may use positive inducements to encourage countries across the Group of Twenty (G20) to stay neutral. Beijing may also leverage its large bilateral lending with a range of emerging and developing economies to attempt to circumvent or not implement G7 sanctions.
6. China is seeking to create resiliency to sanctions by developing alternatives to the dollar-based financial system, including renminbi-denominated transaction networks. Renminbi-based networks are never likely to replace the US dollar-denominated global financial system. However, the gradual expansion of these networks can help Beijing find alternative mechanisms for maintaining access to financing and trade transactions even in the event of far reaching Western sanctions or trade restrictions. A rapidly growing number of domestic and cross border payment projects are being designed with the possibility of Western sanctions in mind.
7. The timing of any crisis can significantly alter the impact of statecraft tools, for both the G7 and Beijing. Western efforts to de-risk and shift supply chains in the next five years may reduce Beijing’s “second strike” statecraft capacity over time. At the same time, China’s renminbi-based financial networks will expand in scope and liquidity, providing Beijing with more options to mitigate Western sanctions.

Introduction

The prospect of a crisis over Taiwan has generated intense discussion in recent years, as other unthinkable scenarios in global affairs have become depressingly manifest. Russia’s invasion of Ukraine presented the United States and its allies with a need to quickly escalate economic sanctions and other tools of statecraft against Russia as part of a broader political response. As tensions in the Taiwan Strait have risen, the policy community began asking whether similar tools could be used to deter China in a Taiwan crisis scenario. Senior leaders in China increasingly reference risks from Western sanctions in policy remarks, and Beijing has reportedly conducted its own assessments of China’s vulnerabilities to Western economic sanctions.¹

As tensions have risen within the US-China bilateral relationship, policymakers and analysts have started to actively discuss the potential use of sanctions, export controls on critical technologies, and China’s retaliatory responses. These economic statecraft tools are now being considered as options within a broader multilateral strategy toward China, without fully considering the consequences for cross-strait stability or the global economy. Over the last two years, economic warfare has become more plausible, even if military engagement still seems remote.

In June 2023, Rhodium Group and the Atlantic Council GeoEconomics Center published a report that found that the Group of Seven (G7) would likely consider a wide range of economic measures to deter or punish China in a Taiwan-related crisis scenario.² While that report highlighted what tools might be considered and their direct costs to the global economy, it largely set aside questions about China’s own economic statecraft tools and responses. This report aims to fill that gap and discuss China’s potential responses to G7 sanctions or other tools of statecraft.

While still extremely costly in economic terms, these tools are nonetheless likely to be considered in a crisis since the costs of war are far higher. But unless the US-China political tensions over Taiwan can be managed, these lines between economic and military warfare will be blurred in any crisis scenario, with economic statecraft tools appearing as plausible and manageable responses.

This is exactly why understanding China’s potential responses to US and allied statecraft is so important. Understanding China’s capacity for economic coercion and circumvention can help refocus policy debate around credible and effective deterrence of both broader military conflict and the steady escalation of tensions from more limited crisis scenarios. Just as theories of nuclear deterrence account for the concept of second-strike capabilities, so too must we consider economic retaliatory measures in assessing the deterrence character of sanctions.³ Recent actions by Beijing to establish export controls on critical raw materials and other critical inputs reveal that Beijing is practicing and refining its use of economic leverage, but the contours of China’s ability, willingness, and channels for action are not well understood.

A February 2024 Atlantic Council policy brief by a senior US official (at the time out of government) with deep experience in this domain outlined seven principles for the effective use of economic statecraft.⁴ While these principles focus on US options, the framework can also be used to evaluate the effectiveness of China’s policy instruments.

Designing and implementing a set of economic statecraft instruments in a Taiwan crisis scenario to achieve political objectives requires clarity on the trade-offs involved among these principles, and where benefits will outweigh costs. In a Taiwan crisis, decisions will need to be made quickly, making it critical to understand China’s potential response. While China’s retaliatory tools can inflict significant short-term economic pain, and China’s leaders may not be considering the same principles as outlined in the table below, Beijing will also struggle to mount an economic statecraft strategy that is both sustainable and effective in limiting G7 policy choices toward China. This study aims to improve understanding of the uses and limits of China’s statecraft tools, as well as the potential costs of escalation, in order to make the commitments from both sides to deescalate in a crisis far more credible.

For the purposes of this report, we are limiting the measures discussed to explicitly economic tools and sources of economic power, even as we are aware that any crisis scenario would also include consideration of other nonmilitary options such as cybersecurity-related measures or disinformation campaigns, as well as military coercion below the threshold of war. Conventional wisdom assumes that China’s response would be coordinated and centralized, free from the democratic factors that constrain US and G7 action, including rule of law and separation of authorities across different branches of government and agencies. This study questions some of those assumptions, as Chinese bureaucratic interests are likely to clash on the question of the country’s need for US dollar inflows in the event of economic sanctions, as well as China’s economic interests in imposing restrictions on trade.

In chapter one, we build a framework to categorize the channels of economic interaction at risk from Chinese economic statecraft. In chapter two, we explore how each of these tools might be used at different levels of escalation, up to the level of retaliation against a major G7 sanctions program. In chapter three, we review China’s capacity to circumvent sanctions and statecraft using financial networks outside of the US dollar system.

This paper, and our prior work on sanctions options in a Taiwan crisis, focuses primarily on China and the G7. A forthcoming paper will explore the role of the G20 in a Taiwan contingency.

Chinese economic statecraft in a Taiwan crisis: Tools and applications

No country has ever tried to sanction an economy of China’s size and importance to the global economy. The use of economic statecraft against Russia following its invasion of Ukraine was exceptional in its breadth and its level of international coordination, but Russia was only the world’s eleventh-largest economy before the war began and had few economic countermeasures available aside from energy export denial.

As the world’s second-largest economy and premier manufacturing powerhouse, China has a far larger toolkit of economic policy instruments. It also has a history of using economic leverage assertively to achieve foreign policy objectives, though with mixed success. That experience means retaliatory efforts are nearly certain in ways the Western powers did not experience after imposing sanctions on Russia in 2014 and 2022 onward. In past work we took stock of economic statecraft tools available to the G7 and the costs and limitations of their use. In this chapter we catalogue China’s economic statecraft tools and applications, and assess the likeliness of their use in moderate or high Taiwan scenario escalations.

Drawing on past case studies and China’s growing legal and regulatory toolkit, we identify a range of economic statecraft actions that China could use in a Taiwan Strait escalation scenario. Scholars of economic statecraft typically subdivide statecraft tools into categories based on their direction (i.e., inbound or outbound flows) and on their channel (i.e., trade or capital flows).⁵ In the first section of this chapter, we look at access to China’s markets—i.e., the potential use of statecraft tools against economic flows into China, looking respectively at trade, foreign direct investment (FDI), and portfolio flows. In the second section, “China in the Global Economy,” we look at the use of statecraft tools aimed at these flows from an outbound perspective.

There is substantial debate within Chinese expert circles on the use of these tools. Academics and experts affiliated with China’s financial and economic bureaucracy often argue that defending against economic sanctions starts by building a strong financial system to improve domestic resilience and by deepening China’s global economic ties to increase the economic and diplomatic costs on the sanctioning economy. Zhang Bei, an economist at the People’s Bank of China’s (PBOC) Financial Research Institute, has argued that although China needs to strengthen countersanctions tools such as the Unreliable Entity List and Anti-Foreign Sanctions Law, it also needs to strengthen management of domestic financial risks and deepen global economic engagement through renminbi internationalization and international financial cooperation.⁶ Chen Hongxiang, another PBOC-affiliated researcher, describes the anti-sanctions policy toolbox as a “last resort strategy.”⁷ Chen notes that the United States faces limitations in the use of financial sanctions given the risks to the attractiveness of the US dollar as a global currency and the diplomatic and economic costs of sanctions.

Other scholars have discussed China’s use of retaliatory measures and the legal foundations for responses in the future. For example, Yan Liang of Nankai University has described trade controls on strategic resources as having played an important role in China’s sanctions toolkit in the past, noting the 2010 export controls on rare earths.⁸ Cai Kaiming, a Chinese cross-border compliance lawyer, has written about the newly developed legal foundations of Chinese economic statecraft tools, including the Anti Foreign Sanctions Law, the 2021 blocking statute, the Unreliable Entity List, and the reciprocal measures of China’s Export Control Law, Data Security Law, and Personal Information Protection Law (see Appendix 1).⁹ Throughout this paper, we consider the use of these new formal tools in a Taiwan crisis scenario, as well as the range of informal tools available, such as phytosanitary inspections and administrative orders, to China’s customs department. Given the range of both formal and informal tools available for the purpose of statecraft, the focus of this paper is on the ends, rather than the means. These tools span many different bureaucratic jurisdictions, but it is likely that, as in past instances of major statecraft actions where major costs to China’s economy are involved (such as China’s retaliatory tariffs against the United States in 2018), the decision to use these tools will come from China’s senior-most leadership.

Scenarios

While China’s past use of economic statecraft is instructive, Beijing may not necessarily respond to future escalations with the same old tools, or with the same intensity. In recent years, China showed a willingness to use economic statecraft more explicitly and intensely than in the past, albeit in a concentrated fashion (e.g., trade bans against Lithuania). China has also created new legal frameworks to justify future retaliatory or punitive actions.¹⁰ In short, we need to make predictions of future use cases beyond the range of China’s past actions.

To explore how China might use economic statecraft tools in the future, we consider two scenarios:

Moderate-escalation scenario: China responds to the United States taking an escalatory diplomatic action in the Taiwan Strait, such as a substantial deepening of the political relationship with Taiwan, a step-change in military aid, or a limited sanctions package in response to Chinese aggression toward Taiwan. In this scenario, China reacts with economic statecraft measures targeting the United States designed to impose relatively higher costs on the United States than China. In this scenario, China’s willingness to use statecraft is constrained by the necessity to maintain a strong business environment amid high geopolitical tensions.

High-escalation scenario: China retaliates to a maximalist G7 sanctions package that includes full blocking sanctions on China’s major banks and the PBOC, sanctions on senior political figures and business elites, and trade bans with relevance for China’s military.¹¹ China adopts a much stronger and broader set of economic statecraft measures against the entire G7, with an intent to impose costs as high as possible on the sanctioning economies.

Both scenarios stop short of war between China and the United States or other G7 countries, and are meant to provide a context to evaluate the potential use of China’s statecraft tools. We consider only economic statecraft responses in a Taiwan escalation scenario, although China is also likely to consider military and quasi-military actions that are outside the scope of this paper, such as undersea cable cuttings, cyberattacks, or blockades. Where we highlight costs in dollar terms, they should be understood as the assets and annualized economic flows at risk of disruption unless otherwise specified.

Access to Chinese markets

One of China’s primary methods of exercising economic statecraft in the past has been to restrict access to its markets, either through trade barriers or disruptions to the operations of foreign companies and investors in China. In this section we consider the use of these tools in the past and in moderate- and high-escalation future scenarios.

Chinese imports

One of China’s primary methods of exercising economic statecraft in the past has been to restrict access to its markets through tariffs and nontariff barriers. In a moderate escalation with the United States over Taiwan, China could scale up these tools to restrict imports across a range of noncritical goods such as consumer products, easily substitutable goods, and goods where the United States is heavily dependent on China as an export market. In a higher-escalation scenario involving a maximalist G7 sanctions program, China could impose import bans on a broader range of goods, although the main initial disruptions to imports would likely come from sanctions against Chinese banks and importers. A total ban on G7 imports, with exceptions for critical agricultural and medical imports, would put $358 billion in exports to China at risk.

Past uses of statecraft

Restrictions on market access have been one of China’s most common forms of coercion in past geopolitical incidents. In most cases, these tools have been narrowly targeted—either against single companies or narrow product categories—to minimize the impacts on China’s economy and to act as a warning rather than full-blown punishment mechanism. Yet they have the potential to be scaled up in response to higher levels of escalation, especially as many G7 companies depend heavily on the Chinese market for revenue and growth.

• Tariffs – In numerous past cases, China has increased tariff rates on imported products in an apparent response to political actions taken by other countries. China retaliated against the Trump administration’s imposition of across-the-board tariffs on Chinese exports to the United States, resulting in a 21% average tariff rate on goods imported from the United States.¹² After members of Australia’s cabinet called for independentinvestigations into the origins of COVID-19 in April 2020, China imposed economic restrictions on a range of Australian products. China’s Ministry of Commerce (MOFCOM) announced tariffs as high as 218 percent on Australian wine and 80.5 percent tariffs on barley.¹³ In these cases, China provided the justification for higher tariffs on the basis of anti-dumping action against Australian exporters, but the timing and character of the tariffs led to speculation that the tariffs were retaliatory action by the Chinese government.¹⁴ Notably, China targeted goods where the costs to China’s economy would be lower than products like natural gas and iron, for which Australia also depends on China as an export market. In the Australia case, MOFCOM was responsible for raising tariffs, but the State Council itself also has powers to increase tariffs, as it did in imposing retaliatory tariffs against the Trump administration’s June 15, 2018, Section 301 tariff announcement.¹⁵
• Inspections and import bans – China also exerts economic pressure through inspections and informal bans on imported goods. In 2010, China effectively banned salmon imports from Norway on the pretense of a violation of sanitary regulations after the Norwegian Nobel Committee awarded the Nobel Peace Prize to dissident Liu Xiaobo.¹⁶ China banned banana imports from the Philippines on health grounds in 2012 amid tensions in the South China Sea.¹⁷ The most recent major case followed the opening of a Taiwanese Representative Office in Lithuania in 2021.¹⁸ China imposed a de facto ban on imports from Lithuania through a range of measures, including denials of trade finance, revocation of import permits, the removal of Lithuania from China’s customs system, and cancelation of freight shipping to Lithuania by a Chinese rail shipping operator. Given that Lithuania only accounts for 0.003 percent of Chinese imports and its goods are primarily agricultural, the immediate cost to the Chinese economy from the import bans was limited. However, the diplomatic blowback from targeting a European Union (EU) member state with a full trade ban was arguably quite high. Coercion against Lithuania led the EU to raise a trade case in the World Trade Organization against China, and it likely strengthened support for the creation of the Anti-Coercion Instrument. It is a matter of debate whether China took these actions against Lithuania accepting these costs, or whether it underestimated the harshness of the EU’s reaction.
• Boycotts – China uses its state media to foment and support boycotts of foreign brands during crises. In 2022, Chinese consumers boycotted H&M for its refusal to use cotton from Xinjiang with backing from state media and party organizations.¹⁹ In February 2017, the Lotte Group approved a land swap with the South Korean government to place a Terminal High Altitude Area Defense (THAAD) missile defense system on its former property. In response, China forced the closure of 74 Lotte supermarkets for supposed fire safety violations and published news articles urging consumers to punish South Korea “through the power of the market.”²⁰ In both cases, China focused on companies that had ample local competition and low import dependence to mitigate the costs to China’s economy. South Korean companies in petrochemicals and semiconductors, by contrast, saw limited or no effect on their performance during the THAAD incident.²¹
• Preferential treatment of competitors – Beijing’s direct and indirect control of state-run procurement provides leverage over foreign firms hoping to capture a slice of China’s market. Companies fear that officials can manipulate the bidding process to hurt their sales and exert influence on their home countries. One example came in 2021 after Swedish authorities implemented a ban on Huawei and ZTE 5G technology in late 2020. In subsequent bidding for state-owned China Mobile in June 2021, Ericsson’s share of 5G equipment awards dropped by nearly 80 percent. Ericsson had previously lobbied against the ban in Sweden, fearing it would be targeted for retaliation in China,²² and an editorial in the state-run Global Times later tied the bidding results to Sweden’s policy decision.²³

Potential use in moderate-escalation scenario

How countries choose which imports to restrict is a central question of economic statecraft. In China’s retaliation against US tariffs in 2018, China’s tariffs tended to target US exports produced disproportionately in counties that leaned Republican and voted for then president Donald Trump in 2016, suggesting a political influence logic to China’s tariff targets.²⁴ More broadly, policymakers are likely to think about the effectiveness of tariffs: Is the sender country able to bear the cost of sanctions while imposing enough damage to compel the other side to make concessions?²⁵

Past instances of China’s restrictions on imports have typically been targeted in ways that limit costs to China’s economy: single firms, narrow sectors, or smaller economies. In a scenario involving the United States in a moderate escalation over Taiwan, China might accept elevated costs if it felt that sanctions on the United States were necessary to signal resolve, punish US behavior, or deter further action. In such a circumstance, China could target a range of sectors where costs to the US economy are high and costs to the Chinese economy, though elevated, are still relatively low. The tools used are likely to be the same as in the past: some combination of higher tariffs and both formal and informal import restrictions. The key question facing Chinese policymakers would be which sectors and goods to target.

First, China could target consumer discretionary products such as imported cars and cosmetics. While consumers would face higher costs and fewer choices, a ban on these products would have a far lower impact on the Chinese economy than a ban on intermediate goods or capital goods that China depends on for industrial production. If restrictions were expanded to US-branded products made in China (Tesla cars made in Shanghai, for instance), China would face some employment impacts, but in general these would likely be the easiest goods to target.

Second, China could target products where it has diversified imports and the United States has limited market power. China imports commodities such as crude oil, coal, polyethylene, and copper ore from the United States, but in small quantities relative to other exporters. China could likely impose high tariffs or bans on such goods from the United States, and procure them from other countries (albeit at higher costs). While not included in the table below, China might also include products where import dependence is still high but where China is actively pursuing self-sufficiency and strong local players are emerging, such as medical devices. China would likely avoid targeting critical inputs to its supply chains that would be difficult or costly to replace quickly, such as integrated circuits.

Finally, China could target areas based on how much the United States depends on China as an export market. In 2022, over half of US exported soybeans went to China, as did 83 percent of its exported sorghum. US dependence on China for its agricultural goods informed China’s decision to target these goods in response to the Section 301 tariffs. Yet the costs to China for imposing tariffs on these products would also be high: the United States supplied 31 percent of China’s imported soybeans and 64 percent of its imported sorghum. China would likely tailor the strength of its import restrictions depending on global agricultural conditions and whether alternative supply could be found elsewhere.

Tariffs or bans on US imports could also provide China with an opportunity to drive wedges between the United States and other countries. Sustained demand from Chinese consumers amid higher restrictions on US imports would increase demand for imported goods elsewhere. As a group of advanced industrial economies, the G7’s exports overlap substantially with US exports that could be at risk from Chinese trade barriers. Table 5 shows the top ten exports from the United States to China by value, and the export rank of those products from other G7 countries and Europe to China. For every product that ranks among the United States’ top ten exports to China, at least one other G7 country (and often multiple countries) also have that product ranked in their top exports to China. While these products are often diverse and not completely substitutable, the overlap in the export baskets of G7 countries to China points to the potential for China to exploit competitive dynamics between the United States and other G7 countries.

Potential use in high-escalation scenario

In a maximalist-escalation scenario, the initial disruptions to foreign exports to China would stem from G7 sanctions themselves rather than Chinese retaliation. As we argued in our June 2023 study on G7 sanctions toward China in a Taiwan crisis, many goods such as chemicals, energy, and electrical equipment would likely fall under a strengthened G7 export control regime, putting hundreds of billions of dollars of trade at risk.²⁶ Sanctions on China’s banking system would limit exporters’ ability to settle transactions with importers.

Over time, however, foreign businesses could shift their transactions to unsanctioned importers and banks. Despite sanctions on much of Russia’s economy, at least 101 multinational companies from G7 countries are continuing operations in Russia as of January 2024, according to Yale researchers.²⁷ While some of these firms are operating in sectors that may be considered humanitarian exceptions— such as agriculture and healthcare—most are not.

G7 trade with Russia fell by more than half in 2022. One quarter of the remaining trade is in agricultural commodities, medicine, and medical devices, which are explicitly authorized under a general license from the US Office of Foreign Assets Control.²⁸ But despite sanctions on many major Russian firms and banks, G7 countries exported almost $25 billion in non-agriculture and non-medical products to Russia in 2022, regardless of the reputational and logistical challenges of exporting even permitted goods to Russia.

The resilience of G7 exports to Russia after sanctions suggests that trade with China, though diminished, could continue even in a maximalist sanctions regime. Broadly speaking, there are three groups of exports in a maximalist sanctions program: (1) goods at higher risk of G7 export restrictions, (2) goods at higher risk of Chinese import restrictions as retaliation, and (3) goods at lower risk of either G7 or Chinese restrictions.

