S HRG 115–15 ASSESSING U S SANCTIONS ON RUSSIA NEXT STEPS HEARING BEFORE THE COMMITTEE ON BANKING HOUSING AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS FIRST SESSION ON EXAMINING THE EXISTING RUSSIAN SANCTIONS ARCHITECTURE IN TERMS OF ITS EFFECTIVENESS AND ECONOMIC IMPACT AND ASSESSING WHAT CORRECTIVE ACTION IF ANY THE UNITED STATES SHOULD TAKE IN LIGHT OF RECENT DEVELOPMENTS INVOLVING RUSSIA’S ACTIONS IN UKRAINE SYRIA AND WITH CYBER ATTACKS TARGETED IN THE UNITED STATES MARCH 15 2017 Printed for the use of the Committee on Banking Housing and Urban Affairs Available at http www fdsys gov U S GOVERNMENT PUBLISHING OFFICE WASHINGTON 25–434 PDF 2017 For sale by the Superintendent of Documents U S Government Publishing Office Internet bookstore gpo gov Phone toll free 866 512–1800 DC area 202 512–1800 Fax 202 512–2104 Mail Stop IDCC Washington DC 20402–0001 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S DOCS 25434 TXT SHERYL COMMITTEE ON BANKING HOUSING AND URBAN AFFAIRS MIKE CRAPO Idaho Chairman RICHARD C SHELBY Alabama SHERROD BROWN Ohio BOB CORKER Tennessee JACK REED Rhode Island PATRICK J TOOMEY Pennsylvania ROBERT MENENDEZ New Jersey DEAN HELLER Nevada JON TESTER Montana TIM SCOTT South Carolina MARK R WARNER Virginia BEN SASSE Nebraska ELIZABETH WARREN Massachusetts TOM COTTON Arkansas HEIDI HEITKAMP North Dakota MIKE ROUNDS South Dakota JOE DONNELLY Indiana DAVID PERDUE Georgia BRIAN SCHATZ Hawaii THOM TILLIS North Carolina CHRIS VAN HOLLEN Maryland JOHN KENNEDY Louisiana CATHERINE CORTEZ MASTO Nevada GREGG RICHARD Staff Director MARK POWDEN Democratic Staff Director ELAD ROISMAN Chief Counsel JOHN V O’HARA Chief Counsel for National Security Policy KRISTINE JOHNSON Professionl Staff Member SIERRA ROBINSON Professional Staff Member GRAHAM STEELE Democratic Chief Counsel LAURA SWANSON Democratic Deputy Staff Director COLIN MCGINNIS Democratic Professional Staff Member DAWN RATLIFF Chief Clerk SHELVIN SIMMONS IT Director JIM CROWELL Editor II VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 S DOCS 25434 TXT SHERYL C O N T E N T S WEDNESDAY MARCH 15 2017 Page Opening statement of Chairman Crapo Opening statements comments or prepared statements of Senator Brown 1 2 WITNESSES Elizabeth Rosenberg Senior Fellow and Director Energy Economics and Security Program Center for a New American Security Prepared statement Eric B Lorber Senior Advisor Center on Sanctions and Illicit Finance Foundation for Defense of Democracies Prepared statement Responses to written questions of Senator Toomey Senator Tillis Rodney D Ludema Ph D Associate Professor School of Foreign Service and Department of Economics Georgetown University Prepared statement III VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S DOCS 25434 TXT SHERYL 4 32 6 44 70 71 7 67 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S DOCS 25434 TXT SHERYL ASSESSING U S SANCTIONS ON RUSSIA NEXT STEPS WEDNESDAY MARCH 15 2017 U S SENATE URBAN AFFAIRS Washington DC The Committee met at 10 23 a m in room SD–538 Dirksen Senate Office Building Hon Mike Crapo Chairman of the Committee presiding COMMITTEE ON BANKING HOUSING AND OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO This hearing will come to order Today we will examine the existing Russian sanctions architecture in terms of its effectiveness and economic impact and assess what corrective action if any the United States should take in light of recent developments Three years ago this week Russia solidified its actions in Crimea by illegally annexing the Ukrainian territory and moving the fight to its eastern border regions In response the United States the European Union and several other allied countries imposed several rounds of targeted economic sanctions against Russia And 2 years ago the Obama administration imposed a separate set of sanctions against Russia in response to its malicious cyber-enabled information warfare activities Today the Committee will hear testimony on the effect and utility of these U S -imposed sanctions and the potential for next steps The existing U S sanctions against Russia pertaining to the Ukraine were designed to change Putin’s behavior Authority for the sanctions is found in a series of four Executive orders issued in 2014 as well as in the Ukraine Freedom Support Act which was signed into law in December of that same year These authorities prescribe asset freezes and transaction prohibitions with specific Russian individuals and entities with ties to the Kremlin including a bank businesses tied to Putin and a stateowned defense company Sanctions also include restrictions on financial transactions such as 1- to 3-month restrictions on debt maturities of Russian firms operating in the financial services energy and defense sectors The United States also restricts its individuals and entities from exporting oil-related goods services and technology in support of deep water Arctic offshore or shale projects in the maritime areas claimed by Russia Pursuant to these measures the United States Department of Treasury has identified and designated more than 520 individuals 1 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S DOCS 25434 TXT SHERYL 2 and entities for their sanctionable activities Those persons designated are subject to the blocking or freezing of assets under U S jurisdiction prohibitions on transactions with U S persons and visa denials During the last 3 years Russia was stung by the twin shocks of international sanctions and low oil prices This was compounded by Russia’s own ill-conceived retaliatory measures As a result Russia is now challenged by a contraction of economic growth capital flight depreciation of the ruble a higher rate of inflation budgetary pressures drawing on its international reserves and more widespread poverty