One Year After Russia Mega Sanctions, Senate Asks ‘Can We Do Same To China?’

It’s been a year since the Western world kicked Russia out of the club — capturing over $200 billion of its central bank reserves, sanctioning everyone on the business class A-list, and bringing Russia’s European energy market to a standstill.

This is punishment for Russian tanks rolling into East Ukraine late last February. The consensus is that the Russia-Ukraine war will last another year.

“I think sanctions are doing their job,” said Daleep Singh, the man in the Biden administration who ran the Russian sanctions from the White House when he was National Security Advisor for International Economics. Singh was one of three witnesses testifying about Russia sanctions before the Senate Banking Committee on February 28.

To many on that committee, the question is whether the U.S. can do the same with China. It was the highlight of last week’s hearing.

China didn’t launch amphibious assault ships against Taiwan, but they did launch a 200-story surveillance balloon over the U.S. And they are a supporter of Russia, despite a peace mediation offer that the State Department was quick to dismiss even as Ukrainian president Volodymyr Zelensky said he was interested in hearing Xi Jinping out. So on February 28, the Senate asked witnesses what they could learn from the Russian sanctions to devise something similar against China.

Hint: going after Russia is easy. Cold Warriors in their 60s and 70s are all over Washington. And the U.S. has almost no business with the Russians. There is no real money on the table.

Going after China will be much different.

Committee Chairman Sherrod Brown (D-OH) — wearing a U.S.-Ukraine flag pin on his suit jacket — asked witnesses what lessons may be learned from the Russia response that would help understand the challenges of using economic sanctions against China next.

Singh hit it out of the park on the first pitch.

“China’s economy is 10 times larger than that of Russia. Its banking sector is 30 times larger than that of Russia. It’s the largest manufactured goods exporter in the world by a very large margin. It has a dominant position in many different critical supply chains, solar panels, EV batteries, machine tools, 5G, even parts of the semiconductor supply chain like assembly and packaging. It also has nearly a pure status with us on foundational technologies like AI, biotech and even quantum computing,” he said. “China has also accumulated a lot of soft power since the Belt & Road Initiative was initiated in 2013. It’s the largest lender to emerging market countries, two times as much as all other Western governments combined, and much more than the World Bank.”

Soft power combines diplomatic relationships, financing, and, perhaps more important, cultural and commercial ties. Find one thing from Europe in your house. Find one European app on your phone. Now do the same with China. Their movie market is growing. One day, Brazilians will be watching Chinese movies and giving up on Jurassic Park and superhero reruns.

Clay Lowery, former assistant director for international finance at the Treasury Department, agreed with Singh.

“The key difference between China and Russia is China’s economy, and overall engagement in the world economy is magnitudes bigger than Russia’s scope and scale. We are comparing an apple to an orange,” he said.

China, like Russia, has a significant current account surplus. It sells more to the world than it buys from the world. Instead of being a major commodity exporter like Russia, they are the go-to exporter of manufactured goods for the West.

China’s share of global manufactured exports is more than twice that of Russia’s share of global energy and fuel exports.

China’s broader and deeper engagement in the international economy suggests that much of the world will work overtime to find workarounds to U.S. sanctions.

“Implementing sanctions on China will be even more complex than Russia,” Lowery said.

In the early days of Russia sanctions, commodity supply chain disruptions were most obviously felt in Europe. Energy prices soared. Companies like steel giant Arcelor Mittal temporarily ceased operations. They were forced to ration energy last year. Russia’s economy fell into a deep recession, but oil and gas price increases saved them from a disaster.

Russia Sanctions: Are They Working?

Are the Russia sanctions working?

If it means the sanctioned elites of Russia would convince Vladimir Putin to end the war, they have not. If it means sanctioned oil and gas will hurt Russian state income, that has failed so far, though a recent oil price cap may change that picture later this year.

If it meant pressure to get the Russian people to convince their government to end the war, Putin’s popularity is higher than Biden’s. America’s support for Ukraine is in decline, according to some polls.

Russia’s economy is okay.