It is impossible to know a priori what sectors G7 countries would agree to impose strict export controls upon, given the substantial costs to their own economies from these sanctions. But for the sake of this analysis, we assume that energy, machinery, chemicals, electrical equipment, trains, planes, and metals are at higher risk of G7 sanctions, making Chinese import restrictions in these sectors less relevant.

What’s left? China imported $92.4 billion in automobiles, plastics, textiles, and rubber from G7 countries in 2022. Losing these imports would certainly be costly to the Chinese economy, but not fatal, making them possible candidates for Chinese retaliation in a maximalist scenario.

Finally, China imported $79.5 billion in agricultural goods, pharmaceuticals, and medical devices from G7 countries in 2022. Agricultural and medical goods were exempt from G7 sanctions in the Russia case as part of humanitarian carveouts present in all sanction regimes. It is likely they would be exempt from G7 sanctions against China as well. While China is likely to impose some restrictions on agricultural products (as it has in the past against French wine and US soybeans), a total ban on agricultural products from the G7 would be extremely costly to the Chinese economy, even if some of those imports could be backfilled by greater imports from non-G7 countries like Brazil. Medicine and pharmaceuticals would be even more so. In this instance, it seems likely that agricultural and medical goods would face lower risks of a total trade ban from either China or the G7.

Import-related statecraft tools have been a part of China’s economic statecraft toolkit in the past and would likely be featured in a moderate- and high-escalation scenario in the future. In a moderate-escalation scenario, the tools would remain more or less the same, but could target a broader range of sectors where Chinese dependence is low (consumer discretionary goods and substitutable goods) or where US dependence on China as an export market is high. Targeted import restrictions against the United States would also create opportunities for China to weaken G7 unity by importing more from other G7 countries.

In a high-escalation scenario, the initial disruption to foreign market access in China would stem primarily from G7 sanctions and market turbulence more broadly, rather than Chinese countersanctions. China is more likely to be judicious in imposing import bans on agricultural goods and pharmaceuticals against the full G7. Excluding those products, the full range of G7 exports to China at risk from G7 sanctions and Chinese countersanctions is around $358 billion.

Foreign direct investment in China

During past geopolitical crises, China has used investment-related tools such as audits, inspections, and antitrust rules, typically either to punish a specific firm for its own actions (such as perceived support for Taiwanese independence) or to pressure firms to lobby their home governments. In a Taiwan escalation scenario, these tools could be used more expansively, potentially affecting up to $460 billion in G7 investment in China and an estimated $470 billion in annual revenue, but at the cost of undermining investor sentiment and accelerating capital flight from China.

Past uses of statecraft

China’s past use of statecraft against foreign firms domiciled in China indicates the wide range of tools available:

• Forced shutdown of online platforms – China’s cyberspace regulator has in the past used its authorities to force companies to adhere to China’s conception of “One China” on their websites and branding materials. In 2018, the Cyberspace Administration of China (CAC) forced Marriott to temporarily shut down its website in China due to an email questionnaire that listed Hong Kong, Macau, Tibet, and Taiwan as separate countries.²⁹
• Merger/antitrust reviews – China has used its antitrust authority, the State Administration for Market Regulation (SAMR), as a powerful extraterritorial tool to block mergers between foreign companies during times of geopolitical tension. It is widely believed that China blocked the $44 billion merger of Qualcomm and NXP in 2018 in retaliation for US Section 301 tariffs on Chinese goods.³⁰ The deal had been approved by eight other jurisdictions but was ultimately called off, as China’s refusal to approve the deal would have prevented the merged companies from operating in China. SAMR refused to approve the merger of Intel and Israeli firm Tower Semiconductor in 2023 amid escalating US tech controls on Chinese semiconductor firms.³¹
• Inspections, audits, fines, and permit delays – China has often used health, safety, environmental, and quality inspections, tax audits, and other routine regulatory actions to punish firms (or the firm’s home country) for their stances on crossstrait issues. In 2021, the Chinese subsidiaries of Taiwan-owned conglomerate Far Eastern Group were fined $13.9 million for a range of violations, including breaches of environmental protection rules. Far Eastern had been a major donor to Taiwan’s Democratic Progressive Party (DPP), a party that Beijing views as advocating for Taiwan’s independence. In the leadup to the 2024 Taiwan general election, Foxconn’s Chinese subsidies became the subject of tax audits and land-use investigations. The investigations were believed by some to be meant to force Foxconn’s founder, Terry Gou, out of the presidential race to avoid splitting votes away from Beijing’s favored party, the Kuomintang.³² And in 2017, China used fire safety and health code inspections to force the closure of Lotte supermarkets during the THAAD incident.³³
• Personnel disruptions – In some cases, China has imposed restrictions on personnel traveling in or out of China for geopolitical reasons. ³⁴ China’s aviation regulator in 2019 ordered Hong Kong carrier Cathay Pacific to ban airline staff who supported the Hong Kong protests from traveling to China.³⁵ In March 2023, China detained five local staff of Mintz Group, a corporate due diligence firm.³⁶ In October 2023, China detained and then arrested a Japanese employee of Astellas Pharma on suspicion of espionage.³⁷

Table footnotes^{38 39}

Potential use in moderate-escalation scenario

Past methods of disrupting multinational corporation (MNC) activities in China could be scaled up in a moderate-escalation scenario, but the use of these tools runs the risk of accelerating MNC diversification away from China and impairing China’s economy. These tools are more effective when firms believe that, despite short-term tensions, China still holds promise for their business operations and sales.

The CAC could use its powers to shut down US companies’ websites in China, disable their apps, or close their app stores. China could impose these restrictions through a variety of legal and regulatory tools, including revoking a firm’s Internet Content Provider (ICP) filing license or by blocking their Internet Protocol (IP) address within China’s Great Firewall.⁴⁰ Through merger reviews, authorities can force companies to choose between abandoning the Chinese market or what can be years-long, multibillion-dollar deals. Inspections, audits, and fines could be scaled up against US firms in a crisis. Personnel disruptions, including tacit hostage-taking as in the cases of Michael Kovrig and Michael Spavor, is extremely worrisome for firms. Put together, these instruments may create a strong incentive for businesses to lobby their home governments for more amicable relations that would allow a deal to go through, but they would also accelerate plans to move operations from China, particularly if it looks like relations will be tense for the long term. Previously unused tools could also be used at higher levels of escalation. China could initiate investigations into a firm’s handling of data or revoke certifications for cross-border data handling. Rules around data, personal information, and cybersecurity ranked second on the list of US companies’ top 10 challenges in China in 2023.⁴¹ Already many companies are working to minimize their regulatory risk by partially or completely localizing their data storage, information technology, human resources, and software solutions in China.⁴² Data issues are particularly acute in the automotive, healthcare, and financial services sectors, making retaliatory data audits and investigations a possibility in a moderate escalation scenario.⁴³ Chinese authorities could also restrict how firms repatriate earnings. In past times of macroeconomic stress, China has restricted remittances for MNCs moving money abroad, although there is no evidence suggesting these restrictions were geopolitically motivated.⁴⁴ Foreign companies in China often repatriate income by issuing dividend payments to their overseas parent companies, which requires certain tax documents and processing by a Chinese bank. Chinese authorities could initiate tax audits targeting US companies to delay repatriation, or order banks to delay or reject processing requests. However, even in a moderate-escalation scenario, China would face macroeconomic pressures that would constrain how aggressively it targeted foreign companies. High geopolitical tensions would likely increase capital outflows and put depreciation pressure on the Chinese currency. Although China has substantial foreign reserves and strong capital controls, China’s reserves are finite and its capital controls are imperfect. Aggressive moves against foreign companies in China could exacerbate capital outflows in ways that Beijing would want to avoid.

Beijing would also seek to avoid moves that make it appear “uninvestable” to foreign firms more broadly. China’s long-term economic and financial stability depends in part on the willingness of foreign investors to continue investing in China, both to offset inherent outflow pressures and to drive productivity through partnerships with world-leading MNCs. Actions taken against MNCs, even if targeted against only one country, could undermine China’s narrative that it is a safe and attractive place for foreign investors to do business.

Potential use in high-escalation scenario

In a high-escalation scenario, China’s willingness to use aggressive economic statecraft actions against MNCs would likely be much higher. G7 sanctions on China’s major banks would immediately make China appear “uninvestable” for many investors, and many MNCs would be executing plans to exit the market even before considering Chinese retaliatory action. At this point, China would have little to gain from holding back on retaliatory actions on a pretense of maintaining “investability.”

Firms selling their assets in China would likely do so at a steep discount given a limited number of buyers and intense pressure to move quickly. Even once assets are sold, it would not be guaranteed that sellers could repatriate the proceeds of the sales to their home countries given strict capital controls on foreign reserves.

Tools used at lower levels of escalation could be used at greater scale. Local staff and visiting executives would likely face higher risks of travel delays and, potentially, exit bans or detentions amid heightened concerns over espionage. Restrictions on personal information protection and cross-border data transfers would likely be tightened considerably, adding to the logistical challenges of operating a Chinese subsidiary. Strict capital controls would likely prevent MNCs from repatriating any earnings in dollars whatsoever.

Companies would also be exposed to risks of asset seizure. G7 companies in strategic sectors such as chemicals and pharmaceuticals could face the risk of immediate expropriation. Within months of Russia’s invasion of Ukraine, for instance, Russia took control of German and Finnish utility assets in Russia.⁴⁵ In China, companies that stayed, even in nonstrategic sectors, would face the risk of seizure as retribution in kind for G7 asset seizures or freezes or to ensure continued employment at firms that suspended their operations due to G7 sanctions.⁴⁶

Estimating the FDI stock and revenues of G7 firms in China is hamstrung by a number of methodological challenges. China’s total inward FDI stock in 2022 was $3.6 trillion, according to the International Monetary Fund’s (IMF’s) Coordinated Direct Investment Survey.⁴⁷ However, because the IMF compiles data based on the immediate investing country, rather than the ultimate beneficial owner of the investing firm, it is difficult to identify what FDI ultimately comes from G7 countries. For instance, only $460 billion of China’s FDI stock comes directly from G7 countries, according to Chinese reporting to the IMF as of 2022, while $2.5 trillion (70 percent of the total) is attributed to Hong Kong, the Cayman Islands, and the British Virgin Islands, some of which is G7 investment channeled through these intermediaries. Complicating matters further, a substantial portion of China’s inward FDI stock is actually China-origin investment that is routed back through Hong Kong or other tax havens. Here we use the most conservative estimate of G7 FDI—that which is directly attributable to G7 countries. The full value of the G7 FDI stock in China is likely much larger.

Similarly, it is difficult to assess the total revenue and profit exposure from MNCs in China. Annual filings of listed companies do not systematically break out revenue by region. Data from China’s MOFCOM estimate that the total revenue of foreign-invested enterprises above designated size in China in 2022 was $3.9 trillion.⁴⁸ China does not individually report business revenues from foreign-invested enterprises by country, although MOFCOM does report the amount of realized inward FDI by country. Assuming that business revenues are proportional to overall business revenue, we estimate that G7 foreigninvested enterprises earned $470 billion in revenues in China in 2022 and $33 billion in profits—all of which would be put at risk from the combined impact of G7 sanctions and Chinese countersanctions in a high-escalation Taiwan crisis scenario.

Portfolio investment and other capital flows

China could use restrictions on its equity markets to limit outflows of foreign portfolio capital from China. While these tools have not been used in the context of economic coercion in the past, China has restricted activity in its equity markets in an attempt to stabilize market conditions. In a moderate- or high-escalation scenario, China will likely consider imposing restrictions on market activity or outbound portfolio flows.

Past uses of statecraft

To our knowledge, China has not restricted trade orders or imposed capital controls in equity markets during disputes with other countries in an effort at coercion. However, China has intervened heavily in equity markets in the past in an attempt to steady markets during times of financial instability. In July 2015, a speculative bubble in China’s equity markets burst, with the Shanghai Composite Index falling by 32 percent from a peak the month prior. To stem the decline, China ordered brokerages not to process sell orders while using state funds to buy stocks.⁴⁹

Potential use in moderate-escalation scenario

In a moderate-escalation scenario, it is probable that China would impose some capital controls and restrictions on equity markets to stanch capital flight stemming from a heightened sense of geopolitical risk among investors. Rather than a tool of economic statecraft per se, capital market controls should be seen as a likely response to financial instability during a crisis. In a more moderate scenario, where tensions with the United States and China trigger a stock market rout, for instance, China might turn to administrative controls on equity markets, as in 2015, that de facto restrict foreign investors selling Chinese stocks and repatriating funds. Given that the objective of such controls would be to ward off financial instability rather than impose costs on other countries, these restrictions would likely affect all financial investors in China rather than any one country.

Potential use in high-escalation scenario A higher-escalation scenario would likely see China impose capital controls across the board, including on capital flows through Hong Kong and Macao, to limit destabilizing outflows. Theoretically speaking, some of these tools could be targeted at G7 investors, but in practice, it would be difficult even for Chinese authorities to identify which portfolio assets belong to which investors. As with direct investment flows, portfolio investment is intermediated through tax havens, obfuscating the ultimate owners of capital. Efforts to estimate the holdings of Chinese securities on a nationality basis (rather than the typical residency basis) suggest that official data significantly understate holdings of Chinese securities.⁵⁰ Chinese authorities in a crisis would likely be hard-pressed to systematically identify G7 countries’ portfolio assets in China, let alone block them in a targeted fashion. If they did pursue this strategy, it is more likely that only a few high-profile investment firms would be targeted.

Instead, the more likely outcome is a comprehensive set of controls aimed at preventing a financial crisis. The IMF’s Coordinated Portfolio Investment Survey provides estimates of total portfolio assets and liabilities by economy.⁵¹ Based on this data, if full capital controls were put in place, an estimated $2.5 trillion worth of foreign equity assets in China, Hong Kong, and Macao would be at risk.

China in the global economy

China’s central place in global supply chains means that disruptions stemming from actions in a Taiwan escalation scenario would have far-reaching consequences. The previous section considers Chinese economic statecraft actions on flows and assets into China. This section considers the use of China’s statecraft toolbox on the global economy outside China: exports, outbound investment, and interactions with global financial markets.

Chinese exports

In an escalation over Taiwan, China could use its central position in global supply chains to exercise leverage against other countries. Because weaponizing supply chains may accelerate diversification away from China, these tools have been used sparingly in the past. However, new legal and regulatory tools have created a pathway for their use in a future scenario where China is more willing to bear the economic and reputational costs of disrupting supply chains.

Past examples of statecraft

Export restrictions on critical goods – China has used export restrictions in past geopolitical incidents to exert leverage over other countries. In September 2010, after a collision between Japanese coast guard ships and a Chinese fishing vessel and Japan detained its captain, China imposed an informal export ban on rare earths to Japan.⁵² In October 2010, industry officials reported that China expanded the export restrictions to the United States and Europe amid a trade dispute. China resumed exports in November of that year.⁵³

In July 2023, China announced it would require export permits for Chinese gallium and germanium, elements used in chip production and solar panels among other products.⁵⁴ China’s announcement came as the United States imposed restrictions on high-end chip and chip equipment exports to China. China announced in October 2023 it would require licenses for export of graphite products used in electric vehicle batteries.⁵⁵ In both cases, demand for the products shot up immediately in advance of the license requirement, as importers stockpiled goods, and then fell, as the license regime was put in place. Gallium and germanium exports returned to pre-control levels by December. Rather than an export ban as in the past, the imposition of an export regime around gallium and germanium appeared to be an effort to formalize the legal foundation of export controls on a new set of critical goods. While Chinese authorities denied that the measures were retaliatory and aimed at any particular country, the announced measures did highlight China’s economic leverage in a period of heightened geopolitical tensions.

Potential use in moderate-escalation scenario

Export restrictions on critical goods – In a moderate-escalation scenario, China could limit exports to the United States across a range of products through export tariffs, informal restrictions, or full export bans. The United States is China’s largest export destination, with $583 billion in goods exported to the United States in 2022 (16 percent of China’s total exports).⁵⁶ Export trade to the United States is an important source of employment, with an estimated 21.6 million jobs in China supported by exports to the United States.⁵⁷ China’s dependence on the United States as an export market suggests that Chinese policymakers will be cautious when imposing export restrictions, aiming to reduce the impacts on the Chinese economy while still imposing meaningful costs on the United States.

For this reason, initial export restrictions would likely focus on select intermediate goods where trade volumes and Chinese export-dependent employment is low, but the lack of which would have compounding effects on US industry. Past supply chain analyses have identified some of the main dependencies on imports from China (see Table 9).

Table footnotes^{58 59 60 61 62}

Restrictions on overseas IP and licensing – In addition to restricting goods exports, China may also change its posture on technology exports to the United States. Since 2008, China has maintained a technology catalogue that regulates what technologies may be exported from China.⁶³ The technology catalogue contains twenty-four technologies prohibited for export and 111 technologies requiring an export license. The latest revision issued in December 2023 added LiDAR systems, used in autonomous driving applications, to the list of technologies requiring a license. Other technologies covered requiring licenses under China’s technology control regime include advanced materials processing (e.g., chemical vapor deposition) and underwater autonomous robot manufacturing and control technology, among others. As China reaches the cutting edge in some of these technologies, the ability to grant or revoke export licenses to companies in the United States and elsewhere represents an additional statecraft tool.

Potential use in high-escalation scenario

In a high-escalation scenario, Chinese policymakers may decide to impose as high costs as possible on the sanctioning G7 countries by imposing export restrictions on all goods where import dependence on China is high. Such an approach would cover a broad range of consumer and industrial goods, and would be aimed at disrupting the economies of the targeted countries and increasing costs for consumers. However, this would come at tremendous cost to the Chinese economy and its ability to withstand sanctions.

Import dependence is contingent on a range of factors, including not only how much a country depends on another for a particular good, but also how widely available that good is in the global market. While a true accounting of import dependence requires a sector-by-sector approach, we roughly estimate the value of goods where the G7 nations are highly dependent on China by summing up G7 imports at the HS 6-digit level where (1) over 50 percent of G7 imports come from China, and (2) China accounts for over 50 percent of global exports. This encompasses all products where both initial dependence on China is high and where substitutes from other countries may be expensive or hard to find given how dominant China is in that product category, at least in the short run. Based on this approach, the G7 is highly dependent on $477.5 billion in goods imported from China. This is a highly conservative measure, since losing access to intermediate goods would disrupt downstream manufacturing and incur costs much greater than their import value alone.

While export restrictions would be one of China’s most impactful economic statecraft tools, it would also be among the options costliest to China itself. First, an estimated 101.2 million jobs in China depend on foreign final demand, 44.8 million of which depend on final demand from G7 countries.⁶⁴ Any measures that disrupted these factories would exacerbate structural issues in employment and wages. Secondly, a major source of China’s resilience against sanctions is the fact that it runs a persistent trade surplus, which could be put at risk from export restrictions. Even under a full-scale G7 sanctions regime against Chinese banks, it would be very difficult to trigger a balance of payments crisis in China so long as the country continues to run a strong trade surplus. Trade restrictions from China that undermine its own trade surplus would work against China’s ultimate objective of maintaining macroeconomic stability in a moment of crisis. Finally, sanction regimes face the challenge of preventing transshipment of goods from third countries into the targeted economy. To effectively cut off the United States and other G7 economies from these products would require China’s non-sanctioned trading partners to agree not to transship controlled products to the G7, and for China to be willing to impose punishments on third countries that refuse to comply. China is unlikely to have the bureaucratic breadth even to monitor potential sanctions evasion on this scale, and may be loath to punish other countries in a moment where it is diplomatically isolated.

Chinese investment abroad

China has typically used overseas investment as a positive inducement rather than a coercive tool. In a moderate-escalation scenario, China could pair promises of outbound investment to friendlier countries with limitations on new outbound investment to other countries, although this would be likely driven less by a statecraft agenda and more by geopolitical realities in the host countries. In a highescalation scenario, China could potentially force the shutdown of Chinese-owned subsidiaries abroad, but this would be extremely costly and of limited effectiveness.

