[Summary] US, First to Define 'Ukraine Invasion,' Cuts Putin's Funding and Warns of 'Direct Sanctions'

[Image source=EPA Yonhap News]

[Asia Economy New York=Special Correspondents Seulgina Jo, Hyunwoo Lee, Byunghee Park] The United States has officially adopted the term ‘invasion’ for the first time since the Ukraine crisis, wielding sanctions against Russia. Not only financial institutions but also close family members of Russian President Vladimir Putin have been targeted, signaling an effort to cut off Putin’s financial resources. The ongoing strong standoff between the West and Russia has raised concerns about a ‘new Cold War.’

◆Biden’s First Use of ‘Invasion’...Announcement of Sanctions Against Russia

On the afternoon of the 22nd (local time), U.S. President Joe Biden declared in a White House speech that "Russia’s invasion of Ukraine has begun," announcing sanctions against Russian financial institutions, sovereign debt, and individuals. This marks the first official sanctions imposed by the U.S. on Russia since military tensions escalated around the Ukrainian border. It is also the first time the Biden administration has officially used the word ‘invasion.’

President Biden explained, "We are imposing full blocking sanctions on two major Russian financial institutions and comprehensive sanctions on sovereign debt," adding, "This means we have cut off Western finance to the Russian government." He also revealed personal sanctions targeting Putin’s close associates. Notably, he referred to these measures as the ‘first tranche’ of sanctions and warned, "The more Russia acts, the more we will increase the severity of sanctions." President Biden also approved the movement of troops and equipment to Baltic countries.

According to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the sanctioned entities include Russia’s largest state-owned bank, Vnesheconombank (VEB), the Promsvyazbank (PSB) which supports the defense industry, and 42 of their subsidiaries. VEB, a state development bank with assets worth $53 billion (approximately 63.2 trillion KRW), plays a role in funding the Kremlin regardless of its financial condition. Established by Vladimir Lenin, it was chaired directly by Vladimir Putin during his tenure as Prime Minister (2008?2012). PSB handles about 70% of Russia’s defense industry. With these sanctions, all assets of these banks in the U.S. will be immediately frozen, and transactions with U.S. companies or individuals will be prohibited.

Additionally, the U.S. has effectively tightened Putin’s financial lifeline by halting Russia’s sovereign debt issuance and trading in Western financial markets. Treasury Secretary Janet Yellen described the measures as "steps to dismantle the Kremlin’s financial network and prevent funding for dangerous actions against Ukraine and the world."

The sanctions also targeted Putin’s close associates and their families. Included on the sanctions list are Alexander Bortnikov, Director of the Russian Federal Security Service (FSB), his son Denis Bortnikov, Chairman of the VTB Board, Petr Fradkov, CEO of PSB, Sergey Kiriyenko, First Deputy Chief of Staff of the Russian Presidential Administration, and his son Vladimir Kiriyenko, CEO of VK Group. The Treasury Department stated, "These close associates of President Putin are believed to have amassed vast wealth and participated in building Russia’s authoritarian regime."

This action follows Putin’s approval of independence for pro-Russian separatist-controlled areas in eastern Ukraine’s Donbas region and his order for Russian troops to enter. Particularly, the U.S. appears aware of criticism that the sanctions announced on this day may be insufficient to halt Putin’s tit-for-tat moves, given Russia’s foreign exchange reserves and other factors, and clearly stated that sanctions will be intensified depending on Russia’s future actions.

A senior U.S. official warned during a phone briefing immediately after the speech, "Just as Russia’s invasion of Ukraine has just begun, so has our response," adding that the sanctions imposed are "only the sharp edge of the pain we can inflict." He indicated that if the invasion continues, no Russian financial institution will be safe, hinting at possible measures against Russia’s largest bank, Sberbank, and the largest state-owned bank, VEB. These banks hold assets estimated at $750 billion, accounting for more than half of Russia’s assets.

Furthermore, the U.S. is preparing other measures such as expulsion from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment network and export bans on advanced technology components and products to Russia. Among these, export controls will apply the ‘Foreign Direct Product Rule’?which dealt a critical blow to Chinese company Huawei?in a Russian context, focusing on semiconductors and extending across Russian industries. Foreign policy media Foreign Policy reported that the White House recently requested Asian countries to join these sanctions, with Japan, Taiwan, and Singapore expressing support.