generally Yet Russia remains a hostile recalcitrant power deploying its military cyber-enabled information espionage activities and economic tactics to harm the United States and drive a wedge between it and its allies With all this in mind I trust the witnesses today will help the Committee understand the impact of the existing sanctions generally and discuss where the real pressure points are in Russia’s economy the costs of inaction and any associated unintended consequences that could arise if sanctions were imposed either unilaterally or too rapidly The extent to which the sanctions on Russia alone contributed to its economic downturn is an important question in terms of preserving the existing sanctions or expanding the breadth of existing sanctions One thing is clear Any reduction to the level of sanctions in the absence of a corresponding shift in Russian behavior will be interpreted as a change in U S policy on Russia’s involvement in Ukraine and that would run counter to the norms of international law and give Russia license to engage in further adventurism Russia must be held accountable for its actions and if sanctions are to be a part of that strategy they must be targeted and staged appropriately according to a set of realistic conditions With that I conclude my opening statement and turn to Senator Brown STATEMENT OF SENATOR SHERROD BROWN Senator BROWN Thank you Mr Chairman Sorry for being late Thanks for calling this hearing Thanks for your willingness to explore on a bipartisan basis how the current U S and multilateral sanctions regime is working and possible next steps to strengthen it while preserving unity with our allies Congress has worked together to craft the current U S sanctions regime and to hold Russia accountable for a long line of misdeeds from its violations of international law and of the sovereignty and territorial integrity of Ukraine to its role in the brutal repression of the war in Syria and its cyber attacks on the United States including U S elections More recently Russia has engaged in efforts to influence our elections and systematically sowed disinformation here at home We should focus now on what the Committee might do to strengthen our response to Russia for the actions I mentioned and for its continuing efforts to destabilize states in Europe including the Balkans and beyond VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S DOCS 25434 TXT SHERYL 3 Russia’s interference in our election confirmed unanimously by the U S intelligence community in a declassified report as we know in early January poses a problem that goes far beyond foreign policy and strikes at the core of our democracy As the joint report makes clear there is no disagreement within the U S intelligence community about what happened here None Zero They wrote Russian efforts to influence the 2016 U S Presidential election represent the most recent expression of Moscow’s longstanding desire to undermine the U S -led liberal democratic order these activities demonstrated a significant escalation in directness level of activity and scope of effort compared to previous operations We assess Russian President Vladimir Putin ordered an influence campaign in 2016 aimed at the U S Presidential election Russia’s goals were to undermine public faith in the U S democratic process denigrate Democratic candidate Secretary Clinton and harm her electability and potential presidency We further assess Putin and the Russian Government developed a clear preference for President-elect Trump We have high confidence in these judgments Those were words from the U S intelligence community The report went on to note that similar efforts would likely be undertaken by Russia against U S allies and others ‘‘We assess Moscow will apply lessons learned from its Putin-ordered campaign aimed at the U S Presidential election to future influence efforts worldwide including against U S allies and their election processes ’’ While we have begun to impose sanctions for Russia’s cyber attacks we have not yet responded to the interference with our electoral process The Ukrainian community rather large in Ohio and around the world knows firsthand the dangers of unchecked Russian aggression We should strengthen not weaken Russian sanctions and the President must work with Congress on a Russia policy that is clear-eyed about our adversaries and their behavior In Syria the U N and others have charged Syrian military units and allied Russian forces with war crimes including attacks on hospitals and an aid convoy and indiscriminate bombing of civilian populations in eastern Aleppo The recent escalation of violence by Russian-based separatists in eastern Ukraine and the lack of a consistent policy to deter further Russian aggression is also dangerous Since Putin’s illegal annexation of Crimea in 2014 3 years ago this week exactly there have been at least 10 000 dead 20 000 wounded 2 million internally displaced according to the U N The situation remains unstable with some 300 000 cease-fire violations in 2016 according to the Organization for Security and Cooperation in Europe It seems clear from the surge of violence since the U S elections that Russia is testing our resolve to support the Ukrainian Government and people We must leave no doubt that Russia must comply with the Minsk agreement Until it does Russia deserves no sanctions relief for the conflict it created and continues to fuel I hope the President ends any ambiguity in our policy in both his words and the vigorous enforcement and strengthening of current sanctions All of us in both parties are very concerned about what the President has done or not done so far So far he has sent VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 4 mixed signals On the one hand he raises