Past uses of statecraft

State-backed overseas investment – Overseas investment is a key part of China’s economic diplomacy.⁶⁵ Although it is debatable how much investment is driven by state versus commercial interests, major investment projects are often marked by both governments as opportunities to demonstrate a constructive relationship. In many cases these projects bring tangible economic benefits to the host country, making them an important part of China’s statecraft toolkit.⁶⁶

Table footnote⁶⁷

Administrative control on outbound FDI flows – China maintains administrative controls on outbound investment, limiting or approving investment when it meets political and economic goals. In the early 2010s, China began liberalizing its strict controls on outbound FDI to encourage Chinese firms to invest abroad.⁶⁸ In 2016, a surge in capital outflows led Beijing to reimpose restrictions on outbound FDI in an attempt to mitigate balance of payments pressures. While this is not a direct application of statecraft, the tools exist for China to selectively restrict outbound investment in a future escalation scenario.

Potential use in moderate-escalation scenario

In a moderate-escalation scenario, Beijing could use promises of investment as positive inducements to align with China diplomatically, or use threats to cut off ongoing or future investments as a form of coercion.

The perceptions of China and its role in a moderate-escalation scenario would matter significantly to the effectiveness of these tools. Where the escalation exacerbates national security concerns toward China, Chinese promises of outbound investment or threats to cut off ongoing or new projects will likely have little effect. Similarly, if the geopolitical environment contributes to capital outflow pressure, China will be less likely to greenlight much new outbound investment.

Potential use in high-escalation scenario

In an escalation over Taiwan, China could theoretically halt all outbound investment to G7 countries as a form of coercion, although geopolitical conditions would likely make the point moot. G7 countries would be unlikely to welcome new investment from China in a major Taiwan escalation. The wave of new and updated inbound investment screening regimes across the G7 over the past decade give G7 governments the capacity to block many types of investments on national security grounds.⁶⁹ China would likely limit outbound investment regardless to stem capital outflows, and Chinese project developers would likely struggle to find overseas lenders willing to finance their projects at the risk of getting caught up in G7 sanctions.

China could hypothetically impose restrictions on the activities of Chinese-owned businesses abroad, with the aim of disrupting the domestic economy of the sanctioning countries. Chinese authorities could theoretically pressure Chinese firms in the United States to slow down operations or lay off workers. Chinese ownership of critical infrastructure — including State Grid Corporation of China’s 40 percent stake in the Philippines’ national grid and COSCO’s proposed 24.99 percent stake purchase in a port terminal in Hamburg — has raised concerns among policymakers over the national security risks of Chinese ownership of critical infrastructure in a crisis.⁷⁰ To our knowledge, there have been no documented cases of Chinese firms shutting down their operations in other countries amid a geopolitical dispute with the intent to disrupt the local economy.

In a moderate- or high-escalation scenario, it is unlikely that China would or could compel Chinese-owned firms in the United States or G7 countries to disrupt their operations as part of an economic statecraft campaign. First, except in the most extreme circumstances, China would avoid pressuring its firms abroad to disrupt their own operations for fear of reputational blowback that could undo years of efforts to expand the global footprint of Chinese companies. Second, a large share of Chinese direct investment abroad is held in minority stakes, and China-based board representation would be too small to unilaterally force a work disruption. Finally, in the event of a deliberate slowdown or disruption, it is likely that G7 governments would nationalize the assets of the Chinese firms, as Germany preemptively did when it nationalized Gazprom’s German subsidiary after Russia’s invasion of Ukraine.⁷¹

Altogether, China holds an estimated $61 billion in FDI assets in G7 countries that could be theoretically put at risk from disruption, although the likelihood of China turning to such tools—even in high-escalation scenarios—seems low. China invested $13 billion in G7 economies in 2022. The most substantial disruptions to Chinese outward investment to G7 economies would likely be China’s own capital controls and defensive investment restrictions from G7 countries toward China in a moment of high escalation over Taiwan.

Portfolio investment and other capital flows

In addition to restrictions on market access or manipulation of operating conditions for multinational companies in China, Beijing could potentially use some of its financial policy tools to achieve certain political signals in response to G7 economic statecraft. However, China would struggle to use these tools aggressively without creating corresponding costs for its own economy and financial institutions. Most of the tools of financial leverage that China can use, including currency swap lines, are likely to be directed against borrowers from Chinese institutions. That volume of lending or the terms of lending could be adjusted in response to political developments. Selling foreign assets in large volumes (particularly US Treasuries) has never been a particularly viable policy option for Beijing. Similarly, using a policy-led depreciation of China’s currency as a tool of statecraft to pressure other countries would have significant implications for China’s own financial stability.

Past uses of statecraft

Official lending (in the form of subsidized concessional or preferential loans) and foreign aid are some of China’s primary economic diplomacy tools with developing and emerging market countries. These programs rarely take the form of explicit quid pro quos, but instead build long-term bilateral relationships that China can later activate to obtain political support on controversial Chinese “core issues,” including Taiwan, Hong Kong, and Xinjiang.

Aid and lending pledges are also key elements of the unofficial financial packages that China uses to induce diplomatic recognition switches from Taiwan to China. Recent examples include Nauru, the Solomon Islands, and Panama. Diplomatic relations with China (rather than Taiwan) are a prerequisite for the receipt of official aid (including concessional loans). Importantly, pledged lending may be just as important as the receipt of actual funds. Past cases suggest China can effect some control over the timing of these recognition switches to maximize their potential political impact on Taiwan, including Gambia (2016, after the DPP’s electoral victory in Taiwan), the Solomon Islands (2019, ahead of the People’s Republic of China’s 70th anniversary), and most recently Nauru (2024) (and likely Tuvalu), to coincide with adverse political events.

China has also offered bilateral swap lines to provide liquidity to developing countries. Although these are nominally intended to facilitate renminbi-denominated trade and investment, most swap agreements are never activated. Yet they are increasingly critical to a handful of countries, including Argentina, Pakistan, and Egypt, providing several billion dollars in emergency liquidity. Swap agreements typically last three years; countries may request the line be activated for a specific amount, and in practice that amount is simply rolled over at the end of a year. It is very rare for China to refuse to activate a swap line or to roll over any outstanding amounts, which would put pressure on any country relying on the swap line as a foreign exchange backstop. One (unconfirmed) counterexample came in December 2023, when China allegedly refused a request from Argentina to activate additional funds under the swap in response to Argentine President Javier Milei’s criticism of the China-Argentina relationship during the 2024 elections.⁷² The implications of China’s bilateral swap agreements with G20 countries will be covered in our forthcoming paper on the role of the G20 in a Taiwan crisis.

Potential use in moderate-escalation scenario

None of the G7 countries receive foreign aid or (official) loans from China in any significant amounts. In a moderate-escalation scenario, China could be expected to approach major recipients of development finance to ask for statements of diplomatic support or voting support in international forums like the United Nations General Assembly. China could look to accept a recognition switch from a country where discussions were already underway, to ratchet up additional pressure on Taiwan’s incumbent administration.

Most likely, China’s financial statecraft would not immediately increase in scope in a scenario of escalating tension over Taiwan. Financial pressures on China during a moderate escalation would likely constrain China’s ability to rush additional development finance to woo new allies. Rather, China would likely leverage the results of past financial statecraft measures to constrain Taiwan’s diplomatic space.

China would also benefit from deep economic and financial relationships with emerging market and developing countries itself to prevent alignment with the United States. China would also be unlikely to immediately begin punitive measures by formally cancelling or conditioning financial flows with existing partners. We are not aware of any examples of negative statecraft involving official lending or aid, where China either outright canceled existing aid projects or called in outstanding loans in response to a diplomatic or policy dispute. Such moves would be not only diplomatically counterproductive, but would also be restricted by Chinese aid and lending agreements and contracts, and a desire to avoid harming Chinese contractors, exports, and financial institutions for relatively limited marginal diplomatic gains. Rather than cancel existing projects, there is evidence that China instead has delayed or cancelled upcoming aid projects in past disputes. One example came in the Philippines in 2012. During a flare-up around the Scarborough Shoal, China continued to execute on existing aid and loan contracts, but does not appear to have undertaken new work until the election of Rodrigo Duterte in 2016.

Similarly, even in a moderate-escalation scenario, it is unlikely that Chinese lenders would cancel or otherwise call in existing projects or loans. As most of China’s project finance is funded on commercial terms, governed by commercial legal contracts, there are few instances where Chinese lenders could accelerate payment outside of clear events of default. One potential channel that could be deployed would be escrow accounts. China’s loans often require the use of escrow or other special accounts in China (either funded directly or through commodity sales to Chinese purchasers), which must be funded at certain levels. In an escalation, China in theory could raid these existing escrow accounts and demand replenishment. One recent example is Suriname, where in 2023 China EXIM Bank tapped an escrow account for payment while Suriname had halted debt service during multilateral debt renegotiations, a major breach of international debt protocol. Additionally, China would be more likely to halt lending (not yet committed or disbursed) in specific countries, as recent reports indicate it has done in Pakistan and Kenya. In an escalation scenario, bilateral swap lines would likely serve as an implicitly threatened target where they have been activated. This could constrain diplomatic support for any G7 sanctions or additional action. However, as very few countries have drawn upon swaps in significant volumes, China may find this tool of leverage limited.

Although China is unlikely to impose punitive measures with loans and aid, it has other options available to gain leverage. China accounts for 6 percent of the IMF’s voting share. An 85 percent majority is required for major decisions at the IMF such as quota increases and allocations of Special Drawing Rights (SDR). In partnership with a small number of other countries, China could disrupt processes (or threaten to do so) at the IMF to gain negotiating leverage.

In a moderate-escalation scenario, China might consider turning to other financial statecraft tools such as competitive devaluation of the renminbi. Facing persistent capital outflows for much of the last decade, China’s central bank frequently intervenes in currency markets to maintain the value of the renminbi, by selling US dollars and buying domestic currency. China could slow down that intervention, allowing the renminbi to depreciate, which would also likely trigger competitive devaluations and capital outflows in other emerging markets, particularly if the depreciation was seen as a policy signal. While this tool benefits from plausible deniability, Beijing runs the risk of undermining confidence in domestic monetary policy, encouraging additional capital outflows from both domestic and foreign investors, and antagonizing other countries with whom Beijing competes for export share. For G7 countries, a weaker renminbi would result in lower demand for G7 goods due to the weaker purchasing power of Chinese consumers, and greater competitive price pressure from Chinese exports.

Potential use in high-escalation scenario

In a high-escalation scenario, China would have limited capacity to harass G7 economies through financial statecraft without drastically undermining its own financial stability. Instead, China’s financial statecraft would be more effectively deployed at developing and emerging market countries to prevent a cohesive response outside of the G7.

Ever since China began to accumulate foreign exchange reserves in the 2000s, analysts have questioned whether China would sell its holdings of foreign assets to retaliate against the United States for political reasons. China officially held $782 billion in Treasuries at the end of November 2023, and likely holds around twice that level including holdings by state banks. The implied threat of a selloff would be to raise US interest rates and tighten US financial conditions. However, this threat has been somewhat overstated, as China could not sell these assets all at once, and US officials could take measures to respond well before significant volumes of assets could be sold. For example, if the Federal Reserve were to issue a statement claiming that it was noticing politically motivated disruptions in financial markets and would purchase securities as necessary to maintain stability, it would likely counteract any aggressive selloff. In March 2020, amidst COVID-19- related disruptions in markets, several foreign reserve managers began aggressively selling Treasuries and other US assets to repatriate funds and manage financial risks, and the Federal Reserve was still able to purchase assets and steady financial markets.

Even if China were able to sell significant volumes of its holdings of Treasuries, at the end of the day Beijing would still be holding US dollars, and would need to invest them in something, which would likely indirectly result in additional Treasury purchases. The withdrawal of China from new Treasury market purchases is also likely to have a limited impact, as Beijing has not been a significant net buyer of Treasuries for many years now. Ultimately, Treasury sales are an unlikely vehicle for Chinese economic statecraft, even in the case of a significant escalation in tensions.

Rather, Beijing would be likely to focus financial statecraft on preventing emerging and developing economies from aligning with G7 sanctions. Under high-escalation conditions, those countries would already feel acute macroeconomic pressure in the form of increased global finance and debt servicing costs (brought on by a stronger dollar), fluctuating commodity prices, and disruptions to global trade. This would increase developing countries’ potential susceptibility.

Even under high-escalation conditions, certain channels would still have constraints. Official lending and aid offers relatively little direct leverage against the G7. China would also be unlikely to be able to convince G20 or developing countries to impose their punitive measures against the G7, beyond pariah states like Iran, Russia, or Venezuela. But other channels would provide more room for maneuver. China has far greater ability to deliberately sell non-US dollar foreign assets in specific markets, as these are more discretionary purchases, and not the result of China’s decision to manage its exchange rate against the US dollar. China does hold significant proportions of non-US dollar currencies in its foreign reserves, and could potentially liquidate those holdings rapidly in response to political events. This may have an outsized impact on currency valuations and interest rates in certain emerging markets that are heavily reliant upon foreign demand for government bonds, such as Indonesia or Malaysia.

Additionally, more aggressive steps could be taken with outstanding loan agreements with developing countries. Publicly disclosed lending contracts from China’s policy banks allow for the lender to declare default—and immediately demand repayment—in response to certain political events, including a switch in diplomatic recognition to Taiwan (or China severing relations with a foreign country). Similarly, under “illegality clauses” common to commercial loans, China’s policy banks could immediately cancel disbursements or call in outstanding amounts due to changes in law that impact their ability to perform their obligations. G7 financial measures (like currency or banking restrictions) could, at least under a theoretical expansive reading, qualify. Yet invoking these clauses would come with bureaucratic risks for China Export-Import (EXIM) Bank and China Development Bank, which would be hard-pressed to collect any outstanding amounts and would likely be reluctant to acknowledge any debt as unrecoverable, especially at a time when China is seeking diplomatic support among other borrowing countries.

China’s capacity to circumvent financial sanctions and G7 economic statecraft

The previous section was concerned with China’s capacity to retaliate against US and G7 economic statecraft, but this is not Beijing’s only option. There have been long-running efforts in Beijing to not only develop tools to respond to foreign economic restrictions, including sanctions and export controls, but to circumvent or bypass them as well. Primary among those tools has been the development of alternative national-level and international financial networks using China’s own currency, the renminbi, rather than the US dollar. These have included bilateral currency swap arrangements for trade settlement, the designation of specific clearing banks in third countries, and the gradual expansion of China’s own interbank payment networks, the Cross-border Interbank Payment System (CIPS). The development of China’s central bank digital currency (CBDC) can be viewed in the same context, although the current structure is focused far more on domestic retail transactions than cross-border interbank financing.

At the same time, China’s reliance upon the US dollar is a major source of friction between different camps in Beijing. Security-minded officials have always viewed the dollar as a source of risk and vulnerability for China, given the potential threats posed by sanctions and other restrictions. However, financial technocrats in China have led the charge to integrate China’s economy more closely with the global financial system, precisely to attract foreign capital inflows. China faces a significant problem with the world’s largest single-country money supply at $40 trillion, which generates new pressures for Chinese savers to actively diversify into foreign assets, as the money supply continues growing by around $3.5 trillion in new renminbi every year. This outflow can create financial instability inside China and weaken the exchange rate and the global influence of China’s economy, unless it is counterbalanced by capital inflows via foreign direct investment or flows into China’s bond and equity markets, meaning purchases of renminbi-denominated assets. While the outflows from China’s financial system are inevitable, the inflows to stabilize conditions are contingent upon the state of China’s economy, interest rates, and the reform of the financial system.

As a result, throughout the past decade, even though the political climate in China has turned more hostile to foreign influence and interests, China has persistently attempted to attract foreign investment and capital inflows, denominated in foreign currency. This has also meant prioritizing policy choices and reforms favored by foreign investors and governments. Maintaining access to US dollar inflows has required deepening China’s access to the global financial system, and therefore exposing China’s financial institutions to potential restrictions on those dollar inflows. China has consistently made compromises when necessary to maintain foreign inflows, most recently including permitting audits conducted under the imprimatur of the US Public Company Accounting Oversight Board (PCAOB) in order to prevent the delisting of Chinese companies on US stock exchanges.

Beijing will continue to prioritize maintaining access to foreign capital and inbound investment, despite concerns about the vulnerability of Chinese institutions to US sanctions. Should China lose access to US dollar inflows, the renminbi’s value globally would depreciate over time, and China’s influence and throw weight in the global economy would similarly diminish. Any credible claim that China could catch the United States in economic prowess would evaporate. As a result, even as China’s overall policy environment has become obsessed with security, this has not fully extended to the financial system, where technocrats have been able to push back against the concerns of security-oriented officials.

At the same time, it is not a credible threat that outside of a wartime or similar scenario, the United States would completely cut off China’s access to US dollars, or take actions against China’s financial system as comprehensive as those against Russia. First and foremost, China remains a sizable exporter and global manufacturing center, at an estimated 14 percent of global exports. While there are alternative sources of exports, disrupting China’s capacity to use US dollars would necessarily interrupt China’s $5.9 trillion in annual trade flows as well. Other more extreme options, such as freezing significant proportions of China’s $3.22 trillion in foreign exchange reserves, as was done to Russia’s central bank following the invasion of Ukraine, would similarly not be credible because the primary impact would be on China’s capacity to defend its currency, producing a sharp depreciation of the renminbi and ironically making China’s exports even more competitive in the global economy. The disruptions of global supply chains during the COVID-19 era created significant economic dislocations, which only moderately eased after China’s rapid return to production and exports in April and May 2020. Suspending China’s overall access to US dollar financing and its impact on trade would generate immediate political opposition in the United States and other allied and like-minded democratic states.

Moreover, Beijing is very aware that wholesale restrictions on financing channels for all of its banks are improbable and difficult to maintain. As a result, China’s methods for avoiding broader sanctions have focused on channeling transactions through individual banks that typically have limited cross-border business. Therefore, when these smaller banks are inevitably sanctioned themselves, the net impact on the rest of the financial system is minimal. This was the playbook that China used in designating the Bank of Kunlun as a preferred vehicle for transactions with Iran after sanctions were imposed in 2012, even though the sanctions did force the bank to shift its behavior as well. Banks in Hong Kong have similarly been forced to juggle overlapping sanctions threats from the United States and China in recent years, but no bank in Hong Kong has completely lost access to US dollar clearing facilities because of secondary sanctions imposed by the United States. And as long as some banks within the Chinese system maintain access to dollar clearing facilities, then it is probable that Beijing and Chinese firms will be able to channel transactions through these institutions. It remains highly unlikely that all Chinese banks will suddenly find themselves unable to access or trade in US dollars in a situation similar to some Russian financial institutions, given China’s importance in the global trading system. Beijing’s awareness of these limits similarly conditions China’s attempts to develop alternative financial networks that do not involve the US dollar. These can serve as alternative channels to be expanded in case of temporary need and limited purposes, rather than alternatives for everyday usage.

Using international Renminbi networks to circumvent sanctions

Obviously, one method China can use to avoid economic sanctions on US dollar-denominated transactions is to conduct business in China’s own currency, the renminbi. (Here, we are assuming that China’s efforts would be designed to avoid or circumvent an explicit secondary sanctions package from the United States or the G7.) Over time, China has sought to both encourage the development of offshore pools of the Chinese currency as well as denominate trade transactions in renminbi. At first, this was primarily a mechanism to avoid the disruptions to US dollar-denominated trade transactions caused during the global financial crisis in 2008. Later, and particularly following the Russian invasion of Ukraine, China’s efforts to promote the international use of its currency carried greater geopolitical significance, as a potential tool of sanctions avoidance, and to reduce the scope of Chinese financial transactions potentially exposed to US economic statecraft. Former Chinese officials such as Yu Yongding, who served on the PBOC’s Monetary Policy Committee, has pointed to the G7’s freezing of Russian foreign exchange reserves as proof of US “willingness to stop playing by the rules” and have suggested sitting Chinese officials are exploring new alternatives to safeguard its foreign assets.74⁷³

Russia itself started invoicing a far higher proportion of its own imports in renminbi in 2022 and using renminbi as a “vehicle currency” for transactions with third countries as well.⁷⁴ Overall, however, the potential for renminbi-denominated transactions to bypass or circumvent economic sanctions depends upon:

1. The liquidity and availability of renminbi to conduct economic transactions
2. The capacity of Chinese international interbank payments systems to accommodate these transactions
3. The ability of financial institutions to conceal those transactions from Western regulators, who could still impose secondary sanctions upon Chinese institutions should the transactions circumventing sanctions be discovered

Among these three requirements, the first one is likely the most difficult for Chinese authorities to control. It is always easy enough to provide financing in renminbi, but it is difficult to find counterparties willing to accept renminbi as payment or in borrowing, unless they have no other alternatives (as in Russia’s case). Setting up the institutional infrastructure to accommodate renminbi-denominated interbank transactions can occur largely within China’s borders, although it does require approvals of several international banks to facilitate these transactions. Beijing’s difficulty in avoiding detection of sanctions-busting financial transactions stems from the fact that China’s banks are also likely to maintain large volumes of dollar-denominated business, particularly for trade settlement. Beijing can always play a game of chicken regarding the imposition of secondary sanctions on China’s larger banks if certain sanctions-busting transactions are discovered, but it still runs the risk of retaliation from the United States and its allies.