The official also said, "All options remain on the table," leaving open the possibility of direct sanctions against President Putin.

Following the U.S., other countries have also imposed sanctions. Germany decided to halt the Nord Stream 2 gas pipeline project connecting Russia and Germany, a key sanction against Russia. The European Union (EU) banned trade with the self-proclaimed Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR), which Putin recognized as independent the previous day. The United Kingdom also finalized sanctions including asset freezes, travel bans, and transaction prohibitions targeting five Russian banks and three individuals. Japan announced it would ban the issuance and circulation within Japan of bonds issued or guaranteed by the Russian government or government agencies as part of its sanctions against Russia.

◆Will Putin Continue the Invasion?...Diverging Analyses

Experts are divided over Putin’s next move. Some argue that Putin will act swiftly before Ukraine is fully armed by the West, while others predict he will hesitate to engage in full-scale war due to astronomical military and post-war costs.

Rob Lee, Senior Fellow at the Foreign Policy Research Institute (FPRI), a U.S. foreign policy think tank, told CNBC, "If Putin backs down now, the U.S. and others might export more weapons to Ukraine or Ukraine might resume nuclear armament. Because not invading now could lead to higher war costs later, he is unlikely to hesitate."

On the other hand, some analyses suggest a full-scale war is unlikely. Foreign Policy reported, "Putin seems aware of the increased cost burden of conventional warfare involving artillery and airstrikes," adding, "Full-scale interstate wars have become rare due to the enormous costs involved." According to the Watson Institute for International and Public Affairs at Brown University, the direct and indirect costs of U.S. wars in Iraq and Afghanistan over the first 20 years of the 21st century amount to $8 trillion. This is also why Russia is conducting so-called hybrid warfare, including cyberattacks, alongside troop buildups.

Russia responded to the sanctions announced by the West, including the U.S., by denying their basis. According to TASS news agency, Maria Zakharova, spokesperson for the Russian Foreign Ministry, appeared on a YouTube channel and criticized, "Such Western sanctions do not require (proper) justification." She explained that even if Russia had not recognized the independence of the self-proclaimed republics formed by pro-Russian forces in Donbas the previous day, Western sanctions would have been imposed.

At the time President Biden announced the sanctions, President Putin was attending another meeting and reportedly did not watch the speech broadcast.

Vladimir Putin, President of Russia [Photo by Yonhap News]

The strong standoff between the West and Russia continues, narrowing the room for diplomatic solutions. White House Press Secretary Jen Psaki stated that "there are obviously no plans for a U.S.-Russia summit at this time." The U.S.-Russia foreign ministers’ meeting scheduled for the 24th was also canceled. U.S. Secretary of State Antony Blinken confirmed, "With the invasion underway and Russia clearly refusing diplomacy, pursuing talks makes no sense." He added, "We will not tolerate Russia disguising itself as diplomatic, but if Russia changes its approach, the U.S. will still engage in diplomacy."

Ukraine has issued a reserve mobilization order. President Volodymyr Zelenskyy said in a national broadcast, "We must strengthen the readiness of the Ukrainian armed forces to prepare for all possible changes in the operational situation," and "As Commander-in-Chief of the Ukrainian Armed Forces, I am issuing a reserve mobilization order for a special period." However, he added, "There is no need to issue a general mobilization order today," and "We are still seeking diplomatic solutions."

As fears of war around Ukraine deepen, international oil prices surged close to $100 per barrel during the day. On the London ICE exchange, April Brent crude prices rose more than 6% intraday to $99.44 per barrel, the highest since September 2014.

Major stock markets plunged. On this day, the three major indices in New York all closed down more than 1%. The S&P 500, focused on large-cap stocks, closed down 1.01%, re-entering a ‘technical correction’ phase with a drop of more than 10% from its peak. This is interpreted as investor sentiment freezing amid Federal Reserve tightening concerns and the escalating Ukraine crisis. Year-to-date, the S&P 500 has fallen 9.7%, and the Nasdaq has dropped 14%.