Can Europe go it alone on Russia sanctions?

Now that Donald Trump has shifted the US from the Free World to the autocratic column in the global geopolitical stand-off, it is surely only a question of time before Washington changes its sanctions policy. Already, the US president is musing about opportunities for closer economic engagement with Russia (even though US companies are not exactly drooling at the idea, given how completely President Vladimir Putin has buried the rule of law in his country).

That would mark a huge shift not just in the target of US economic pressure, but in the whole way Washington uses its tools of coercive economic diplomacy. In the almost quarter-century since the 9/11 attacks, the US government has built up a sophisticated suite of economic sanctions with which it can effectively cut its targets out of the global economy. Trump’s go-to tool is instead to increase the cost of access to the US market — aka tariffs.

There are those, perhaps especially outside of the richest economies, that will say nothing fundamental has changed: the US is throwing its weight around, as always. But there is a big contrast between the painstakingly methodical way Washington has wielded its sanctions framework and the Trump administration’s use of tariffs, which seems unpredictable by design. I caught up with Lael Brainard, director of the US National Economic Council in the last two years of the Joe Biden administration, who pointed out that “tariffs . . . are being announced and imposed in a way that is completely arbitrary and capricious . . . they are rooted entirely in authority that the president is using to announce and then retract”.

There are rumours of a more comprehensive effort to use American economic muscle to effect a “grand global economic reordering” as Treasury secretary Scott Bessent has called it. The ideas floating around include challenging other countries’ tax practices, monetising the government’s gold and bullying large surplus countries to convert their US dollar reserves into very long-term low-interest paper. (My colleague Gillian Tett has been excellent at highlighting the ideas that have currency in Trump’s financial circles, so do follow her writing.)

“It’s very grandiose,” said Brainard, “but what we’ve seen it’s very mundane, just lots and lots of tariff announcements that are potentially very disruptive but we don’t know because they are so unclear. I don’t know what that kind of language which sounds very grandiose really means.”

What is, in contrast, very clear is the precision engineering of the existing sanctions regime, especially against Russia. Not only does the US wield an impressive array of economic weapons, but it also has had the support of virtually all advanced economies in creating a common policy. “The coalition around sanctioning Russia, trying to put pressure on Russia to cease hostilities in Ukraine has been really remarkably successful, and that has been due to leadership on both sides of the Atlantic. But the United States has been critically important to that,” said Brainard.

Which raises the question: what happens to this common approach if the US pulls out?

It is useful to think of three different fronts in the economic warfare that the west has employed against Russia. There are tools that limit its export earnings, such as the price cap on oil shipments serviced by western shipping and insurance companies, or outright sales embargoes on certain commodities. There are tools that restrict Russia’s imports, focused in particular on military and dual-use goods. And, finally, there are financial sanctions, restrictions on using western banking services to transmit money — which can hold up trade in either direction even without direct trade sanctions. Russia’s capital controls, for example, were necessitated by Moscow losing access to its convertible foreign exchange reserves.

To think through what would happen if the US unilaterally lifted sanctions on Russia, consider each of these economic fronts in turn. Can the EU and the UK together with the remaining western partners hope to keep sanctions in place with any effect? “Any effect” is the operative part of this question. Nothing stops them from maintaining sanctions legally. But can they keep constraining Russia’s economic opportunities (don’t doubt that they have, so far) if the US is not on board?

“My hope is that we never see that put to the test,” said Brainard. “I do worry enormously if there were a change in the administration’s views about the importance of maintaining those sanctions until peace is firmly re-established. That would make it more difficult for European partners [but] I anticipate that they would continue to try to maintain the sanctions regime that has been so important.”

So how much autonomous power does Europe have in the area of economic coercion? Depending on the category of sanction, I think the answer is “not much”, “a lot” and “quite a bit”.