Current scope of Renminbi internationalization

The term “renminbi internationalization” is often used to describe multiple phenomena, not all of which are relevant for China’s avoidance of Western economic statecraft. The most conventional definition involves the holdings and usage of renminbi outside of China’s borders, including for trade settlement. Other definitions include foreign holdings of renminbi-denominated assets within Chinese markets, which are less important in the context of sanctions avoidance. Sometimes “renminbi internationalization” incorporates the use of bilateral currency swaps extended by China’s central bank, or the usage of renminbi in outbound lending. But in terms of sanctions avoidance using renminbi-denominated transactions, the primary threat is the usage of Chinese financial networks by third parties to bypass US financial and regulatory surveillance. The most important consideration in that context is the liquidity and availability of renminbi itself, and trade and financial activity involving China’s currency, particularly wholesale transactions between banks.

One of the methods Beijing attempted to use to improve the attractiveness of renminbi-denominated assets was to have China’s currency included in the IMF’s SDR basket of currencies, which would provide an official designation that the renminbi was a currency that the IMF agreed was acceptable for holding within foreign exchange reserves. In addition, any transaction with the IMF would need to include renminbi, so this designation would produce a certain volume of purchases of renminbi. In addition, it would reduce a perceived obstacle to other investors, including central banks, acquiring renminbi-denominated assets. Beijing was required to demonstrate that the currency was “freely usable” in international financial markets. Because the renminbi was not fully convertible, and there were still capital controls in place on the currency, attesting to the currency’s usability was difficult. Instead, Beijing argued that the offshore currency, or the international renminbi (the Chinese yuan traded in the offshore market, or CNH) traded primarily in Hong Kong, fulfilled those criteria, since these transactions were subject to more limited capital controls. The IMF ultimately accepted the argument when it admitted the renminbi into the SDR currency basket in 2015, which helped to expand the range of investors who could readily invest in renminbi-denominated assets.

However, the accumulation of offshore renminbi and improving liquidity in financial markets for China’s currency is far from a straightforward process. Because China runs a global trade surplus, even if 100 percent of China’s trade was denominated in renminbi, no Chinese currency would necessarily accumulate outside the country’s borders, while foreign currency would come into the country. A portion of China’s trade could be denominated in renminbi—primarily China’s imports—which would result in third countries accumulating renminbi payments from Chinese companies. Then they would be forced with the choice of what to do with the Chinese currency: trade it for dollars or domestic currency, invest in renminbi-denominated assets, or deposit it in an overseas or Chinese bank. Chinese consumers could carry renminbi outside the country, but would need to find merchants to accept it. Capital outflows, including overseas investment and lending, could hypothetically increase the pools of available renminbi outside the country, assuming there were third parties willing to hold the currency or invest it in Chinese assets. This is one reason China’s central bank has encouraged currency swap deals to expand liquidity in offshore renminbi markets, but the actual utilization of these swap lines has been very limited. Simply put, there is no easy mechanism for Beijing to encourage foreign investors and central banks to hold the Chinese currency, as this depends upon public perceptions of the currency’s utility, liquidity, safety, and long-term value.

China’s currency is generally considered the fifth-most commonly used currency in the world, and is used for 3.6 percent of global transactions by value, according to SWIFT data. It still falls behind not only the US dollar and the euro, but the Japanese yen and pound sterling. Excluding payments within the eurozone, according to SWIFT’s data, the renminbi is sixth, falling behind the Canadian dollar. (And this may be low, given that SWIFT’s data will more heavily sample transactions in Western financial markets.) In terms of offshore holdings of renminbi, the PBOC’s own data shows that foreign holdings of renminbi-denominated assets totaled 9.76 trillion yuan ($1.36 trillion) as of June 2023, down from a peak of 10.8 trillion yuan in 2021. Naturally, the change in US interest rates starting in 2022 reduced the attractiveness of renminbi-denominated assets to foreign investors, along with geopolitical risks tied to China’s alignment with Russia.

Most relevant for sanctions avoidance is the liquidity of renminbi-denominated trading, or the ability of third parties to use renminbi in transactions outside of US and Western surveillance. However, the vast majority of renminbi-denominated financial transactions still take place in Hong Kong (79 percent), followed distantly by the United Kingdom (5 percent) and Singapore (3 percent). While this is logical given Hong Kong’s role as the gateway between China and international financial markets, the importance of Hong Kong within the offshore renminbi market raises the question of how “international” offshore renminbi trading really is. Most likely transactions involving offshore renminbi that are used to avoid sanctions would transact via Hong Kong, using institutions that would also maintain business in the US dollar, and would therefore also be subject to US sanctions or other economic statecraft.

As of 2023, the renminbi share of allocated global foreign currency reserves stood at around 2.4 percent, a decline from 2022 (2.6 percent) and 2021 (2.8 percent).⁷⁵ According to the PBOC, more than 80 foreign central banks or monetary authorities have held renminbi in their foreign currency reserves.⁷⁶ Many of the countries publicly committed to holding renminbi in their foreign currency reserves have a significant trade relationship with China (Table 13). China is the top trading partner of Russia, Australia, Brazil, Bangladesh, and Kazakhstan. At 13.1 percent, Russia holds the largest disclosed share of renminbi reserves (although the effective share of Russian reserves may be higher given the impact of sanctions). US sanctions on the use of US dollar assets have added pressure on Russia to diversify into other currencies, and Russia’s share of trade invoiced in renminbi increased from 3 percent in 2021 to 20 percent by the end of 2022.⁷⁷ Around 2018, several European countries, including France, Belgium, Germany, Slovakia, and Spain, as well as the European Central Bank, began announcing the inclusion of renminbi in their reserves, likely a result of the renmimbi’s inclusion in the IMF’s SDR currency basket. However, these countries do not publicly disclose the current composition of reserves, and more recent reporting on the quantity of renminbi reserves is sparse. African countries such as Rwanda and South Africa primarily mention trade settlement and investment promotion as motives for diversifying assets with renminbi holdings.

Because the currency remains subject to capital controls and is not fully convertible, choosing to hold foreign exchange reserves in renminbi is not necessarily as straightforward as holding other currencies. But during periods when interest rates on US Treasuries and other traditional reserve currencies are low, higher return on Chinese government bonds may offer an attractive alternative to diversify reserve holdings.

Trade settlement in China is also increasingly denominated in renminbi. Naturally, it is easier for China to impose payment terms upon its own imports from foreign companies, as the customer. As a result, along with foreign exchange reserves, countries that tend to denominate more trade in renminbi tend to be significant exporters to China, and run trade surpluses with China, primarily in raw materials or commodities. The overall volume or proportion of trade settlement in renminbi is a far less significant gauge of renminbi internationalization than other metrics such as the accumulation of renminbi assets or the volume of cross-border financial transactions in renminbi. Nonetheless, the proportion of trade denominated in renminbi has increased notably since the Russian invasion of Ukraine, and has hit all-time highs above 35 percent in recent months.

In the past, when renminbi-denominated trade settlement surged from 2013 to 2015, this reflected strong demand for renminbi in offshore markets, because the Chinese currency was appreciating against others, and against the US dollar. As a result, exporters to China were more likely to be willing to hold renminbi if Chinese importers paid in the currency. The recent surge also corresponds with a change in the currency’s value, but the renminbi has depreciated against the dollar since early 2022. The rise in renminbi-denominated trade settlement in recent years has occurred alongside the rise in US and global interest rates relative to Chinese interest rates. The lower Chinese rates can make trade credit denominated in renminbi more attractive to firms, relative to more expensive US dollar-denominated trade finance. The renminbi’s share of global trade finance increased to 5.12 percent in November 2023, from only 2 percent in December 2020, according to SWIFT data, and it is probable that lower Chinese interest rates can explain the recent rise in overall trade settlement.

Financial infrastructure: CIPS

Central to Beijing’s efforts to build resilience and circumvent potential G7 sanctions is CIPS. Launched by the PBOC in 2015, CIPS is a large-value renminbi payments system designed to facilitate and settle domestic and cross-border renminbi transactions.⁷⁸ Built to resolve the inefficiencies of China’s legacy payments system, including the China National Advanced Payment System (CNAPS), CIPS promises to integrate its participants into the existing global financial architecture, while allowing for onshore renminbi clearance and settlement services.⁷⁹

Structured like the Clearing House Interbank Payments System (CHIPS), the US-led interbank payments system, financial institutions are either direct participants, which maintain an account within CIPS, or indirect participants, which engage with the system through relationships with a direct participant. As of December 2023, CIPS boasts 139 direct participants, with foreign participants concentrated within China’s trading partners, and 1,345 indirect participants.⁸⁰ Direct participants have to be incorporated in China. However, direct participants can be located abroad if they are a subsidiary of a Chinese financial institution In total, CIPS participants span across 113 countries and regions around the world.⁸¹

CIPS’ stated goal is to improve efficiency and reduce costs associated with international renminbi settlements. Beijing aspires to make it an integral part of the world’s existing financial infrastructure. Unlike CNAPS, CIPS is directly interoperable with SWIFT and uses the ISO 20022 international payments messaging standard. However, CIPS’ potential as a replacement to the US-led global financial plumbing has not gone unnoticed. Experts in China noticed US efforts to disconnect Iran from SWIFT in 2012 and threats to take similar action against Russia in 2014. Fearful that the United States may eventually consider similar actions against China, some have argued CIPS may be more important as a tool to protect Beijing’s national and economic security.⁸² Recent actions by the G7 against Russia to follow through and disconnect ten Russian banks from SWIFT have amplified these fears.⁸³ As a result, while CIPS does reportedly utilize SWIFT for around 80 percent of the transactions it processes,⁸⁴ among CIPS’ direct participants, it does maintain an alternate communications channel.

Due to its capacity to operate independently with its direct participants, even in a maximalist-sanctions scenario similar to G7 actions against Russia or US sanctions against Iran, CIPS can continue to function and process bank-to-bank transfers. CIPS provides meaningful insulation for the Chinese financial system as well as means to easily engage with willing partners abroad either through CIPS’ current roster of direct participants or by onboarding new ones.

There is also little question CIPS can scale to meet China’s needs in the face of Western sanctions. When looking at CIPS’ support for renminbi internationalization efforts, especially in the context of sanctions, it’s critical to disaggregate Chinese goals to encourage international use of the renminbi from building resilience against potential G7 sanctions. At the end of 2023, CIPS processed around 3 percent of the total value that passes through CHIPS.⁸⁵ This transaction volume is well short of what Beijing would need to legitimately challenge the dollar as the dominant currency of international commerce. However, taken along the far narrower goal of building a payments network that remains operational for trade and basic financial transactions in the face of economic sanctions, Beijing has succeeded.⁸⁶ CIPS has the capacity and resilience to manage and onboard China’s global economic relationships in the event of maximalist G7 sanctions. While CIPS processes a fraction of the total value that passes through CHIPS, this is already adequate capacity to cover China’s total goods trade in the event Beijing is removed from SWIFT. In Q3 2023, CIPS processed, on average, $51 billion in transactions a day. Chinese total imports and exports over the same period amounted to an average of around $17 billion a day. Restrictions and transitional pain points will primarily stem from Chinese trading partners’ willingness to engage with the system.

Digital currency and e-CNY

In 2017, China established the digital yuan project, a CBDC, with the stated goal of facilitating cross-border transactions and reducing reliance on traditional payment systems. Mu Changchun, the director of the Digital Currency Research Institute at the PBOC, discussed expanding the scope of Project mBridge to eventually “formulating a road map to develop an influential cross-border payment infrastructure.”⁸⁷ In the context of a Taiwan crisis, policymakers should consider China’s advancements and ambitions in both retail and wholesale CBDCs and how these platforms could be leveraged to mitigate the effect of potential Western sanctions.

China’s retail CBDC project focuses on enabling Chinese individuals and businesses to use the digital currency for everyday domestic transactions and creating a network of state-enabled payments.⁸⁸ Common use-cases of the retail e-CNY include public transportation, integrated identification cards, school tuition payments, tax payments, and refunds.⁸⁹ Currently, the domestic pilot project has 13.61 billion renminbi in circulation with 260 million digital wallets.⁹⁰ However, this project has limited ability to help internationalize the yuan and serve as a means of sanctions evasion given its domestic focus.

China’s wholesale CBDC projects are different. Phase 1 of Project mBridge started in 2021 as a joint experiment with the central banks of China, Thailand, the United Arab Emirates, and the Hong Kong Monetary Authority (HKMA), and select commercial banks within these jurisdictions, as well as the Bank for International Settlements (BIS) Innovation Hub.⁹¹The project was initially designed to create a common infrastructure that enables real-time crossborder transactions using CBDCs. In the current version, the project connects over twenty banks across the four jurisdictions, reducing the reliance on the correspondent networks utilizing the dollar.⁹² mBridge can be understood as an upgrade to the current cross-border payments technology, and if implemented at scale could deliver efficiency, speed, and security to international payments outside of dollar-based networks. In October 2022, the project successfully conducted 164 transactions, settling a total valued at $22 million, with almost half of all transactions in e-CNY.94⁹³ This was the first successful test of a wholesale CBDC with actual funds and concluded Phase 1 of the project.⁹⁴

In Phase 2 of the project, China and the BIS will expand the mBridge participants. As of January 2024, twenty-five central banks have joined the project as observing members and additional countries are interested in joining this expanding network.⁹⁵ mBridge is organized in a three-tier participation structure.⁹⁶ The first level is the project’s founding members: China, Thailand, Hong Kong, and the UAE. The second level consists of eleven anonymous central banks engaged in mBridge’s sandbox testing; notably, the Central Bank of Türkiye has announced its involvement in testing. mBridge’s sandbox offers a secure environment for central banks to experiment with simulated nodes and transactions. The third tier consists of observing members, which includes the IMF, the World Bank, and fourteen additional central banks. The value of a payments infrastructure lies in the network effects it generates for participants. As more central banks join, this infrastructure becomes increasingly efficient.⁹⁷ China has also announced plans to integrate traditional payment systems like real-time gross settlement systems or fast payment systems with mBridge, so that central banks can issue their own CBDC on mBridge without creating their own CBDC infrastructure.⁹⁸

Transactions on this payment infrastructure are conducted outside of the US dollar and therefore outside of US sanctions influence. As a result, mBridge can offer an alternative cross-border settlement system to jurisdictions looking to bypass US sanctions or compliance with US anti-money laundering/countering the financing of terrorism regulations. Therefore, mBridge could serve as an alternative financial channel that could be leveraged in the event of a Taiwan crisis—especially as an option for jurisdictions that may be reluctant to join Western sanctions and/or “fence-sitting” economies that rely significantly on Chinese import and export markets. In a crisis scenario, China could also evade secondary sanctions and still maintain access to critical commodity markets and energy products.

There have been changes in technology that also reflect Beijing’s influence on the cross-border project. Until recently, mBridge was running on a proprietary blockchain based on Ethereum’s Solidity language and developed by “central banks for central banks,” unlike other CBDC initiatives that run on blockchains built by third parties.⁹⁹ However, in November 2023, Chinese media reported that mBridge will be transitioning to the Dashing protocol, which was developed by the PBOC’s Digital Currency Research Institute and Tsinghua University.¹⁰⁰ The specific program language has not been announced, but the protocol could achieve higher scalability and lower latency. This shift underscores how much China remains the center of mBridge as the project designer, manager, and main trading partner.

There is also a lack of US- or dollar-based alternatives to mBridge. Despite the dollar comprising more than 70 percent of SWIFT messages worldwide in 2023, there is currently no equivalent Western or G7 digital currency or platform to counterbalance the advantages presented by mBridge, including faster settlement and reduced transaction costs. This is a significant gap in the emerging digital financial ecosystem, which provides China with an opportunity to use this infrastructure to encourage more countries to opt for faster and more cost-effective transactions, and then turn to this system during a sanctions scenario.

While mBridge has significant potential to serve as a cross-border payments alternative for China, it is currently in the experimental stage—its scalability and wider adoption in real-world scenarios remains uncertain. Experts have projected that mBridge’s current capabilities are limited to facilitating roughly $190 million in transactions annually, which limits Beijing’s ability to shift flows in the event of a crisis in the short term.¹⁰¹ In the medium term (three to five years), the project can potentially be leveraged to shield China’s financial system. In 2022, the total trade volume between the four founding mBridge members was $540 billion—if China moves just 5 percent of these flows to mBridge it could facilitate trade up to $27 billion.¹⁰² Moving the mBridge consensus protocol to Dashing would also improve the efficiency of the project by increasing the number of transactions per second. However, liquidity remains a major concern for the scalability of mBridge. To facilitate large-scale cross-border transactions daily without dollars or euros would require a change in the current currency settlement system. However, at least for a shortterm crisis and for specific transactions that would fall under sanctions, mBridge can help the Chinese financial system and its commercial banks maintain liquidity.

mBridge, along with CIPS (see below), can potentially augment China’s ability to respond in a Taiwan crisis scenario. Despite its growth over the last two years, CIPS’ capability is limited by its reliance on SWIFT. Participants can message each other through the CIPS messaging system, but 80 percent of transactions on CIPS rely on the SWIFT infrastructure for translation.¹⁰³ As a result, China might pivot toward strengthening the role of digital yuan and mBridge in its international payment networks, hoping to maintain transactional flows and mitigate the impacts of any restrictions on CIPS. Ultimately, China is likely to rely on both networks in a crisis to mitigate sanctions through multiple avenues.

One way to understand China’s goal with CIPS and its linkages with SWIFT is that by adding more banks to both networks China is making it more difficult to sanction the Chinese banking system without enormous repercussions to trading partners all over the world. Instead of a sanctions shield, like mBridge, CIPS expansion can be thought of as a leverage point to discourage sanctions.

There is growing interest around the world in finding alternatives to the dollar-based messaging and settlement systems. China is meeting this demand while also serving its own goals of internationalizing its currency and providing a hedge against sanctions. The development of the e-CNY and mBridge project provide Beijing with new options to circumvent a potential international sanctions regime in a Taiwan crisis. This makes the timing of a crisis critical. Without a change in current dynamics, the impact of sanctions today on China’s economy could be far more significant than the impact in three to five years when mBridge has become fully operational with additional countries as partners.

Prospects for future expansion of international Renminbi

While China has struggled to increase the attractiveness of the renminbi in overseas markets, there are certain political initiatives Beijing can take to increase the currency’s utility to third parties, and to expand participants in mBridge and CIPS. One of these is the use of currency swap arrangements to administratively offer pools of liquidity in renminbi for trade settlement or financial transactions in other countries. Another would be to offer concessionary lending to third countries in renminbi, for overseas infrastructure or Belt and Road Initiative-related projects, which can improve liquidity in overseas markets but may also require the borrower to spend or convert many of the proceeds back in China or with Chinese firms who can accept the renminbi.

Other options for Beijing include more ambitious concepts such as the use of a BRICS currency, which emerged as a topic of discussion during the last BRICS summit in South Africa in August 2023 and will continue to be a key area of policy exploration under the Russian BRICS presidency in 2024.¹⁰⁴ Any creation of a BRICS currency would necessarily require China’s participation, and given China’s economic weight within the group of countries, a BRICS currency would be almost equivalent to an offshore renminbi. The basic challenge persists, though, in that a BRICS currency could not provide any meaningful insulation from Western economic statecraft. Most of the BRICS countries, including China, run trade surpluses, so unless China dramatically increased imports from these countries, these countries would continue to export to Western economies, most likely using US dollars, and accumulating US dollars that would need to be cleared via US-domiciled accounts.

