Over the last decade, the United States has sharpened its extraterritorial financial swords to punish international actors that violate U.S. laws and international norms, and such sanctions did encourage Iran to negotiate the original Joint Comprehensive Plan of Action. These include sectoral sanctions which make capital markets an important battleground. But Russia is a major power, unlike Iran, boasting the world’s sixth-largest economy (measured in purchasing power parity; eleventh in market rates), a current account in surplus, and a war chest of more than $625 billion in financial reserves. Moscow also adeptly managed to resume issuing Eurobonds in 2016 and again in 2018 with provisions for repayments not just in U.S. dollars, but in some circumstances in euros or Swiss francs, and even Russian rubles at the U.S. dollar exchange rate set by the Russian Central Bank. This puts Western bondholders at risk of a substantial haircut if sovereign debt sanctions trigger a Russian “alternative payment currency event” in repayments. U.S. banks have been barred from participating in the primary market of Russian government debt issuances since August 2019, but Russia continues to sell Eurobonds. Some experts further underscore how more extreme sanctions on Russian foreign debt will negatively impact Western financial institutions while Russian authorities restructure their liabilities.

If Putin escalates the war over Ukraine, and the United States counterattacks with financial weapons, Russia will suffer severe economic costs. Yet both the regime and the nation will survive, just as they did after four previous economic shocks all experienced by Putin’s generation—most notably the 1991 collapse of the Soviet Union when the stagnating Soviet economy was hit by a perfect storm triggered by a collapse of world oil prices, the depletion of Soviet currency reserves, and the country’s final death spiral. Weeks then separated the country from bankruptcy, nonpayment of its foreign debt, and severe food shortages. Among the documents that Yegor Gaidar unearthed for his landmark study, Collapse of an Empire, was one from the Vneshekonombank [Foreign Economic Bank of the Soviet Union], which notified the leadership that the Soviet state had not one cent remaining in its coffers. This calamity was followed by the 1998 currency shock and Russian default, the 2007 global financial crisis, and a fourth economic shock in 2015 coinciding with a plunge in oil prices and the value of the Russian ruble, and the imposition of Western sanctions.

It is also worth remembering that when Putin assumed power in 1999, Russia had less than $13 billion in hard currency reserves and faced $133 billion of foreign debt. More than most leaders, Putin understands there is a lot of ruin in a nation and how to come out on the other side. Among other steps, the Russian leader is undoubtedly instructing Russia’s competent and experienced Central Bank head, Elvira Nabiullina, to prepare to ensure macroeconomic stability as she did in 2015 with a textbook orthodox response to navigate the financial and economic crisis.

Blowback: Weaponization of Finance Pushes Russia and China Closer

The United States should plan for the contingency that its deterrence by weaponized finance may fail if Russia’s brinkmanship goes to the wall this time. Former Russian prime minister Dmitry Medvedev and other elites have described cutting Russia off from SWIFT as tantamount to a “declaration of war.” Deterrence failure would likely lead first to proportionate cross-domain escalation involving Russian cyberattacks against U.S. infrastructure, with the expectation of containing the risks of vertical escalation. The wielding of financial weapons will also provoke a new sense of urgency in Russia and China to accelerate their decade-long effort to build alternatives to the dollar-dominated currency world, including further steps to internationalize the renminbi to serve as a unit of account and medium of exchange in cross-border payments.

In a meeting with foreign experts in 2014, Putin underscored the certain blowback that would result, asserting that sanctions are reinforcing the inclination of many countries to become “less dependent on the dollar” and to set up alternative financial and payments systems and reserve currencies. Putin insisted that the United States does not have a monopoly on financial statecraft, warning “I think that our American partners are quite simply cutting the branch they are sitting on.”

Together with China, Russia has spent the last decade hardening its financial infrastructure and building parallel systems. Besides large hard currency reserves, each has its own financial messaging system. Although more rudimentary than China’s cross-border interbank payment system CIPS, Russia’s financial messaging network system similarly operates according to the same standards as SWIFT. There are plans to link it to China’s and possibly a future payment system being developed by India (all one-time targets of U.S. sanctions).

It’s unclear how many times the Kremlin can go to the brink without tripping itself and others off the cliff deliberately or inadvertently. Two days after a video call between Putin and Joe Biden, which Washington hoped would defuse the crisis, Moscow was still increasing the pressure. On December 9, TASS quoted Deputy Foreign Minister Sergei Ryabkov as warning that East-West tensions over Ukraine could turn into a rerun of the 1962 Cuban missile crisis. The same day it quoted Putin as saying that the events in the Donbass conflict zone in eastern Ukraine “increasingly resembled genocide.”

Putin and others in his circle believe Russia is strong enough militarily to create situations in Ukraine in which it can impose its preferences. For the Kremlin, permanently losing Ukraine— even a Ukraine whose domestic politics it can no longer shape—is synonymous with Russia losing the power to influence European security and its own identity as a European great power. As the thirtieth anniversary of the collapse of the Soviet Union is upon us, the United States, Ukraine, and the Western allies should prepare for what comes next. Paradoxically, the common thread in approaches, that the worst outcome—nuclear escalation—is unthinkable, increases the likelihood of conflict rather than dampening it.

Cynthia Roberts is Professor of Political Science at Hunter College, CUNY, and a Senior Research Scholar at the Saltzman Institute of War and Peace Studies, Columbia University. Her most recent book (with L. Armijo and S. Katada) is The BRICS and Collective Financial Statecraft (Oxford, 2018). In 2019, Prof. Roberts served as a policy adviser at the Joint Staff, Department of Defense in J-5, Strategy, Plans, and Policy.

Image: Reuters.