The ability to deny Russia’s access to importing strategic goods is not worth much if the US doesn’t play ball. For almost any item some country prohibits selling, there will be an adequate or superior US substitute. And even if there isn’t, sales can be rerouted through the US. Circumvention is happening today, of course — trade via Russia’s neighbours such as Turkey, China and central Asian states has soared — but some of this can be stopped if authorities are determined to enforce their sanctions properly. But try to stop exports to the US: it couldn’t be done unless the US collaborated.

Blocking Russia’s exports is a very different matter. Facts of geography and gifts of nature have long meant the bulk of Russian exports consisted of commodities shipped to Europe. That’s particularly true for natural gas: much is extracted in the European part of Russia and can only be piped to Europe for now (it takes time to build alternative pipelines, and there is a limit to how much can be liquefied and shipped on LNG tankers). Europe has been a large market for its oil, too. If Europe is determined to keep its market closed, it can make a significant difference even without the US — which was never a large direct market for Russian commodity exports.

This can be seen in the history of the oil price cap — the policy that bans western companies from servicing Russian oil shipments unless the oil is sold below a certain price ($60 a barrel for crude). The EU and the UK dominate these services globally, from shipping to cargo insurance. So the European sanctions have had a large effect — much larger than the outright US ban on Russian oil imports. Indeed, the sanctions could have hit much harder had the US not pressed Europe to allowing sales under the cap rather than banning such services outright, at any oil sales price. What the US has contributed is to discourage sanctions-dodging by targeting particular “shadow” vessels that ship Russian oil without reputable insurance. But Europe has been picking up the baton on the enforcement side, too.

Not only can Europeans unilaterally keep the squeeze on Russia’s commodity export earnings; they have a lot of room to make it tighter. This could be in terms of the calibration of sanctions (you could lower the oil price cap), their scope (you can extend trading sanctions to other goods, such as LNG and other commodities), and their enforcement (closing loopholes, pursuing sanctions-busters, imposing sanctions on shadow fleet vessels more vigorously and imposing secondary sanctions).

Finally, what about financial sanctions? Here the US dominates — with an important exception. The dollar is still the unrivalled trading currency and being locked out of the US’s dollar-based financial system is a risk few want to take, which is why cutting off US banking services to a sanctions-hit person or entity is so devastating. Conversely, as long as you have access to the US financial system, there is little others can do to you. In particular, European banking sanctions would have little impact as Russia could just do its international business in US dollars through US banks.

But there is one financial sanction where Europe has the upper hand — indeed the only hand: blocking the Central Bank of Russia’s access to hundreds of billions of foreign exchange reserves. Virtually all of this is in European jurisdictions, mostly in the form of a blocked near-€200bn deposit the CBR holds in Euroclear Bank in Belgium.

So far, most European authorities have denied themselves the opportunity to force Russia to compensate Ukraine for the damage it has caused. (Brainard rightly pointed out that “we know that the cost of the war has been greater than the full sum of the immobilised Russian sovereign assets”. So it is: the World Bank just published its updated estimate of Ukrainian reconstruction costs of $524bn.)

Both strategically and financially, this will surely have to be reconsidered. For years, leaders have suggested their hands are tied by international law; French President Emmanuel Macron repeated this talking point at the White House this week. But this is a vicarious argument that just serves to hide a political choice not to do anything. There are by now well-established legal routes to confiscation, as a report to the European parliament laid out a year ago. And there are ways of getting the money to Ukraine without confiscating anything — by splitting out the Euroclear balances to a new banking entity that could be directed to lend to Ukraine, as I have proposed, or by matching and setting off Russia’s claims and its obligations, as Lee Buchheit and Hugo Dixon advocate.

Europe is whingeing about not being given a seat at the table as Trump horse-trades with Putin over Ukraine. But the best way to get a seat at the table is to have something to bring to the table. Peacekeeping troops to stand and watch whatever Trump has given away clearly does not cut it. Tightening sanctions and seizing a few hundred billion for Ukraine might.

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