Beijing is also using the Shanghai Cooperation Organization (SCO) to advance non-dollar-denominated financial systems by promoting the use of local currencies like the renminbi in international trade and finance. Chinese leaders have supported the creation of an SCO development bank and have advocated for measures to increase local currency settlements including through improving local-currency cross-border payment and settlement systems as well as bilateral currency swaps arrangements.¹⁰⁵

The problem with the BRICS currency and Chinese efforts at the SCO speak to the larger limitations on the accumulation of offshore renminbi. As long as China runs a trade surplus, globally, then renminbi remains scarce, and remains inside China itself. Only by running a persistent trade deficit would renminbi end up circulating more regularly outside of China, and therefore create incentives for other market participants to hold renminbi-denominated assets. Otherwise, renminbi must spread through outbound investment, outbound lending, or currency swap arrangements, all of which must be negotiated with Chinese commercial banks or the central bank, rather than proceeding entirely via market transactions. The conundrum for Beijing is that should China run a persistent trade deficit or face persistent capital outflows, China’s currency would remain less attractive than other alternatives, because these forces may reduce the value of the currency over time. But those are also the only channels through which renminbi can significantly increase its circulation outside China.

Policy constraints on expansion of renminbi financial networks

China could meaningfully expand the international use of its currency by opening its capital account more rapidly to both capital inflows and outflows. The fact that the currency is not fully convertible meaningfully limits its usage, because market participants cannot exchange the currency freely for others, nor participate freely in Chinese financial markets. Beijing has significantly liberalized its own financial markets and allowed more foreign participation, but this has primarily been focused on maintaining inflows, rather than permitting outflows. There are still considerable restrictions on daily transaction volumes through China’s Bond Connect and Stock Connect programs, which permit two-way flows via Hong Kong.

However, fully liberalizing China’s capital account would bring a slew of additional financial risks, which explains Beijing’s reluctance to commit to greater opening. China has maintained a closed capital account for years, while the world-leading money supply has expanded to over $40 trillion, even though 98 percent of China’s monetary assets are denominated in renminbi. Currently, Chinese citizens are limited by the $50,000 annual quota on per capita foreign exchange conversions, and corporates are limited by a series of restrictions on outbound investments and rules limiting access to foreign exchange. These capital controls do not completely prevent conversions into foreign assets, but they slow down these flows considerably. Liberalization of the capital account would likely permit more inflows, but at the cost of much faster potential outflows, which may trigger significant liquidity problems within China’s financial institutions and significant pressure on the renminbi to depreciate. And such depreciation pressure would meaningfully reduce the attractiveness of the currency to overseas investors.

Implicit within these limitations is a broader problem of trust and credibility in Chinese policymaking. To hold an asset denominated in renminbi implicitly involves some degree of confidence in the longerterm value of the currency, the stability of China’s regulatory environment, and the credibility of China’s policymaking process. That policy credibility takes years to accumulate, but can be disrupted rapidly, through actions such as the crackdowns on IT firms or education and tutoring firms in 2021, or the botched efforts to bail out the equity markets, both in 2015 and earlier this year.¹⁰⁶ These campaigns and crackdowns were highly adverse to foreign investors’ interests and raised questions about the ultimate intentions of China’s leadership to maintain economic growth and preserve an attractive climate for foreign investment. The same concerns among investors can emerge over geopolitical issues, such as China’s alignment with Russia after the invasion of Ukraine, which has cost China considerable credibility as an attractive economic partner or investment destination. As China’s political system has become more centralized, and campaign-style governance has become more common, it is more difficult for economic technocrats to send countervailing signals that campaigns have ended and normalcy has returned.

All of these constraints limit Beijing’s capacity to develop highly liquid and credible markets for its currency outside of China itself. As a result, China’s financial institutions remain dependent upon the US dollar at the same time as Beijing attempts to expand alternative financial networks in renminbi. Even while many states may seek an alternative to the US dollar system, Beijing faces meaningful limits in its capacity to provide that alternative, without jeopardizing financial stability in China itself.

Responding to G7 economic statecraft in a crisis

The concerns outlined above are longer-term in nature. The immediate question looming for Beijing is what China can plausibly do now if G7 countries initiated some of the economic sanctions and other statecraft measures discussed in the scenarios above. And Beijing does have some meaningful options, simply because most of the renminbi-denominated financial networks can still be used on a limited basis, even if they are unattractive for large volumes of conventional economic transactions.

The first and most obvious step would likely be to route trade transactions involving energy sources and critical commodities imports via countries that were unlikely to cooperate with G7 sanctions or export controls. This would also likely involve the use of the renminbi as a payment currency, which is plausible since many of the commodity exporters to China are likely already receiving renminbi from their Chinese customers. The third-party exporters to China could then be subject to secondary sanctions in some cases, but this would likely involve a significant escalation in targets from G7 countries. Most of this trade activity is likely to continue in spite of Western sanctions on China.

The second measure includes currency intervention, openly selling US dollars in order to shore up the value of China’s currency and reduce near-term pressures for capital outflows that would likely intensify as sanctions were imposed. Currency stability would likely be necessary to maintain Beijing’s capacity to use alternative financial networks in a crisis scenario, to prevent third countries from facing pressure to sell their renminbi and avoid the currency because of sanctions risks. This may appear in Western financial markets as China “dumping” US Treasuries or other US dollar-denominated assets, but the nature of this operation would be to maintain ammunition to stabilize China’s currency.

Third, Beijing can reallocate critical trade and financial transactions with the rest of the world through very large or very small financial institutions. Small financial institutions may be sanctioned, and lose access to US dollar clearing facilities, but these limits are unlikely to have significant implications for financial stability in China, and can shift to other institutions as necessary. Larger financial institutions are more difficult to sanction because of the potential for significant disruptions in regular trade activity with Western markets, and the potential for sudden dislocations in global supply chains. Shifting more critical transactions to larger state-owned banks such as the Bank of China or Industrial and Commercial Bank of China, for example, would be a more difficult secondary sanctions target for Washington.

In terms of rapidly accelerating the development of renminbi-denominated financial networks, Beijing may struggle to react quickly and effectively. More participants from third countries can certainly be admitted into CIPS, more central banks can be linked to mBridge, and more CBDC can be issued, of course. Beijing can suspend cooperation with SWIFT altogether, including within CIPS. But these are not the primary limits on the utilization of these networks, which remain the liquidity and attractiveness of renminbi financial assets, and the limits Beijing places on convertibility of the renminbi. The imposition of G7 sanctions would likely intensify these problems for Beijing, given the rising political costs of third countries in economic engagement with China, rather than catalyzing faster growth of renminbi-denominated financial networks.

Beijing’s responses to different types of crises

As discussed previously, the level of escalation and the mechanics of the scenarios involved will also influence the level of Beijing’s response and attempts to circumvent sanctions. Moderate escalation as defined in this report would suggest that Beijing will attempt to maintain the perception of normalcy in its international financial engagement, leaving channels open for capital inflows into China’s equity and bond markets. The exchange rate would likely be under pressure but within the capacity of the central bank to stabilize conditions, and under most circumstances, it would be in Beijing’s benefit to project financial stability. China would likely try to shift sensitive trade and financial transactions to smaller banks at less risk of international sanctions or restrictions.

Renminbi-denominated international financial networks could become more active in a moderate-escalation scenario, precisely because Beijing would not be facing widespread restrictions on trade, and would be attempting to portray Western sanctions as unreasonable and overreactions, demonstrating the lack of credibility in US and G7 economic policy. Beijing would likely attempt to sign up additional countries’ financial institutions to networks such as CIPS and mBridge, and channel trade and wholesale financial transactions through those networks. Renminbi-denominated central bank swap lines to friendly countries could also be expanded under these circumstances to improve liquidity conditions for renminbi-denominated trade transactions.

In a high-escalation scenario, the renminbi would presumably already be under considerable pressure and would be weaker against the US dollar, and the PBOC would not be as interested in maintaining a certain level of the currency (while also trying to prevent an outright currency collapse). Since this scenario assumes widespread restrictions on China’s financial institutions, it is probable that third countries would be cautious about engaging with China’s renminbi-denominated financial networks for fear of potential secondary sanctions. Furthermore, it is more likely that the pressure on the renminbi would reduce the attractiveness of engaging in trade transactions via China’s international financial networks. More probably, these transactions would be limited to those conducted with Beijing’s explicit political guidance.

Supply and demand of alternatives to the dollar-based financial system

Demand for alternatives to the dollar-denominated financial system are shaped by a desire to mitigate the impact of possible Western sanctions and reduce transaction costs associated with utilizing dollardenominated cross-border payments systems. The G7 and its partners levied unprecedented coordinated sanctions against Russia in response to Russia’s invasion of Ukraine. However, several governments maintain economic and political relationships with Russia. These “fence-sitter” governments, which include BRICS and Gulf countries, have not joined the sanctions campaign and are exploring alternatives to the dollar and euro in order to continue their economic relationships with Russia.¹⁰⁷

The United States and its allies’ perceived willingness to use tools of economic statecraft in the event of any conflict shapes the urgency with which countries are pursuing these alternatives.¹⁰⁸ Similar to G7 economic initiatives to de-risk or pursue China+1 goods supply chain initiatives, nonaligned capitals around the world are also interested in analogous financial hedges.¹⁰⁹ Their efforts are not necessarily meant to supplant the dollar as the dominant international currency but are designed to safeguard their economies in a crisis scenario. It is important to recognize that different countries within the BRICS, for example, have varying motivations and levels of interest in de-dollarization. It is therefore more useful to evaluate de-dollarization efforts on a country-by-country basis as the Atlantic Council has done in its Dollar Dominance Monitor.¹¹⁰

Countries are also striving to reduce dollar usage in cross-border payments because of potential efficiency gains brought about from local currency settlement, or, in the case of China’s trading partners, renminbi trade settlement. This is particularly prominent in Association of Southeast Asian Nations (ASEAN) member states whose central bankers have long taken issue with the inefficiencies and risks incurred by their reliance on the dollar for regional trade and finance.¹¹¹ Currently, most high-value crossborder dollar payments are settled through the US-led CHIPS system. However, because only one ASEAN member state’s bank—Thailand’s Bangkok Bank Public Company Limited—is a direct participant in CHIPS,¹¹² most dollar-denominated financial flows have to rely on correspondent banking relationships where local institutions maintain accounts with institutions that are members of CHIPS. This financial intermediation incurs costs on traders and financial institutions generating financial motivations to advance dollar alternatives.¹¹³ Still, the network effects associated with dollar dominance are considerable, and dollar alternatives may not be readily available or cost effective.¹¹⁴ So while ASEAN countries, for example, are exploring new systems to directly link national payments systems as an alternative to correspondent banking,¹¹⁵ policymakers in the region face considerable headwinds to develop an alternative that is cheaper than established US dollardenominated financial networks.

Foreign exchange markets are one such example. Countries interested in local currency settlement still must utilize foreign exchange markets to convert their domestic currency to their partner’s. However, G7 currencies, led by the dollar, make up nearly 85 percent of all foreign exchange transactions globally.¹¹⁶ With emerging market currencies comprising just 8.9 percent of all foreign exchange transactions, markets for non-dollar currency pairs are mostly underdeveloped. Low volumes for local currency settlement increase the gap between buying and selling rates (the bid-ask spread). For example, in Asia, where ASEAN governments have made a concerted effort to close this gap and increase cross-border local currency use, the bid-ask spread can still be more than double what traders pay for a transaction involving the local currency against the dollar.¹¹⁷ This can counteract the dollar transaction costs incurred by financial intermediation, reinforcing the role of the dollar.

To decrease local currency transaction costs between China and its trading partners, Beijing is actively providing additional pools of renminbi offshore to improve liquidity. During the summer of 2022, the PBOC and the HKMA upgraded their currency swap line to a standing arrangement, providing offshore renminbi markets with stable, long-term liquidity support. The PBOC has also encouraged other regional central banks, namely the Monetary Authority of Singapore, to utilize its renminbi swap funds to enhance the liquidity of their own renminbi markets. The PBOC has suggested it will continue to improve offshore renminbi liquidity through additional supply arrangements.¹¹⁸

Geoeconomics and transactional efficiency gains must reinforce each other for meaningful supplies of dollar alternatives to emerge. The immense network effects of the dollar mean that governments must foot some of the bill, as Beijing and its financial system is doing to develop renminbi foreign exchange markets. These costs can be more easily justified when there is a legitimate national security concern. While the Russia sanctions have accelerated interest in efforts to find dollar alternatives, many of these initiatives are still years away from having enough demand from China’s partners to be useful and effective at scale. However, in the aftermath of a Taiwan crisis, and a sanctions package from the G7, it is likely countries would increase efforts to build these systems both between each other and with China. However, if G7 use of financial statecraft instruments becomes more infrequent or guidelines are adopted to constrain them, there will be less incentive and momentum to develop and adopt alternatives.

Assessing China’s capacity to respond to G7 statecraft

The costs of any Taiwan crisis scenario that threatens to spiral into broader conflict between China and the United States are so large that it may seem trivial to draw finite distinctions between these scenarios, or break down where costs are likely to be most severe. But understanding how China is likely to respond to G7 economic statecraft can help policymakers prepare to minimize those costs, while also outlining alternative paths to avoid conflict by emphasizing that the G7 understands the scope and range of China’s economic second-strike capability. Respect for the damage that both G7 and Chinese economic statecraft can impose can help both sides walk back from the brink of a Taiwan crisis.

The timing of any scenario is also critically important, given how policy is currently evolving in both Western democracies and in Beijing to improve the range of choices in the event of a crisis. The process of de-risking and diversification of supply chains is likely to marginally reduce China’s capacity to practice critical elements of economic statecraft via trade and export restrictions over time. But in finance, policy is trending in the opposite direction, with China’s renminbi-denominated financial networks likely to continue to expand in scope and liquidity, providing more alternative options for China to potentially circumvent US or G7 statecraft tools. A Taiwan crisis in a year’s time will present both sides with far different options and concerns about costs relative to a scenario in five years’ time.

The impact on trade and FDI

One of the principal arguments of this study is that China is armed with powerful statecraft options relating to trade (both imports and exports) and foreign investment (particularly inbound FDI), but that the expansive use of these tools in a moderate- or high-escalation scenario comes with steep economic and reputational costs. Prior geopolitical incidents have shown China to have a wide array of formal and informal tools available, but it has generally used these tools in a targeted fashion: on single firms or industries, or smaller trading partners. China is expanding the legal foundations for these tools. China’s Anti-Foreign Sanctions Law, anti-blocking statute, and expanding export control regime serve to highlight Beijing’s leverage in trade and direct investment with G7 countries.

In an escalation over Taiwan, China has the capability to expand the use of these coercive tools. Trade-related tools would likely focus first on restricting access to China’s market in goods where the costs to China are lower (consumer discretionary goods, easily substitutable goods) and where the relative costs to adversaries are high. Export-related restrictions would likely focus on critical raw materials and key industrial inputs that account for a relatively small share of China’s overall output and employment, but which are difficult for other countries to replace or do without. Investment-related tools would likely begin with disrupting MNC operations through investigations, audits, and interfering with data and financial flows. In a higher escalation scenario, all of these tools could be scaled up further, up to near-total trade restrictions and seizure of MNCs assets in China.

But using these tools, even in limited ways, comes with immediate costs to China. China’s economy depends in large part on the contributions of foreign firms and export-oriented manufacturing. It also carries longer-term costs from frightening off global investors worried about China’s “investability” due to macroeconomic and geopolitical risks. In short, though these coercive tools exist, their use comes at a cost that Chinese policymakers will be loath to bear.

More germane in a moderate-escalation scenario will be China’s usage of positive trade and investment inducements to create cracks in G7 unity on economic sanctions or restrictions, in combination with other restrictions on market access. Beijing may combine measures to restrict market access for one country while offering preferential access to another. In conditions where countries adopt unilateral sanctions against China, China is likely to seek opportunities to undercut alignment by focusing countersanctions solely on that country and offering positive inducements to other G7 countries or the broader G20.

Beijing’s response will also ultimately depend on China’s central position within global supply chains, and as a node in $5.9 trillion in annual global trade activity. Gradual de-risking and diversification of global investment will shift this position, even if the outright volume of China’s trade with the rest of the world remains at a high level and China continues to provide intermediate goods to newer manufacturing centers.

Financial statecraft and consequences

Beijing’s capacity to retaliate against G7 economic statecraft using financial tools alone is limited, and far less consequential for the global economy than Chinese statecraft’s impact on trade and FDI activity. More important are Beijing’s efforts develop alternatives to the dollar-based system financial infrastructure to withstand Western sanctions in the future.

Certainly, Beijing has the ability to impose financial sanctions on Western banks and firms. In a crisis, Beijing is likely to impose stricter capital controls in ways that disrupt financial investments in China, although the primary purpose of these tools would be to prevent destabilizing capital outflows rather than punish foreign investors. Beijing also exerts considerable influence over countries that have borrowed from state-owned banks or received other preferential credit terms for infrastructure construction in cooperation with Chinese companies. These loans could be withdrawn or renegotiated quickly, imposing immediate financial concerns for the borrowing country. This is far less relevant a tool in retaliation against the G7 specifically, but could help Beijing to shape the global political environment in the course of an escalating Taiwan crisis.

The greater focus of policy efforts in Beijing is to expand the scope and capacity of renminbi-denominated international financial networks to offset or circumvent some of the impact of G7 financial sanctions or other economic restrictions. These renminbi-denominated networks are unlikely to challenge the US dollar-dominated financial system at any point in the future, in terms of liquidity, global reach, or reducing transaction costs. But Beijing does not need a comparable or fully competitive system in order to preserve alternatives for critical transactions that can bypass US or G7 controls in the event of broader financial sanctions. Beijing is likely to make further progress in expanding the technical reach of these networks via its digital currency pilot programs such as mBridge and adding more banks in multiple countries to CIPS. This can occur even if offshore renminbi liquidity conditions continue to weaken, as China’s currency remains under pressure to depreciate from capital outflows, which would likely intensify considerably in the event of a Taiwan crisis. Ultimately, it is easiest to understand the internationalization of the renminbi as a safety valve for Beijing in the event of a crisis rather than a full-fledged alternative to the US dollar system.

Preventing escalation in economic warfare

In contemplating the use of economic statecraft in a Taiwan crisis scenario, the challenge for policymakers in G7 capitals and in Beijing will be managing escalation, limiting economic costs, and preventing a spillover into broader kinetic conflict. Understanding how Beijing is likely to respond to G7 statecraft tools can thus help to communicate the potential costs of responsive or retaliatory spirals, and assist both sides in stepping back from the brink before ruinous economic costs result. Escalation is a particular concern for financial markets, which are likely to draw simple parallels between any Taiwan-related crisis and the Russian invasion of Ukraine, along with the past G7 sanctions response. The potential costs of escalation will be presented clearly in the very early stages of any crisis scenario.

Beijing’s initial responses to G7 statecraft measures are likely to fall upon predictable ground, in line with the past actions that China has taken in more limited scenarios. The range of those actions detailed in the previous sections is unlikely to surprise G7 policymakers. But there will still be uncertainty about China’s escalatory responses from those initial steps. The revealed capacity of Beijing to respond with policy agility on unfamiliar ground appears limited, based on the current state of economic policymaking. In addition, past episodes of retaliation against economic statecraft seem to value the perception of reciprocity rather than a technocratic skill in targeting a response toward G7 weaknesses. However, there are some notable counterexamples, such as the restrictions impacting specific foreign firms in the semiconductor industry.

As a result, the chances of escalation and rising economic, political, and potentially humanitarian costs will be higher if in addition to Beijing, G7 actions are also seen as unpredictable, rather than following a logic that global policymakers, financial markets, and Beijing can understand. The case for transparency about the enormous costs of even economic restrictions short of military conflict is strong, particularly as tensions over Taiwan have already risen over the past several years.

Similarly, the more frequent usage of economic sanctions and G7 statecraft targeting US dollar-denominated transactions that are central to the global trading system will help to create further global demand for alternative networks, including those managed by Chinese institutions (even as Beijing maintains similar threats of controlling access to these alternative financial architectures). Explicit restraint in deploying the most aggressive restrictions on economic activity can therefore help to reduce the attractiveness of alternative renminbi-denominated financial networks to third countries, and can also weaken China’s potential leverage over global supply chains and trade activity.

