May 31, 2017

Congress’s Options to Punish Russia and Deter Interference in Western Elections

By Peter Harrell

Russia’s aggressive campaign to interfere in U.S. and Western elections poses a major threat to the basic rules of U.S. democracy. In the United States, Russia’s campaign against the 2016 presidential election included hacking into and releasing the emails of the Democratic National Committee and of Hillary Clinton Campaign Chairman John Podesta, the use of “bots” to spread false stories on social media, and attempted intrusions in state elections systems. In Europe, Russia’s campaign appears to have included hacking the emails of French President Emmanuel Macron’s campaign and stepped up cyberattacks on politicians and political parties across Europe.

Regardless of whether Russia’s actions in fact affected the outcome of the 2016 presidential election, Russia’s attack on the foundation of U.S. and European democracy merits tough, effective new sanctions as a part of a comprehensive strategy to push back on Russia and deter other authoritarian governments that might consider intervening in Western democratic processes.

While existing U.S. and European sanctions on Russia have had economic impacts on Russia, there is ample room for escalation. Given there are national elections in Germany later this year and less than 18 months remain until the 2018 U.S. midterm elections, Congress should move quickly to enact new sanctions that punish Russia for its intervention in democratic elections and deter other governments from seeking to intervene in Western elections.

Existing U.S. Sanctions on Russia

Existing U.S. sanctions on Russia date mostly to 2014 and were designed to punish Russia for annexing the Crimean peninsula and supporting armed separatists in eastern Ukraine. Current sanctions prohibit lending to many large, state-owned Russian banks and energy companies; prohibit the provision of high-end energy development technology to Russia deepwater, arctic, and shale oil projects; and freeze the assets of various Russian military and defense companies. In addition, in December 2016 former President Obama imposed sanctions on a number of Russian officials involved in Russia’s intervention in the U.S. presidential election as well as on two Russian intelligence agencies, the FSB and the GRU.

Although it is difficult to separate the economic impact of U.S. and European sanctions on Russia between 2014 and 2016 from the decline in global oil prices during the same period, in 2015 the IMF estimated that sanctions cost Russia’s GDP approximately 1–1.5 percent, and there is also evidence that the sanctions have impacted individual sanctioned Russian companies. However, Russia has increasingly found ways to compensate for the sanctions, such as turning to non-Western lenders for financing, and Russia experienced modest economic growth at the end of 2016 and Russian GDP is expected to grow in 2017.

Principles for Escalated Sanctions

In drafting new sanctions to punish Russia for its meddling in U.S. and European elections, Congress should be guided by several important principles:

Additional pressure needs to hurt: Congress should treat Russia’s interference in U.S. and other Western elections at least as seriously as U.S. and EU officials treated Russia’s military intervention in Ukraine. Regardless of whether Russia’s intervention in 2016 actually changed the outcome of the U.S. elections, Russian intervention profoundly eroded Americans’ trust in the U.S. government and represents a direct assault on the foundation of American democracy. Russia’s intervention in elections is at least as serious a threat to the United States as Russia’s military adventurism in Ukraine, and the U.S. response should reflect that. Sanctions enacted to punish Russia for its intervention in U.S. and European elections should aim to inflict economic costs at least as great as the economic costs inflicted on Russia over its intervention in Ukraine, e.g., equal to or more than 1.5 percent of Russian GDP.

Seek European support: By moving quickly to increase pressure on Russia, Congress and U.S. diplomats have an opportunity to secure European support for an increase in economic pressure on Russia. Existing EU sanctions on Russia must be renewed every six months, with the next renewal due in July. Until recently most experts thought the major EU debate this summer would be whether the EU should renew the existing sanctions in full or whether the EU should partially relax them. However, Russia’s support for Syrian President Bashar al-Assad’s April 2017 gas attack on Syrian civilians, Russia’s hacking of French President Macron’s campaign in early 2017, and rising fears of Russian meddling in Germany and other EU countries creates the potential for Europe to join the United States in punishing Russia for its assaults on Western democracy. Congress as well as the State and Treasury departments should seek EU support for expanding sanctions on Russia.

Build for the long term: Given Russia’s increasingly aggressive posture globally, the United States is likely to be in a period of confrontation with Russia for as long as Vladimir Putin remains Russia’s ruler. Congress should enact sanctions that have the potential to impact Russia over the long term, not just the short term.

Specific Sanctions Options for Congress to Consider

Congress should consider a number of specific sanctions to put increased pressure on Russia in response to its intervention in U.S. elections. These include:

Sanction the purchase of new Russian sovereign debt: Existing U.S. and European sanctions prohibit companies from purchasing new debt issued by a number of large Russian energy companies and banks, but do not currently prohibit the purchase of new Russian sovereign debt. In early 2017 Russia announced plans to issue Euro-denominated bonds for the first time since 2014. If the Russian government is able to re-enter global capital markets, its ability to borrow will help Russia offset some of the pressure from existing financial sanctions on its state-owned companies.