“The IMF is even predicting the Russian economy will grow next year. If this prediction holds, that’s troubling to me,” said Senate Banking Committee Ranking Member Tim Scott (R-SC).

There is also some debate as to whether the Russian oil price cap is working, as CNBC reported on Friday.

Sanctions have had effects that many people may not have seen. Sanctions removed Russia’s ability to receive a bailout from the IMF or the World Bank, should it need one. Washington removed Russia from its Most Favored Nation trading status, something a handful of Senators are trying to do with China. This would greatly increase tariffs on China imports.

Interestingly, Singh also said, “Sanctions downgraded Russia’s position as a leading energy supplier. By shutting down its prized Nordstream 2 pipeline and banning imports of Russian crude oil and other fuel sources, we have undercut Putin’s revenues.” He also said the squeeze on Russian fossil fuels means “we are speeding our transition to renewables” as if this is the real reason for some of these policies, especially in Europe.

Singh may be patting himself on the back here.

Lowery is less laudatory.

“A year later, this has had a substantial economic and financial impact, but it has neither been as dramatic nor as sweeping as was estimated last year,” he told the Committee.

There were still major carveouts for natural gas, oil, and petroleum products in U.S. and European sanctions. Geopolitical risk gave the markets a reason to drive up fuel prices. This led Russia’s current account surplus to nearly double in 2022, which means an extra $100 billion. That helped Russia provide the much-needed liquidity it needed for its economy.

Russian oil export volumes fell across the E.U., Japan, Korea and several other European countries. But Russian oil export volumes increased in 2022 as China, India, and Turkey all increased their purchases.

Russia adapted to the sanctions.

The Central Bank of Russia “took swift and decisive measures that allowed the exchange rate and the banking system to stabilize,” said Lowery. “Russia’s economic and financial resilience in the face of such a major sanctions program does not mean that the program was a failure, though,” he said, adding that the “jury is still out” on the success of the G7 countries price capping Russian oil.

Russian factory expansion is turning inward. The economy is on war-footing.

Manufacturing output has grown at its fastest pace in six years, as Reuters reported on March 1.

“The White House predicted that last year the Russian economy would shrink by 15% or more. It shrank just 2.2%,” noted new Senator J.D. Vance (R-OH). “He said that the Russian ruble would be reduced to rubble. The Russian ruble is one of the best-performing international currencies in the world today, and is worth the same as it was when the invasion began a little over a year ago.”

Chairman Brown lamented these facts in the hearing. “It’s true the depth of the Russian sanctions is not as large as many expected, including me.”

If the mega-sanctions on Russia are not heralded as a total victory by outside observers, and those in the Senate from both parties, try and imagine a sanctions regime on China.

China Has Friends, Maybe More Than US?

One Senator talked about a global poll showing that some 70% of the world has a favorable view of Russia and China. The good news, most of the world prefers American-style freedom to Chinese-style autocracy, according to a Eurasia Group Foundation poll last year.

With China offering an olive branch to Putin and Zelensky, the country is seen as a peacemaker to all but the West, which is seen more as a warmonger. Those living in the Brussels bubble or working on Capitol Hill may not see it that way, but the rest of the world will.

During a recent trip to the U.S., Brazilian president Luiz Inacio Lula da Silva was asked by Biden to send ammunition to Ukraine. Lula said he was not interested in that; he wanted the war to end and did not want to help prolong it.

Senator John Kennedy (R-LA) asked Singh why the White House couldn’t get another BRIC member, India, to pick a side. Narendra Modi is neutral on this issue, keeping his country non-aligned as usual.

“We can’t even get India to join us on Russia sanctions, let alone China,” Kennedy said.

“I tried,” Singh said about Russian sanctions and India. “I went there, and we’ve had a steady stream of officials go to India. We have to think long term, play the long game,” he said.

China hawk Bill Hagerty (R-TN) expressed outrage over the surveillance balloon, calling for Russia-style sanctions. Even mini-ones.

“I certainly encourage you to take a damn hard look at what China is doing,” he told the witnesses. “Particularly after they violated our sovereignty with that balloon, which they have done.”