As the lines between economic statecraft and military conflict blur, mapping the paths and consequences of escalatory dynamics can help to prevent initial actions that risk policymakers finding justifications to unveil newer economic statecraft tools. But analyzing the steps China has taken in the recent past and anticipating steps Beijing may take in the future can only go so far. China’s economic second-strike capability is considerable, extending into a large proportion of global trade activity. Credible commitments to restraint in the usage of the most aggressive G7 economic statecraft tools can be just as effective as actively threatening their deployment in limiting escalation in a crisis.

Appendix 1: China’s formal economic statecraft toolkit

About the authors

Logan Wright is a partner at Rhodium Group and leads the firm’s China Markets Research work. He is also a Senior Associate of the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. Previously, Logan was head of China research for Medley Global Advisors and a China analyst with Stone & McCarthy Research Associates, both in Beijing. Logan holds a Ph.D. from the George Washington University, where his dissertation concerned the political factors shaping the reform of China’s exchange rate regime. He graduated with a Master’s degree in Security Studies and a Bachelor’s degree in Foreign Service from Georgetown University. He is based in Washington, DC, after living and working in Beijing and Hong Kong for over two decades.

Agatha Kratz is a director at Rhodium Group. She heads Rhodium’s China corporate advisory team, as well as Rhodium’s research on European Union-China relations and China’s economic statecraft. Agatha also contributes to Rhodium work on China’s global investment, industrial policy and technology aspirations. Agatha holds a Ph.D. from King’s College London, having studied China’s railway diplomacy. Her previous positions include associate policy fellow at the European Council on Foreign Relations and editor-in-chief of its quarterly journal China Analysis, assistant editor for Gavekal-Dragonomics’ China Economic Quarterly, and junior fellow at the Asia Centre in Paris.

Charlie Vest is an associate director on Rhodium Group’s corporate advisory team. He manages research and advisory work for Rhodium clients and contributes to the firm’s research on US economic policy toward China. Charlie holds a master’s degree in Chinese economic and political affairs from UC San Diego and a bachelor’s degree in international affairs from Colorado State University. Prior to joining Rhodium, he worked in Beijing as research manager for the China Energy Storage Alliance, a clean energy trade association.

Matthew Mingey is an associate director with Rhodium Group, focusing on China’s economic diplomacy and outward investment, including development finance. Matthew is based in Washington, DC. Previously, he worked on global governance issues at the World Bank. Matthew received a Master’s degree in Global Business and Finance from Georgetown University’s Walsh School of Foreign Service and a Bachelor’s degree from the University of Pennsylvania.

Acknowledgments

This report was written by Logan Wright, Agatha Kratz, Charlie Vest, and Matthew Mingey in collaboration with the Atlantic Council GeoEconomics Center. The principal contributors from the Atlantic Council GeoEconomics Center were Josh Lipsky, Kimberly Donovan, Charles Lichfield, Ananya Kumar, Alisha Chhangani, and Niels Graham.

The GeoEconomics Center and Rhodium Group wish to acknowledge a superb set of colleagues, fellow analysts, and current and former officials who shared their ideas and perspectives with us during the roundtables and helped us strengthen the study in review sessions and individual consultations. These individuals took the time, in their private capacity, to critique the analysis in draft form; offer s uggestions, w arnings, a nd a dvice; and help us to ensure that this report makes a meaningful contribution to public debate. Our gratitude goes to Sarah Bauerle Danzman, Gerard DiPippo, Matthew Goodman, Peter Harrell, Annie Froehlich, Emily Kilcrease, Daniel McDowell, William J. Norris, Daniel Rosen, Dave Shullman, and Hung Tran.

This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations.

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Report Jun 21, 2023

Sanctioning China in a Taiwan crisis: Scenarios and risks

By Charlie Vest and Agatha Kratz

New research on possible options and their costs of G7 sanctions on China in the event of a Taiwan Crisis.

China Economic Sanctions

Report Oct 4, 2023

Running out of road: China Pathfinder 2023 annual scorecard

By Atlantic Council GeoEconomics Center and Rhodium Group

The China Pathfinder project examines whether China’s economy is converging or diverging with the world’s leading open market economies.

China Digital Policy

New Atlanticist Feb 22, 2024

Forging a positive vision of economic statecraft

By Daleep Singh

The United States must institutionalize how it uses economic tools in the context of today’s great power competition.

China Economic Sanctions

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Enforcement remains a critical but underresourced element of economic sanctions. The US Congress and the Department of the Treasury should consider updates to its resources, public guidance, and policies to ensure the efficacy of sanctions enforcement as the use of the sanctions policy tool continues to expand.

Economic sanctions are often described as the foreign policy tool of first resort. The Department of the Treasury acknowledged this reality in its “2021 Sanctions Review.” Through its Office of Foreign Assets Control (OFAC), the Treasury Department administers thirty-eight different, albeit overlapping, economic sanctions programs. With only a few hundred employees, OFAC has a nearly unparalleled national security mandate with oversight of the US economy and many other facets of global economic activities. OFAC develops policies for the use of sanctions, designates sanctions targets like individuals, entities, and jurisdictions, engages with the private sector to promote compliance, and civilly enforces apparent violations by US persons and others. This latter enforcement role represents a critical but often overlooked capability. For instance, the same “2021 Sanctions Review” does not even mention the enforcement function in its assessment. (However, it did seek to ensure that sanctions are “enforceable” in the context of sanctions implementation.) Resource constraints, a lack of attention, and the prioritization of policy crises hamper this enforcement function. In 2023, OFAC only undertook seventeen public enforcement actions, including its largest settlement to date with Binance, a global cryptocurrency exchange. For perspective, the Department of Justice terminated 63,419 civil cases in fiscal year 2022, according to the most recent public data.

As the wider interagency continues to rely on sanctions as a critical tool and the United States seeks to expand partner sanctions capacity, US policymakers must fully support the sanctions enforcement function. Strengthening the internal controls for OFAC enforcement improves the rule of law through improved due process and protects OFAC from legal challenges that could existentially undermine its national security mission. OFAC enforcement urgently requires increased budgetary resources and an upskilled workforce from Congress, stronger internal procedures to avoid litigation risks, improved public guidance, and revised enforcement guidelines to promote consistency and improve compliance by industry.

Increasing necessary enforcement resources

As a first step, Congress should provide appropriate budgetary resources for OFAC and consider authorizing OFAC to create positions requiring legal and/or prosecutorial experience, and not just within the Treasury Department’s Office of the Chief Counsel, Foreign Assets Control, which is the legal office that supports OFAC.

Congress has taken necessary but incremental steps to increase the budget for the Treasury Department’s Office of Terrorism and Financial Intelligence (TFI), which includes OFAC. The resourcing of a sanctions economic analysis unit demonstrates a step in the right direction. Yet the outsized expectations from Congress and the interagency for OFAC (and other TFI components) do not correlate with its budget. For specific budgetary requests, Congress should authorize and appropriate for more OFAC enforcement officers, dedicated training and continuing education for enforcement officers, and more attorneys in the Office of the Chief Counsel, which reviews enforcement activities across the life cycle of an investigation. Sanctions can only remain an effective tool if new sanctions are paired with credible and timely enforcement actions. The yearslong lag between sanctions violations and enforcement actions would be reduced if OFAC enforcement had more personnel. Expanding the enforcement workforce would also provide sufficient staffing to allow the secondment of OFAC enforcement experts to more parts of the US government as well as the creation of overseas assignments with allies and partners to improve their sanctions enforcement competencies.

Relatedly, OFAC enforcement capabilities would be enhanced if Congress authorized attorney billets, or positions, in the OFAC enforcement function. OFAC and its sister office, the Financial Crimes Enforcement Network (FinCEN), which is the primary federal regulator for anti-money laundering and countering the financing of terrorism (AML/CFT), both have enforcement divisions that investigate apparent violations of sanctions and the Bank Secrecy Act regime, respectively. Unlike other enforcement capabilities at regulators with civil enforcement responsibilities like the Securities and Exchange Commission and Commodity Futures Trading Commission, OFAC and FinCEN enforcement officers are not required to have any legal training. On the contrary, Congress and the Office of Special Counsel in 2014 investigated FinCEN, in part, for hiring attorneys in nonattorneys roles, resulting in the suspension of FinCEN’s direct hiring authority for several years. Having attorneys in enforcement roles, rather than only as reviewers through the Office of the Chief Counsel, would raise the baseline skills and experience of the OFAC enforcement function in areas like investigative strategy, subpoena issuance, and witness interviewing. While the Treasury Department may have the unilateral authority to create these types of positions, as a practical matter, the legacy of the FinCEN hiring scandal disincentivizes senior Treasury leadership from expending time and political capital to initiate what would most likely be a major bureaucratic undertaking. Congress should do the work to get Treasury capabilities on a par with other civil regulatory agencies.

Improving internal procedures

Even without congressional action, OFAC has a number of options within its own control to improve internal procedures. These changes would increase consistency between different enforcement actions and even among different enforcement officers, which can vary wildly under existing practices. In making these changes, OFAC can both improve the quality and consistency of its enforcement practices while also improving the quality and attractiveness of its enforcement officer roles.

OFAC should articulate consistent standards for the use of subpoenas and tolling agreements.  Increased enforcement brings with it increased litigation risk from enforcement targets, and any inconsistent practices by OFAC could leave it open to charges that it has acted arbitrarily and capriciously in violation of the Administrative Procedures Act. Nonetheless, based on the experiences of a number of practitioners, OFAC seems to use subpoenas haphazardly and in unpredictable ways. Similarly, OFAC’s use of tolling agreements—which suspend the statute of limitations during an investigation—including their duration and when OFAC insists on them seem to vary from case to case. Nonetheless, OFAC enforcement officers often claim they are only using “boilerplate” terms. This can often leave parties confused about whether they are the target of an enforcement investigation or merely providing evidence for another party, and therefore whether there is genuine benefit to entering into a tolling agreement. To provide greater consistency and to give enforcement officers better guidance, OFAC should:

• articulate a standard for issuing subpoenas and explain that standard to recipients
• standardize the timing of subpoena responses and a subsequent reply from OFAC
• create greater consistency on requests for tolling agreements, including a presumptive length of time for such agreements across different cases

OFAC enforcement should engage with the Office of the Chief Counsel earlier and more often in the course of investigations and enforcement actions. Often and in part due to resource constraints, counsel only becomes involved in an investigation late in the process, meaning they are not reviewing subpoenas, tolling agreements, or other practices for legal sufficiency or overall consistency. The involvement of counsel’s office earlier in the process could meaningfully improve and standardize enforcement practices, minimizing litigation risk and imposing consistency across enforcement actions.

Increasing public guidance and transparency

OFAC enforcement, working with its policy and compliance components, can improve guidance and transparency in its operations by increasing publicly available resources on its enforcement practices. OFAC should be commended for its compliance efforts, such as publishing “A Framework for OFAC Compliance Commitments” in 2019 and a 2021 companion for the virtual currency industry. These are necessary but not sufficient, and compliance documents could be enhanced with more enforcement-focused guidance. Some of these recommendations could be implemented with the current workforce, but more time-intensive initiatives would require additional personnel, as recommended above.

Within its existing legal authorities, OFAC could take several steps that would have immediate effects in improving its operations and engaging with an increasing segment of the economy that seeks to comply with OFAC sanctions. At a policy level, OFAC could articulate where enforcement has worked or failed to achieve policy goals with specific examples. As a starting point, OFAC could publish guidelines to explain the circumstances under which OFAC declines to pursue an enforcement action through so-called cautionary or no action letters. This guidance would send a powerful signal to the public, while also highlighting the ongoing work of OFAC enforcement for its exercise of discretion. Complementing this guidance, OFAC could consider publishing anonymized cautionary or no action letters, with explanations or redacted voluntary disclosures, to provide greater clarity into OFAC’s standards and practices. The other benefit would be additional data for industry stakeholders to understand the bounds of permissible as well as impermissible conduct.

The OFAC enforcement division also could publish a more detailed statement of facts with each public enforcement action and/or settlement agreement case to similarly educate the public and inform sanctions compliance programs. Similarly, the office could consider publishing all settlement agreements.

These various efforts would yield many benefits to improve OFAC’s internal operations, engagement with the public for compliance, and due process for investigation targets.

Amendments to OFAC enforcement regulations

Perhaps the lowest hanging fruit is for OFAC to revise its enforcement guidelines to provide greater clarity and transparency in how OFAC calculates penalties. OFAC’s enforcement guidelines, which appear at 31 C.F.R. § 501 Appendix A, provide the most granular framework available regarding OFAC’s calculation of a potential penalty, including the calculation of a base penalty and aggravating and mitigating factors to raise and lower the base penalty. While OFAC may have been reluctant in the past to provide more detailed guidance, concerned that it could limit its discretion to decide a penalty, OFAC would maintain broad discretion even after making extensive amendments to these regulations. The enforcement guidelines provide reasons for increasing or lowering a penalty, but do not restrain OFAC in any way with respect to the weight it gives to various mitigating and aggravating factors, meaning providing greater detail about those factors would not hamstring OFAC in the way it chooses to use them.

Below are three priority technical fixes for OFAC to provide greater specificity in its enforcement regulations:

First, OFAC should provide more specific guidance on the definition of the transaction value that it uses to establish the base penalty in a given enforcement action. Currently, the regulations define the transaction value as “the domestic value in the United States of the goods, technology, or services sought to be exported from or imported into the United States.”  [See 31 C.F.R. § 501(I)(H).] Yet as it continues, the regulation makes clear how arbitrary that definition may be, defining the value of an export of goods to be the market value of those goods and a dealing in blocked property to be the value of the blocked property. The regulations, therefore, establish the same transaction value for a person who transfers blocked funds to a sanctioned person as for the bank that inadvertently processes the transaction, or for an individual who sends equipment to a sanctioned person as for a company that provides shipping or insurance services. Relatedly, OFAC should clarify how the “transaction value” applies to facilitation cases, and whether OFAC would use the value of the transaction facilitated or merely the value of the services provided by the enforcement target.

Second, OFAC, in the course of determining the base penalty, could also consider a universal standard to value the course of the apparent violative conduct. Currently, OFAC’s regulations calculate the base penalty based on the sum of each transaction or the statutory maximum of each transaction, in some cases whichever is greater. Accordingly, the maximum penalty in egregious cases—for which OFAC uses the statutory maximum “per transaction” to calculate the base penalty—could vary dramatically if the goods or services were provided in a single transaction or split among many transactions. In the latter case, the statutory maximum would be multiplied by each transaction, potentially making it exponentially larger than the penalty for a single transaction involving the same amount of goods or money. For example, OFAC calculated the base penalty in the 2023 Binance case to be an eye-popping $592,133,829,398 (which was settled for less). OFAC could establish a universal method for considering the entire course of conduct, avoiding these wildly differing outcomes, but also considering more important factors such as the harm to the sanctions program and impact on the US financial system.

Third, just as many other enforcement agencies already do, OFAC could provide a consistent standard for crediting penalties paid to other US agencies or even foreign jurisdictions. As OFAC’s enforcement more regularly becomes part of a cross-agency enforcement effort, enforcement targets are often paying penalties to OFAC, the Department of Justice, New York’s Department of Financial Services, and other agencies for the same conduct. OFAC does take into account and credit all or part of these penalties to avoid duplicate civil enforcement for the same violations, but it has not publicized any standard for the circumstances in which it will do so. Similarly, as enforcement ramps up in the United Kingdom and within the European Union, OFAC could consider credit for penalties imposed by foreign authorities and articulate a standard for this type of credit.

Conclusion

As policymakers continue to rely on economic sanctions as a tool of first resort, sanctions enforcement must remain a central part of the policy process to maintain the tool’s efficacy. This starts with a more credible, resourced, and transparent enforcement capability. Increasing the budget, upskilling personnel, harmonizing internal protocols, expanding publicly available guidance, and revising regulations for sanctions enforcement will make meaningful improvements to the use of economic sanctions and provide a model for allies and partners to develop the full spectrum of sanctions capabilities.

David Mortlock is a nonresident senior fellow at the Atlantic Council Global Energy Center. He is chair of the Global Trade & Investment Group at the law firm Willkie Farr & Gallagher, where he focuses on sanctions, export controls, and other international trade issues, and managing partner of Willkie’s Washington office.

Alex Zerden is an adjunct senior fellow at the Center for a New American Security. He is the founder of Capitol Peak Strategies, a risk advisory firm focusing on economic sanctions, financial regulation, and illicit finance issues.

This article was informed by not-for-attribution roundtable discussions with economic sanctions and other subject matter experts. The authors would like to thank those who participated, including those listed below, though we recognize they do not necessarily share all the views expressed herein:  Justyna Gudzowska, John Hughes, Michael Mosier, Britt Mosman, Maura Rezendes, and Adam Smith.

Econographics Mar 20, 2024

Global Sanctions Dashboard: How Hamas raises, uses, and moves money

By Kimberly Donovan, Maia Nikoladze, Ryan Murphy, and Alessandra Magazzino

How Hamas raises, uses, and moves money; How sanctions are used to counter Hamas and combat the financing of terrorism; Where governments align and diverge in their approaches to combat this activity.

Economic Sanctions European Union

New Atlanticist Feb 22, 2024

Forging a positive vision of economic statecraft

By Daleep Singh

The United States must institutionalize how it uses economic tools in the context of today’s great power competition.

China Economic Sanctions

Report Sep 20, 2023

The US, EU, and UK need a shared approach to economic statecraft. Here’s where to start.

By Kimberly Donovan, Maia Nikoladze, Nicole Goldin, Mrugank Bhusari, Sarah Bauerle Danzman, Ambuj Sahu, and Daniel McDowell

The economic statecraft landscape is becoming more complex as transatlantic partners increasingly leverage the tools to counter transnational threats. There is a growing need to understand how these tools are used, by whom, and when, as well as their intended and real impacts worldwide.

Economic Sanctions Economy & Business

The post Sanctions have become a tool of first resort. But enforcement needs upgraded and updated resources. appeared first on Atlantic Council.

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Targeted human rights sanctions are, in short, a tool governments use to freeze the assets of and deny visas to those complicit in human rights violations. While they are generally intended to prompt offenders to change their behavior, they have additional effects. For example, preventing perpetrators from obtaining the tools needed to continue abuses and showing support for victims. However, the Atlantic Council’s Strategic Litigation Project (SLP) has heard from multiple sources that many people in affected communities—including the Iranian community—do not have sufficient information, especially in their native language, about these measures and what they mean.

Based on this feedback, this blog series was started to highlight important information about targeted human rights sanctions as they relate to the Islamic Republic of Iran; major updates on Iranian perpetrators who have been sanctioned for human rights abuses and why; and any other information that may be relevant to affected communities. Input is welcomed from readers, particularly in Iranian civil society, for questions and topics that should be addressed.

Since Mahsa Jina Amini’s death in 2022 and the resulting protests, the Islamic Revolutionary Guard Corps (IRGC) has been one of the main perpetrators of human rights violations in Iran. The IRGC is a security force of the Islamic Republic of Iran (IRI) headed by the commander-in-chief of the Iranian Armed Forces, Supreme Leader Ayatollah Ali Khamenei. It has been responsible for countless violations across a variety of contexts and has significant influence over domestic matters in Iran. In addition to the various sanctions that have been issued against the IRGC for human rights violations, there have been repeated calls for governments across the world to list it as a terrorist organization. This post looks at how terrorist organization listings are decided, the consequences, and how these are related to targeted human rights sanctions.

Which countries have listed the IRGC as a terrorist organization?

Of the main jurisdictions featured in this series—Australia, Canada, the European Union (EU), the United Kingdom (UK), and the United States (US)—only the US has listed the IRGC as a foreign terrorist organization (April 15, 2019). The Canadian government recently announced it is “looking at ways to ‘responsibly’ designate” the IRGC but has so far only listed a subsidiary of the IRGC, the Quds Force (December 17, 2012). Other countries that have listed the IRGC as a terrorist organization include Bahrain and Saudi Arabia.

What does a ‘terrorist organization’ listing mean and how does it compare to sanctions?