Close loopholes that let Russia access financing: In addition to sanctions on the purchase of Russian sovereign debt, Congress should enact sanctions prohibiting U.S., European, and other countries from offering Russia large advance payments for future oil and other commodities deliveries. For example, Rosneft has turned to such “prepayment deals” as a way of raising capital since Western sanctions prohibited it from issuing bonds in the United States and Europe.  New U.S. sanctions should close this loophole.

Prohibit lending to additional state-owned Russian companies: Existing U.S. sanctions prohibit lending to large Russian state-owned energy companies and banks. Other large Russian state-owned companies, however, remain largely unaffected by the sanctions and can continue to borrow on international markets. New U.S. sanctions should shut down lending to large Russian state-owned companies in other sectors, such as mining and transportation.

Tighten pressure on Russia’s energy sector: Despite U.S. and EU sanctions targeting Russia’s ability to develop its arctic, deepwater, and shale-oil energy resources, in 2016 Russia was able to increase oil production to near post-Soviet highs and has steadily increased production since sanctions went into effect in 2014. Russia has done this in part by using fracking technology, including fracking technology developed by Western energy firms, to expand production in conventional oil fields and in tight-oil formations that are not covered by the existing ban on providing such technology to shale-oil production. New sanctions should ban the provision of specific high-end enhanced recovery techniques that Russia cannot easily obtain from domestic Russian suppliers to oilfields in Russia, regardless of the type of field that the technologies are used in.

In addition, some European energy companies appear to be taking advantage of loopholes in EU sanctions that allow them to continue participating in arctic, deepwater, and shale oil projects in Russia as long as the projects were begun prior to the sanctions being enacted in 2014. Congress should mandate broad U.S. sanctions against these companies unless they commit to ceasing their involvement in these Russian projects and wind down their activities.

Restrictions on large investments by Russian energy companies outside of Russia:  Major Russian state-owned companies have announced a number of large acquisitions of strategic assets outside of Russia since 2014. For example, in late 2016 Rosneft announced plans to acquire 49 percent of Essar, one of India’s largest refineries. There is also a chance that Rosneft may acquire U.S. gas retailer CITGO from Venezuela’s PDVSA, given loans that PDVSA owes Rosneft. Given Russia’s history of acquiring international energy assets for strategic purposes, new U.S. sanctions should seek to block Russian energy companies from taking new large stakes in strategically-important energy assets outside of Russia.

Sanction Russia’s defense and intelligence sectors: Existing sanctions on Russia’s defense sector have already begun to impair Russia’s planned military modernization program. The sanctions have both denied Russia access to important international component parts and put sufficient fiscal pressure on Moscow that Moscow has reduced planned military expenditures. The United States also blacklisted two of Russia’s intelligence agencies, the FSB and the GRU, in December 2016 in response to Russia’s intervention in the U.S. election. Congress should consolidate these sanctions by codifying them in statute and by enacting secondary sanctions against the sale of goods to blacklisted defense and intelligence firms to prevent Russia from turning to other international suppliers for component parts.

Tighten pressure on Putin’s cronies: Finally, the United States should escalate the pressure on some of Vladimir Putin’s closest associates. The United States sanctioned several of Putin’s long-time cronies in 2014, including the Rotenberg brothers, Gennady Timchenko, and Igor Sechin, and the EU also imposed sanctions on a handful of Putin’s cronies. But unlike Iran, where the United States actively threatens sanctions against foreign companies that do business with blacklisted Iranian entities, such as Iran’s Revolutionary Guards, U.S. sanctions do not currently prohibit foreign companies from dealing with Putin’s cronies. Congress should crank up the pressure on Putin’s cronies by enacting new sanctions on foreign companies that continue to do business with them. 

Deter Future Intervention

In addition to punishing Russia for its intervention in the 2016 U.S. presidential election and the elections of treaty allies like France, Congress needs to enact new measures to deter Russia and other foreign governments from intervening in U.S. elections in the future. Foreign governments need to understand that future intervention in U.S. elections will trigger swift, tough consequences.

Congress can deter future intervention by establishing a new sanctions regime that would automatically impose sanctions on foreign governments that engage in illicit intervention in U.S. elections. Specifically, Congress can charge the intelligence community to report periodically on foreign government efforts to illicitly intervene in U.S. elections, such as by hacking the accounts of political candidates, cyberattacks against state elections officials, and other illicit tools. If the intelligence community reports that illicit foreign intervention is occurring, the Treasury Department would be directed to automatically impose economically significant sanctions on the responsible government.

While this approach to sanctions would give the executive branch less discretion than it generally has with respect to imposing sanctions, given the potentially severe consequences that arise when a foreign government illicitly intervenes in out elections, it is appropriate for Congress to take the lead and minimize executive branch discretion on the issue. 

Conclusion

Russia’s attacks on the U.S. elections in 2016 and European elections this year bring home the reality of a new kind of threat to the United States and to its Western allies. A failure to respond to this threat will only encourage Russia and other adversaries to double down on their efforts to attack democratic institutions. Congress needs to enact a strong, forceful response to punish Russia and to deter illicit intervention in U.S. elections and to protect elections in the years to come.

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