While each country has its definition, usually, this listing means the designated group is seen as being involved in terrorism in some way. A terrorist organization listing is similar to a targeted sanctions designation but involves different legal bases, processes, and consequences. As with targeted sanctions, these differ depending on the country making the listing and are detailed below for the main jurisdictions. Similarly, each of the main jurisdictions also has protections in place to uphold due process and other rights of the listed organizations and their members. In particular, each jurisdiction has policies mandating periodic reviews of listings and/or other de-listing or revocation processes. Unlike targeted sanctions, a terrorist organization listing opens the door for prosecutors to bring certain criminal charges for terrorism-related offenses against the organization’s members and associates, such as for the crime of membership in a terrorist organization.

What is the process for adding an organization?

As with targeted sanctions, the process for terrorist organization designations for all the main jurisdictions is mainly a discretionary decision by senior government officials. However, different criteria and different government agencies and officials are involved.

Australia: The minister for home affairs evaluates whether the criteria required in the Criminal Code Act 1995, Division 102 have been met and arranges a briefing for the leader of the opposition. The minister also seeks the agreement of the state/territory first ministers and advises the prime minister on the matter. Once this is complete, the governor-general “may make regulations to list” the organization.

Canada: Under the Anti-terrorism Act, once it has been established that there are “reasonable grounds to believe” that an entity was sufficiently involved in the terrorist activity, reports are submitted to the minister for public safety, who, if they are satisfied the “reasonable grounds” standard is met, may recommend that the governor in council place the entity on the list.

European Union: The EU has the most complex process as a multilateral organization. For the EU, there must first be a “decision” by a “competent authority” concerning “a terrorist attack, an attempt to perpetrate, participate in or facilitate such an act based on serious and credible evidence or clues.” A “competent authority” could be “a judicial authority, or, where judicial authorities have no competence… an equivalent competent authority in that area.” Those identified by the United Nations Security Council “as being related to terrorism and against whom it has ordered sanctions” may also be included.

According to the case law of the Court of Justice of the EU, administrative authorities could also be considered competent authorities so long as their decisions are subject to judicial review. This indicates that a sanctions designation by certain countries could be sufficient if adequate due process considerations are guaranteed.

Once a competent authority has made a decision, a member state of the EU or the high representative for foreign affairs and security policy (HR) can submit a proposal to be reviewed by the Working Party on restrictive measures to combat terrorism (COMET). After reviews and consultations, COMET then recommends the listing, or not, to the EU Council for adoption.

United Kingdom: The organization must first meet the proscription requirements in the Terrorism Act 2000. Then, the home secretary uses their discretion to determine if proscription would be “proportionate,” looking at factors including the “nature and scale of an organisation’s activities”; “the specific threat that it poses to the UK”; “the specific threat that it poses to British nationals overseas”; “the extent of the organisation’s presence in the UK”; and “the need to support other members of the international community in the global fight against terrorism.” If the secretary believes the requirements are met and it would be proportional, they may add the organizations to the list of Proscribed Terrorist Groups or Organisations.

United States: Under the Immigration and Nationality Act (INA) § 219, the US Department of State can designate groups as foreign terrorist organizations (FTO). This is based on three criteria: the group must be a foreign organization, must engage in “terrorist activity,” and that activity must threaten either the security of US nationals or US national security. To recommend a designation, the Department of State’s Bureau of Counterterrorism prepares an “administrative record” of information about a proposed foreign terrorist organization. The secretary of state consults with the attorney general and the treasury secretary in deciding whether to make a designation. The secretary of state, and barring any action to block the designation over a seven-day waiting period, the designation takes effect.

In a similar process under Executive Order 13224, both the State and Treasury departments, in consultation with the Department of Justice, can list, as a targeted sanction, “specially designated global terrorists” (SDGT). These designations cover a wider range of individuals and entities than are allowed under the foreign terrorist organization listing. Still, its effects are limited to those of targeted sanctions (in this case, freezing assets and prohibiting transactions). Unlike a designation as an FTO under the Immigration and Nationality Act, a designation as an SDGT under Executive Order 13224 cannot, for example, give rise to certain civil and criminal offenses related to terrorism. However, an SDGT designation may have other benefits compared to an FTO designation, such as better allowing the US government to engage in diplomacy with the organization.

What are the consequences of being designated as a terrorist organization, and why should the IRGC be listed?

In addition to the symbolic gesture, one of the main consequences of a “terrorist organization” listing is the availability of terrorism-related prosecutions both against members of the organization and against those supporting it. The specific crimes that involve terrorist organizations vary by jurisdiction but often include membership and supplying resources.

This means that, for example, an IRGC official arrested in an EU country could be prosecuted not just for atrocities committed in Iran—for example, torture and crimes against humanity—but also for membership in a terrorist organization. While there are policy reasons why it is important for prosecutors to try to bring atrocity-related charges, it can be difficult to establish the link between high-level officials and the relevant offenses and so terrorism-related charges may be easier to prove.

Further, some jurisdictions also allow for cumulative charges, which means they can bring different charges for the same underlying act. For example, if someone provided weapons used in an attack by the IRGC, they could be charged both with indirect liability—such as aiding and abetting—for atrocity crimes and could be simultaneously charged with “supporting” a terrorist organization. This increases the likelihood of conviction on at least one charge and, if both result in convictions, of a longer overall sentence. Additionally, for some countries—such as the US—there may be “less inhibition on exercising universal jurisdiction” over those supporting terrorist organizations as opposed to those committing other crimes.

Finally, the US requires financial institutions to “retain possession of or control over” the funds of a foreign terrorist organization or its “agent” and report the funds to the US government. It also prohibits entry to “[r]epresentatives and members” of the organization “if they are aliens.” In the EU, “EU external terrorist” organizations have their funds and financial assets frozen, and funds, financial assets, and economic resources cannot be made available to them directly or indirectly. In Canada, a listed entity’s property “can be the subject of seizure/restraint and/or forfeiture.” Neither the UK nor Australia implements asset freezes for domestic terrorist organization listings.

What are the arguments against listing the IRGC?

First, as with sanctions—targeted and otherwise—an IRGC listing risks imposing a burden on civilians through over-compliance and negative impacts on the Iranian economy without guaranteeing constraints on the IRGC’s behavior or significant effects on the “political elite.”

In addition, even with the domestic pressure to list the IRGC as a terrorist organization, leaders have voiced hesitation in taking that step. The UK, for instance, appeared willing to list the IRGC in early 2023 but has since indicated that it will instead expand the criteria for targeted sanctions to include violations that occurred inside the UK. It was reported that the UK’s Foreign, Commonwealth & Development Office worried that a terrorist designation would trigger the expulsion of the UK ambassador to Iran and that it knew that the EU was unlikely to make a parallel terrorist designation. It was also reported in February 2023 that US diplomats were urging the UK not to designate the IRGC as a terrorist organization, though the spokesperson for the US Department of State responded that such an approach by the US didn’t “ring true” to him and by October 2023 there were reports indicating the Joe Biden administration was urging the UK to make the designation.

Notably, the IRGC is distinct from most other listed terrorist organizations as it is a state military organization and is “constitutionally mandated.” In the United States, for example, no other country has military components which have been designated as FTOs.

Finally, Iran has compulsory military service, and conscripts were historically randomly assigned to branches—including the IRGC—which has impacted immigration for those who were conscripted decades ago. However, since 2010, about 80 percent of the IRGC’s conscripts actively choose to join the IRGC. There are further reports that conscripts can use bribes, “privileges,” and connections to avoid combat and that the IRGC, in particular, is “very corrupt.” Since 2010, over 70 percent of IRGC conscripts were already members of the Basij Resistance Force—a “volunteer paramilitary organization operating under” the IRGC—because the IRGC recognizes Basij training (reducing the total length of military service) and because Basij members are viewed as “more loyal” to the regime. Of the remaining 30 percent, some have postgraduate degrees with a “personal choice” of desk jobs due to their specialization. Finally, a “maximum 20 percent” are distributed to the IRGC “in some unprivileged and poor areas, due to the number of Basij members being insufficient.” Determining who falls into this category could be achieved through “filtering and determining [with] a special degree of scrutiny[…] on a case-by-case basis.” 

Celeste Kmiotek is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

Lisandra Novo is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

The post Iran targeted human rights sanctions series: Understanding ‘terrorist organization’ designations in relation to the IRGC appeared first on Atlantic Council.

This past October, the US Treasury sanctioned a network of financial facilitators managing a complex global investment portfolio for Hamas, with assets estimated to be worth hundreds of millions of dollars. These designations and subsequent actions likely disrupted Hamas’ finances and investments, but more importantly shed light on a persistent challenge: A heavily sanctioned entity, designated as a terrorist organization across multiple jurisdictions, was able to take advantage of the international financial system to raise, use, and move significant amounts of funds for its terrorist operations.

In this edition of the Global Sanctions Dashboard, we explore Hamas as a case study to illustrate how designated terrorist groups abuse the global financial system. We will walk you through:

• How Hamas raises, uses, and moves money;
• How sanctions are used to counter Hamas and combat the financing of terrorism; and
• Where governments align and diverge in their approaches to combat this activity.

How Hamas raises and moves money despite sanctions

Hamas has been designated as a foreign terrorist organization by the United States since 1997 and the group is now sanctioned by the European Union (EU) and Group of Seven (G7) allies to varying degrees. Governments have further sanctioned hundreds of individuals and entities associated with Hamas, and thousands more with ties to Iran, Hamas’ primary benefactor. Nevertheless, the group has been able to access the global financial system to amass a diverse stream of income from multiple sources.

In addition to extorting money from the civilian population of Gaza and receiving varying amounts of annual financial support from Iran, estimated to be as much as $100 million, Hamas has created a global investment portfolio valued between $500 million and $1 billion. This portfolio is invested in companies in countries including the United Arab Emirates (UAE), Turkey, and Qatar. Hamas has also effectively exploited the charitable sector and solicited donations from witting and unwitting donors using crowdfunding websites. The US Treasury recently noted that while Hamas and other terrorist groups prefer fiat currencies, there is a risk that they will turn to virtual assets as they lose access to traditional financial services.

Terrorist groups, such as Hamas, and other illicit actors use increasingly sophisticated money laundering techniques including smuggling cash and using shell companies to avoid detection and hide their involvement in financial transactions.

Who has sanctioned Hamas

Terrorist designation gaps across jurisdictions create vulnerabilities for the global financial system and may be one explanation as to how Hamas and its financial facilitators were able to operate within the system and with impunity.

Hamas is not designated as a terrorist group by the United Nations (UN). . . UN member states follow and implement UN designations of terrorist groups, including entities like al-Qaeda and the Islamic State of Iraq and al-Sham (ISIS or ISIL), among several others. However, the UN has not designated Hamas as a terrorist organization. Most countries do not have an autonomous terrorism sanction regime and rely on the UN terrorist designations to inform and justify their counterterrorism efforts.

. . .or sanctioned by the West’s partners. Treasury’s October tranche of designations included individuals and entities in Turkey, Sudan, and Qatar—jurisdictions that have not sanctioned Hamas and thus do not have legal restrictions that would prevent Hamas and its facilitators from accessing their financial systems.

There are gaps in sanctions designations among Western jurisdictions. Over the past thirty years, Hamas, in part or in its entirety, has been designated as a terrorist group by various countries in response to its terrorist activity and efforts to destabilize peace operations in the Middle East. Several governments originally only designated Hamas’ “military wing,” the Izz al-Din al-Qassam Brigades, and later began designating the entirety of the organization as a terrorist group.

The lack of a common narrative of what constitutes terrorism and the lack of a coordinated and unified multilateral effort on terrorist designations provide Hamas and other terrorist groups more freedom to operate and abuse sanction loopholes between jurisdictions.

Closing sanctions gaps

Following the October attacks and subsequent war between Israel and Hamas, international partners have come together to close gaps and improve multilateral coordination and enforcement of their sanctions regimes related to Hamas and other groups undermining peace and security in the region.

Engagement with partners in the Middle East. Treasury’s outreach to countries in the Middle East included convening an emergency meeting of the Terrorist Financing Targeting Center (TFTC), which was created in 2017 to enhance information sharing and collaboration on efforts to counter the financing of terrorism. TFTC is focused on the Middle East and includes the United States and the Gulf Cooperation Council (GCC) countries (Saudi Arabia, Qatar, Kuwait, Oman, Bahrain, and the UAE). Engagement with partners in the Middle East is critical to effectively disrupt and address terrorist financing by Hamas and other groups in the region, while working together to prevent further escalation of the Israel-Hamas conflict. It is important to note, however, that these countries have not explicitly designated Hamas as a terrorist organization, and based on recent sanctions, we know Hamas has used their financial systems to raise and move funds. The GCC countries need to take action to secure their financial systems, and thereby the global financial system from abuse by Hamas. There are political challenges at play, but the GCC should consider a Council-wide terrorist designation of Hamas, similar to the action it took against Lebanese Hezbollah in 2016.

Information sharing with the private sector. The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an alert for financial institutions providing guidance and red flags to help identify and subsequently report suspicious activities related to Hamas financing. Such suspicious activities include but are not limited to a customer that is:

• Transacting with an Office of Foreign Assets Control-designated counterparty,
• Transacting with a Money Services Business or other financial institutions located in high-risk jurisdictions of Hamas activity, or
• A charitable or nonprofit organization soliciting donations but not seeming to be providing any charitable services.

Alerts often help financial institutions understand what types of information FinCEN and other countries’ financial intelligence units (FIUs) are most interested in. This information is used to inform law enforcement investigations or national security actions, including financial sanctions. It is reasonable to estimate that the Hamas alert generated additional suspicious activity reporting from financial institutions within the US jurisdiction, which can help FinCEN and its partners identify potential terrorism financing activity related to Hamas.

Information sharing with foreign partners. Information sharing and coordination among FIUs is critical for disrupting terrorist financing. FIUs are national centers responsible for receiving and analyzing suspicious activity reports from financial institutions and publishing red flags and alerts to help them identify suspicious activity and protect their systems. The need to share information and develop a common understanding of the terrorist financing threat was acknowledged after the October 7 attack, when FIUs from Australia, Canada, Estonia, France, Germany, the United Kingdom, the United States, and other like-minded states created the Counter Terrorist Financing Task Force–Israel. In a public statement, this task force committed to expediting and increasing the sharing of financial intelligence in terrorist financing-related issues.

Designation of the Hamas network. In response to Hamas’ October attack, the United States and United Kingdom took coordinated action to designate individuals and entities involved in financing Hamas. The EU and other partners took action to shore up their existing sanctions regimes targeting the group and its facilitators. This is a needed step to counter Hamas and deny the group access to funds to finance its terrorist operations. However, allies need to go beyond Hamas and these specific designations. The terrorism threat is on the rise as a result of escalating tensions in the region. Lebanese Hezbollah is increasing rocket attacks in northern Israel, the Houthis continue to attack shipping vessels in the Red Sea, and other Iranian-backed groups have attacked US forces in Iraq, Jordan, and Syria, killing US soldiers. Allied nations must consistently prioritize counterterrorism and countering the financing of terrorism by aligning their sanctions, sharing information, and coordinating designations. Multilateral coordinated action will prevent terrorist groups from taking advantage of jurisdictional gaps between sanction regimes and will create clarity that helps financial institutions identify and report suspicious terrorist financing activity, which in turn can help governments take appropriate action.

Consider secondary sanctions. When partners do not align on terrorist financing risks, the United States should consider leveraging its secondary sanctions authority (pursuant to Executive Order 13224 as amended) to target the foreign financial institutions that continue to facilitate terrorist financing within the global financial system. The use of secondary sanctions sends a strong message that may deter third parties from providing material or financial support to US-designated terrorist groups and will unilaterally shore up gaps in international sanctions regimes that pose a threat to the US financial system.

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Ryan Murphy is a program assistant at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Alessandra Magazzino is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @alesmagaz.

Castellum.AI partners with the Economic Statecraft Initiative and provides sanctions data for the Global Sanctions Dashboard and Russia Sanctions Database.

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By targeting fossil fuel exports—the financial lifeline of the Kremlin’s regime—this response has had an impact. In January Russia’s seaborne oil product exports fell 8.6 percent from a year earlier and 2 percent from the previous month to 10.8 million metric tons, owing to lower processing capacity and unplanned repairs.

Drone strikes at critical processing and export facilities bring financial pain to Russia. Repairs are costly and time-consuming, especially because of sanctions that limit access to Western technology, which is making the replacement of destroyed equipment difficult.

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However, Ukraine’s efforts to repel Russian attacks would be made less challenging if Europe and the United States did even more to throttle Moscow’s oil and gas exports by utilizing the full power of sanctions.

The tragic loss of human life in Ukraine, including hundreds of children, is still too often paid for by cash that Russia receives from the export of oil and gas enabled by loopholes that persist in the sanctions regime imposed on Moscow by the United States and the European Union. Amid the ongoing struggle for peace and sovereignty in Ukraine, governments that believe in the rule of international law must do more. The United States, EU, and the Group of Seven (G7) industrialized nations should be consistent and strict in enforcing sanctions against Russian fossil fuels.

Western governments have strong tools to dry up the Kremlin’s war budget. They can do this by plugging the gaps in sanctions against Russian oil and gas exports, strengthening them further, and thereby severing the critical revenue stream supporting the Kremlin’s oppressive regime and its brutal war machine.

There are five specific actions that the G7 and EU can take in this direction: enforce price caps on Russian oil and oil products; prevent the expansion of Russia’s shadow fleet of oil tankers; close the refining loophole; fully ban Russian liquefied natural gas (LNG) imports; and take decisive actions to reduce demand for oil and gas in the long-term.

Civil society organizations are urging Western leaders to take these steps. More than 290 groups from across the globe addressed the G7 and EU leaders with this call in February, as Ukraine marked the tragic two-year anniversary of the full-scale invasion.

There is an urgent need to eliminate loopholes in sanctions against Russian fossil fuels to prevent further escalation of the Kremlin’s aggression in Europe outside of Ukraine.

The shadow of Russia’s military plans looms ominously. This is evident in the 2024 federal budget, with a staggering allocation of resources to the military-industrial complex, not seen since Soviet times. This is a startling shift in budgetary focus, with a third dedicated to the army. This militarization signifies a perilous path toward conflict intensification, threatening regional stability. In 2024, Russia’s “national defense” budget will expand to 10.8 trillion rubles ($110 billion), marking a 70 percent increase from 2023 and more than doubling from 2022. It is three times higher than the pre-war 2021 allocation.

Regrettably, Europe and the United States inadvertently contribute to this war chest. The refining loophole in Western sanctions against Russian oil exports, meticulously highlighted by Global Witness, remains a massive funding source feeding Russia’s aggression, a fact that should not be overlooked.

While Western governments have banned the imports of crude oil, petrol, diesel, and jet fuel that originate in Russia, their countries can still import refined oil products produced from Russian crude in other nations, like India, China, Turkey, or the United Arab Emirates. In 2023 sales of Russian crude oil to refineries in India went through the roof. These Indian refineries capitalized on selling the refined products to G7 markets, where direct supplies of Russian oil were banned. The refining loophole increases the demand for Russian crude oil and enables higher sales in terms of volume, while keeping its price up. As a result, the price of Russian crude oil does not collapse in the global market even with the Western sanctions.

OPEC members’ decision to restrict exports of additional volumes of oil to world markets benefits Putin, and contributes to Russia’s strategy to weaponize energy supply. The refining loophole also creates a space for cooperation between Russia and OPEC countries, which can import Russian oil to refine or mix it with other blends of crude to conceal origin and profit from it.

Similarly, Europe still buys significant volumes of Russian natural gas, not so much through pipelines, but increasingly in the form of LNG. Key Russian LNG importers such as France, Spain, and Belgium have little excuse for continuing to do business with Russia. The gas storage in Europe is ample, and projections indicate an energy surplus bolstered by record-breaking clean energy expansion and alternative LNG supplies set to come online in 2024.

In total, since the start of the full-scale invasion in Ukraine on February 24, 2022, Russia has amassed more than $650 billion in profits from fossil fuel exports. Yet, if international sanctions on Russia’s fossil fuel industry are maintained and rigorously enforced, the International Energy Agency projects that the Kremlin’s profits from oil and gas could plummet by 40 to 50 percent by 2030.

The West has to act collectively to cripple the Kremlin’s fossil fuel export lifeline to help end the war in Ukraine faster. The future of Ukraine’s security and human dignity hinges on this critical moment of action, and world leaders must take action now to stop funding Russia’s aggression.

Svitlana Romanko, Founder and Director of Razom We Stand

Oleh Savytskyi, Campaigns Manager at Razom We Stand

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It is impossible to put a price on this death and destruction, of course. Nevertheless, there is no escaping the financial dimension of Russia’s invasion. Every single month, Ukraine requires billions of dollars from partners to fund the war effort, balance the state budget, and keep its economy afloat. In the coming years, the bill for the reconstruction of the country is expected to be in excess of $500 billion. These are truly staggering sums. Making Russia pay would be the most sensible solution, from both a moral and practical perspective.

There is believed to be at least $300 billion in Russian assets currently frozen in the West. Discussions have been underway since the early stages of the invasion over possible mechanisms for handing these assets over to Ukraine. In recent months, the idea of using Russian funds to finance international support for Ukraine has gained momentum, with a range of parallel initiatives unfolding in the US, the EU (which holds the biggest share of frozen Russian assets), and among the G7 group of leading industrialized nations. Multiple different options are currently being explored, from directly transferring funds to Ukraine, to using frozen Russian assets as collateral for bonds.

It is now vital for individual countries to draw up and implement the necessary legislation at the national level, while also coordinating with global initiatives to create legally solid foundations for the transfer of frozen Russian assets to Ukraine. This task must be approached with a sense of urgency that reflects the scale of the challenges facing Ukraine, while also underlining Russia’s criminal responsibility for what is by far the largest and bloodiest European invasion since World War II.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

Critics of asset seizures have argued that any attempt to hand over Russia’s frozen assets to Ukraine could undermine faith in the international financial system while potentially deterring state bodies and private investors from the Global South from putting their money in the West. However, these concerns are overblown.

Much as the Kremlin would like to make this an issue of global confidence in Western financial institutions, any autocrats with major concerns would have been more likely to withdraw their money from Western jurisdictions in early 2022 when Russian assets were first frozen. That did not happen, in part due to recognition of the exceptional circumstances, and partly as there were no viable alternatives to Western currencies and assets. This remains the case, despite very public discussions over the possible seizure of Russia’s frozen assets.

Others have warned that Russia would almost certainly retaliate by confiscating assets belonging to Western governments and businesses. This, too, is not a serious argument against using Russia’s frozen assets to help Ukraine. The Kremlin is already applying a range of tools to seize Western businesses and assets located inside Russia, without any apparent need to justify such actions by pointing to the loss of its own frozen assets in the West. Companies that chose to invest in Putin’s Russia did so knowing this involved a high degree of risk. They cannot now realistically expect the international community to frame its response to Russia’s invasion around their narrow commercial interests, especially in light of the obvious ethical issues involved.

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From a pragmatic perspective, the argument in favor of seizing Russian assets and transferring them to Ukraine is compelling. Western support for Ukraine is expensive, with the international coalition of countries backing the Ukrainian war effort already contributing hundreds of billions of dollars over the past two years. As Ukrainian officials have rightly noted, this is not charity. On the contrary, Ukraine is fighting to defend the security and values of the entire Western world. If Russia is not defeated in Ukraine, the cost of stopping Putin will rise dramatically. It is therefore entirely reasonable to expect Western countries to back Ukraine financially.

At the same time, the very large sums involved are perhaps inevitably making Ukrainian aid an increasingly contentious domestic issue in countries across the West. Amid a widespread cost of living crisis and sluggish economic growth, many Western taxpayers are uncomfortable seeing so much money being sent to Ukraine. Kremlin allies are already seeking to exploit this mood, as are opponents of further Western aid to Ukraine. Using confiscated Russian assets would ease the burden on Western countries and silence critics who complain of paying the price for the Kremlin’s war.

Crucially, the seizure of Russia’s frozen assets is morally justified. Russia’s invasion of Ukraine is widely acknowledged as a war of aggression and has been condemned in numerous UN votes. International investigators have documented evidence indicating thousands of individual Russian war crimes, while Vladimir Putin himself has been indicted for war crimes by the International Criminal Court in the Hague. Failing to hold Russia financially accountable for the invasion would make a mockery of the entire notion of a rules-based international order.

Those expressing concerns over the legality of asset seizures or the possible implications for financial stability must recognize that time is running out. Their navel gazing is already preventing Ukraine from being able to defend itself properly and is costing Ukrainian lives on a daily basis. Urgent progress is particularly necessary as we are now approaching a period of geopolitical uncertainty, with an unprecedented number of elections set to take place around the world in the coming months.

Finding the right formula to fund Ukraine with Russia’s frozen assets should be an international priority. This will reduce the financial pressure on Western countries and undermine economic arguments against continued international support for Ukraine. Most of all, it should be pursued on moral grounds. Bringing Russians to justice for their crimes in Ukraine and transferring Russian assets located in the West to Ukraine are two very concrete steps to support Ukraine’s victory. States guilty of violating international law should be punished and held financially accountable. This would bolster the rules-based international order and send a clear message that any country embarking on wars of aggression can expect to pay a very high price for doing so.

Paul Grod is President of the Ukrainian World Congress.

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The numbers don’t lie. Two years after Russian President Vladimir Putin launched his full-scale invasion of Ukraine on February 24, 2022, the humanitarian and economic costs to Ukraine have been immense. But the war has also wreaked devastating self-inflicted wounds on Russia, including catastrophic casualty rates, growing economic isolation from the West, and the mass emigration of skilled workers. Below, our experts quantify the staggering human and economic toll that the invasion of Ukraine has cost Russia since the war began.

The autocratic regime of Vladimir Putin is doubling down on fear, a trend that has accelerated since Russia’s invasion of Ukraine two years ago. This dynamic was dramatically demonstrated by the suspicious death of opposition leader and anti-corruption activist Aleksei Navalny last week in a Russian prison. It is also borne out by the numbers. According to data from the human rights organization OVD-Info, which compiles statistics on political persecution in Russia, there are currently 892 criminal cases against anti-war dissidents, and a total of 19,855 people have been detained at anti-war protests. The OVD-Info data also show a sharp uptick in Russians being detained for political reasons since the invasion. Of the 3,626 people in Russia subject to politically motivated prosecutions since 2012, more than one third, a total of 1,305, have come in the past two years (728 in 2022, 521 in 2023, and 56 thus far in 2024). The Kremlin’s decision to double down on fear is in fact a function of its own fear. Political change in Russia tends to come when three factors are present: a divided elite, a disaffected public, and an absence of fear. The Putin regime appears determined to assure that for the foreseeable future, fear will not be in short supply.

—Brian Whitmore is a nonresident senior fellow at the Atlantic Council’s Eurasia Center, an assistant professor at the University of Texas-Arlington, and founder and host of “The Power Vertical” podcast.

Launching the full-scale invasion of Ukraine led Russia to lose a significant natural gas market share and revenues in Europe. In 2024, Russia’s projected loss stands between twenty-seven and thirty-four billion dollars (assuming a price of seven to nine dollars per one million British thermal units of Dutch TTF gas). For context, these figures track closely to Russia’s planned spending on education and health care in 2024, allocations that have dropped as funding was diverted toward Moscow’s brutal military campaign.

Ironically, Europe’s race to phase out coal while maintaining industrial competitiveness would have led to an increase in Russian gas exports to the continent had Putin chosen economic prosperity over bloody, unprovoked aggression. This increase would have occurred regardless of whether the Nord Stream 2 pipeline came online. Moscow would have been on course to ship more than 184 billion cubic meters (bcm) of gas to Europe in 2024, according to an assessment by Rystad Energy that will be featured in a forthcoming Atlantic Council Global Energy Center report. Instead, Russia sent around 72 bcm piped and liquefied natural gas in 2023—a number that’s expected to remain steady this year unless new limits or sanctions are put in place. These figures speak to the unprecedented pivot from Russian energy sources in Europe as well as the urgent need for Europe to fully decouple from Russian supply chains. Energy exports remain the main mechanism for Russia’s ability to finance two years of a full-fledged war in Ukraine, as almost a third of Russian revenues comes from the oil and gas sectors.

—Olga Khakova is the deputy director for European energy security at the Atlantic Council’s Global Energy Center.

As of December 2023, 315,000 Russian troops have been killed or wounded in Ukraine, according to declassified intelligence shared with Congress. With a ground force of 360,000 prior to the invasion, Russia has expended almost 90 percent of its prewar troops, an unimaginable loss for a country that has claimed to be the world’s second-strongest military. Russia’s highly attritional tactics, which often include pushing troops forward to the point of inoperability before being rotated out, have also included the use of human wave attacks, in which Russia engages in offensive efforts around places such as Bakhmut and Avdiivka by throwing masses of poorly trained and poorly armed Russian soldiers onto entrenched Ukrainian positions.

To put these numbers in context, Russia’s losses in the recent four-month campaign for Avdiivka, according to figures provided by Ukraine’s military, were greater than the Soviet Union suffered in its decade-long war in Afghanistan.

Russia’s high casualty rates in this war have acutely set back its fifteen-year-long effort to modernize its ground forces as Russia has taken “extraordinary measures” to sustain its fighting capacities, including the recruitment of convicts and older civilians. As long as Ukraine stays in the fight, Russia is likely to have irrevocably lost its force quality for the duration of this war.

—Olivia Yanchik is a program assistant with the Atlantic Council’s Eurasia Center.

In 2022, 10 percent of the information technology (IT) workforce left Russia, along with more than one thousand Western firms. The IT sector is vital to the Russian economy, having driven nearly a third of the country’s growth since 2015. In the months following the invasion, Moscow offered lower income taxes and mortgage rates to IT workers to retain talent. Yet these measures failed to stop more than one hundred thousand of these young, highly-educated professionals from leaving the country. According to the Russian minister for digital development, the IT sector now faces a shortfall of over half a million workers.

The effects of a growing “brain drain” are compounded by the exit of Western tech firms such as IBM, Intel, Microsoft, and others. Prior to the invasion, the sector was heavily reliant on Western inputs from semiconductors to operating systems. With access to Western technology severely hindered by sanctions, few domestic alternatives exist, and Chinese technology has proven an imperfect and costly substitute. The sector is now deprived of access to global connectivity, research, scientific exchanges, and critical technology components, and in the long term is likely to fall behind other global powers such as the United States, China, and the European Union (EU).

—The Economic Statecraft Initiative within the GeoEconomics Center publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests. This post is adapted from the Economic Statecraft Initiative’s Russia Sanctions Database.

As of today, 444 individuals are currently designated foreign agents and undesirable organizations. Russia has used its foreign agents law to designate these groups and entities “foreign agents” under legislation that allows it to punish individuals and target groups for allegedly receiving support from outside of Russia or operating under foreign “influence.” The undesirable organizations law also allows Russia to completely ban entities deemed “undesirable” for supposedly compromising Russia’s defense or security capabilities or “constitutional order.” A total of 535 groups and individuals have been designated under these laws and placed on foreign agent and undesirable organization registries since 2022, comprising a majority of the total 920 designated since 2013, some of which are no longer currently listed. 

Since launching its full-scale invasion of Ukraine, the Russian government has expanded and applied these laws extensively to crack down on independent media, civil society organizations, and other entities and individuals perceived as threatening to the Kremlin’s grip on power and war effort. Liberal use of the purposefully vague language of these laws has given the Russian government nearly unfettered power to silence opposition, eliminating the space for free expression and limiting social, political, and humanitarian work in and with Russia. Consequently, these laws have taken a massive toll on civil society and deprived Russians of access to information—particularly damning as the Kremlin works to mask the realities of its brutal war in Ukraine under a veil of pro-Kremlin and pro-war propaganda narratives.  

—Mercedes Sapuppo is a program assistant at the Atlantic Council’s Eurasia Center.

In the weekend following February 24, 2022, the Group of Seven (G7) nations decided to ban transactions servicing the Russian Central Bank (CBR). The measure—implemented by the entire EU and a handful of other like-minded partners—keeps this money out of Moscow’s reach. The assets have not been frozen. Indeed, uncertainty remains on where a minority of the funds are. Still, we now know much more than even the US government did on the first anniversary of the invasion, and it is now clear that the block is working.

To arrest the ruble’s depreciation, CBR Director Elvira Nabiullina was forced to implement capital controls, which she had always ruled out prior to Russia’s full-scale invasion. Had the G7’s ban not been in place, she could instead have used the reserves to intervene in currency markets. Breaking the taboo on capital controls will cost in the long term as foreign investors will always remember that they may struggle to transfer returns out of Russia.

Moscow has practically written the money off. Two G7 statements say the block will only be lifted if Russia retreats behind Ukraine’s 1991 borders and pays compensation for the damage it has wrought, so the money will not come under Russia’s control any time soon. While simply using the assets for Ukraine’s reconstruction remains unlikely for now, the European Council has recently agreed to transfer the interest income and the principal may also be used to help Ukraine borrow more cheaply.

—Charles Lichfield is the deputy director and C. Boyden Gray senior fellow, of the Atlantic Council’s GeoEconomics Center.

The Ukrainian Office of the General Prosecutor has 685 suspects in its main case of aggression, including ministers, deputies, military commanders, officials, heads of law enforcement agencies, and “instigators of war and propagandists of the Kremlin.” It has 125,698 registered crimes of aggression and war crimes, and as of November 14, had completed war crimes trials against 238 military personnel.

For the situation in Ukraine, the International Criminal Court (ICC)’s Office of the Prosecutor (OTP) has only two public suspects, both accused of war crimes. There are plenty of reasons for the disparity. The ICC is a court of last resort, operating on the principle of complementarity. It also is required to focus on the parties that “bear the greatest responsibility,” which is generally not a requirement and is often difficult to pursue within domestic courts given immunities.

The OTP is likely to release more arrest warrants in coming years while balancing other investigations. Meanwhile, the Ukrainian general prosecutor can continue to develop capacity, working with the OTP and allied countries to best divide responsibilities and hold fair and efficient proceedings. Jointly, the resulting arrest warrants will help ensure that Russian perpetrators either will be unable to travel freely or will face trial.

—Celeste Kmiotek is a staff lawyer for the Strategic Litigation Project at the Atlantic Council.

G7 coalition members imposed the oil price cap in December 2022 with the goal of minimizing Russia’s oil revenues. For the first few months of 2023, the price of Russian oil remained below the cap of sixty dollars per barrel, which was taken as a sign of this novel measure’s success. However, the policy came under scrutiny in September 2023 when the oil price exceeded eighty dollars per barrel.

The oil price cap has reduced revenues for Moscow, but enforcement challenges have undermined its effectiveness. To circumvent the price cap, Russia reduced reliance on G7 shipping services, and switched to the use of “shadow fleet” tankers. Shadow fleet tankers allow Moscow to charge higher fees for oil and manipulate vessels’ locations. The lack of information on beneficial (actual) owners of tankers and complex ownership structures of maritime companies have made it difficult to counter Russia’s circumvention efforts.

The US Treasury Department is addressing these enforcement challenges by building compliance capacity in the maritime industry and also sanctioning the price cap violation networks. On February 1, the Price Cap Coalition published the Oil Price Cap (OPC) Compliance and Enforcement Alert, which provides an overview of key OPC evasion methods and guidance on how to report suspected breaches across the Price Cap Coalition. One week later, the Treasury’s Office of Foreign Assets Control designated a network of four entities based in the United Arab Emirates and Liberia and one tanker registered in Liberia because of their involvement in the price cap violation scheme. The combination of capacity-building measures and targeted designations of the evasion network is likely to enhance the effectiveness of the price cap and further reduce Moscow’s oil revenues. 

—The Economic Statecraft Initiative within the GeoEconomics Center publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests. This post is adapted from the Economic Statecraft Initiative’s Russia Sanctions Database.

The Soviet Union, which Putin so often laments the collapse of, was a powerhouse in the Olympics. During its existence, more than 1,700 Soviet athletes won an Olympic medal in sports ranging from weightlifting to table tennis. Individual triumphs, such as Belarusian Olga Korbut in gymnastics in 1972, generated awe and admiration around the world—even in the anticommunist West. For the Soviets, the Olympics were a way to attract positive attention and accrue soft power.

In a little more than 150 days, 4,600 athletes will descend upon Paris for the 2024 Summer Olympics. According to the most recent count, just six Russian and five Belarusian passport holders will compete. By the opening ceremony, these numbers may rise somewhat if more athletes qualify, but none will compete under the Russian flag, and none will hear the Russian national anthem on the medal stand.

After Russia’s full-scale invasion of Ukraine, the International Olympic Committee (IOC) condemned the “senseless war.” Russians were banned from competing in the Olympics under their own flag, as were Belarusians for their country’s role as a staging ground for Russia’s invasion. In December 2023, the IOC announced that some qualifying Russian and Belarusian passport holders could still compete in Paris, but they must do so under the banner of Individual Neutral Athletes.

In his marathon end-of-year address, Putin whinged to his captive audience that the “very idea of Olympism has been tarnished.” He’ll just have to settle for watching the more than sixty Ukrainian athletes competing in Paris.

—John Cookson is the editor of the Atlantic Council’s New Atlanticist section.

The post The toll on Russia from its war in Ukraine, by the numbers appeared first on Atlantic Council.

In the immediate aftermath of the invasion, a combination of G7 sanctions and export controls, as well as broad moral outrage, caused Western exports to fall some 63 percent from their pre-COVID, 2019 average. Though G7 exports to Russia did make a slight recovery in the second half 2022, they have since fallen to new lows. In the final months of 2023, G7 exports to Russia were valued at just 28 percent of their 2019 average. Since then, however, Moscow has been able to substitute its long standing trading relationships with the G7, and most importantly the EU, with China. Today, China exports more to Russia than the entire European Union (EU), Russia’s former largest trading partner, did pre-COVID.

However, the EU and broader G7 coalition are still sending Russia around $3.2 billion in goods a month in 2023. What are they still selling to Russia? And what are the products that Beijing is producing and trading with Russia that have since made it Moscow’s most important trading partner? 

What is the G7 still trading with Russia? 

Over the past two years, a coalition of countries, dominated and led by the G7, has implemented the largest sanctions and export controls regime ever imposed on a major economy. This has severely restricted, and in some cases halted, the export of a range of goods to Russia including aviation and space equipment, raw materials, and certain industrial machinery.

In addition to suspension in trade of explicitly controlled items, more than 1,000 companies have voluntarily restricted their operations in Russia or engagement with Russian firms and consumers beyond the minimum legal requirements. The combined impact of this has been a precipitous drop in trade between Russia and the West with exports dropping from around $9.3 billion a month in 2019 to $3.2 billion a month in 2023. 

While total exports from the G7 to Russia fell by around 65 percent in the first eleven months of 2022 when compared with the same time period in 2019, certain goods categories were more impacted than others. In line with the formally-controlled goods categories, the strongest-hit export categories were transportation goods such as air and spacecraft falling 99.6 percent, boats falling 99.4 percent and cars falling 83 percent; raw materials such as iron and steel falling 92 percent; chemicals such as dyes and paints falling 93.3 percent; electrical machinery and electronics 90 percent; and rubber falling 87 percent. (For a full overview see this table.) 

Many of the least-impacted goods were either foodstuffs and pharmaceuticals—two categories that are exempt from sanctions or export controls to avoid causing humanitarian crises. Total G7 food and animal product exports have still fallen by around 15 percent from 2019 to 2023 though pharmaceutical exports remain the same from 2019. 

The EU has felt the brunt of these trade restrictions. Though the United States has experienced a larger percentage drop in export value—falling 90 percent from $484 million a month in 2019 to $48 million a month in 2023—the absolute effects were relatively benign for an economy that, in 2019, exported $212 billion a month. In contrast, for many EU member states like Latvia and Lithuania, Russia still is an important export market. In 2019, EU exports comprised 85 percent of total G7 exports to Russia, or around $7.7 billion a month. By 2023, monthly EU exports had fallen by nearly $5 billion to $2.9 billion a month. 

This exemplifies the disproportionate economic impact the war in Ukraine has had on European countries compared to the broader G7. It also explains EU resistance to additional G7 trade restrictions, such as efforts last year to shift the current sector-by-sector controls regime to a complete export ban with only a few exemptions.

What is China now exporting to Russia?

As Russia’s importing relationships stabilized throughout 2023, it has become increasingly clear that new Chinese exports to Russia have replaced the lost EU imports. While EU exports have fallen by just under $5 billion a month from 2019 to 2023, Chinese exports have risen by just over $5 billion a month growing from $3.9 billion to $9 billion a month over the same time period.