questions about moral equivalence between the United States and Russia and flirts publicly with relaxing Russian sanctions On the other hand he has said he intends for now to maintain U S sanctions and U N Ambassador Haley has condemned Russian aggression in Ukraine Today we are joined by three sanctions experts who will help us assess where we are and what effects the current sanctions regime is having on the economy and the behavior of Russia We will also discuss how stricter sanctions enforcement closing administrative loopholes strengthening statutory requirements where appropriate and other measures can send a clear unambiguous signal of our resolve I welcome the witnesses and thank the three of you for joining us Chairman CRAPO Thank you very much Senator Brown I would like to remind all of our Senators today to try to stay very close to the 5-minute time limit We have a hard stop at about 5 minutes to 12 and I think we will have a lot of interest in this hearing and so I encourage us all to pay close attention to the time restrictions And to our witnesses I ask you to please pay attention to the 5 minutes as well I know that you are not going to be done with everything you have to say in 5 minutes but you are going to have a lot of opportunity with questions to get into it all Today we are joined by three excellent witnesses First we will receive testimony from Ms Elizabeth Rosenberg who is the Senior Fellow and Director of the Energy Economics and Security Program at the Center for a New American Security Next we will hear from Mr Eric Lorber who is a Senior Advisor at the Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies And finally Dr Rodney Ludema Associate Professor of Economics at Georgetown University will give us his assessment of the economic impact of the current sanctions regime Ms Rosenberg you may proceed STATEMENT OF ELIZABETH ROSENBERG SENIOR FELLOW AND DIRECTOR ENERGY ECONOMICS AND SECURITY PROGRAM CENTER FOR A NEW AMERICAN SECURITY Ms ROSENBERG Thank you Chairman Crapo Ranking Member Brown and distinguished Members of this Committee thank you for the opportunity to testify today on Russia sanctions U S and European sanctions imposed on Russian entities and individuals since 2014 have been remarkably innovative and forceful Responding to Russia’s aggression in Ukraine they powerfully demonstrate transatlantic unity and they have delivered economic leverage Their impact was augmented as was noted by an oil price collapse and Russia’s resulting loss of hard currency Additional recent U S sanctions have exposed Russia’s human rights record its destabilizing involvement in Syria and its insidious cyber intrusions into U S institutions and political processes The recent record of Russian economic performance demonstrates a period of distress From the beginning of 2014 to December 2016 Russian external debt shrank from $729 billion to $519 billion and VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 5 officials drew down the Reserve Fund from $87 billion to $16 billion Russian officials slashed state spending in education health care and defense and allowed the ruble to plunge in value Capital fled Russia roughly $210 billion in 2014 and 2015 combined and GDP contracted from 0 7 percent in 2014 to negative 3 7 percent in 2015 It recovered last year but remained negative Russian officials including President Putin have acknowledged that sanctions hurt Russia They were a meaningful contributor to Russia’s agreement to the Minsk accords and Russia arguably refrained from more expansionist territorial aims because of sanctions pressure However the force of sanctions has diminished over time as investors have adapted to lower oil prices the Russian economy stabilized and U S and EU leaders have not kept up sanctions pressure In 2016 Russian capital flight was one-tenth of the 2014 record Russian economic growth is expected to rebound to just over 1 percent in 2017 Russia expanded its already massive energy output by 4 4 percent between January 2014 and January 2017 taking advantage of higher prices to draw in critical new revenue streams A primary reason for declining sanctions effects is a lack of their maintenance by the United States and the European Union In particular European leaders have struggled over the last 2 years to hold the line on sanctions doubting their utility and advisability in some instances Now political signals from the new U S administration as well as from nationalist political leaders in Europe that a warmer relationship with Russia may be forthcoming indicate to the private sector that sanctions are weakening further Russia has actively taken advantage of this crumbling resolve on sanctions Through military posturing media and cyber manipulation and economic interventions President Putin has been transparently engaged in a reproach of Western interests and Western unity U S leaders are now contemplating policy toward Russia including sanctions measures The White House has not yet outlined a definitive strategy with the Kremlin or European allies Congress is in the position to enhance pressure on Russia in response to increasing aggression in eastern Ukraine and Russia’s cyber interference in the United States Legislators can lead on the direction for an updated sanctions response and set the tone for diplomacy toward European allies and Russian counterparts To maintain effective sanctions U S and European leaders must closely coordinate This will be difficult but the alternatives—stasis or conflicting sanctions policy delivers economic and political benefits to President Putin and undermines U S interests It is far preferable to maintain Western economic leverage with Russia and negotiate from a position of strength In this context U S leaders with Congress at the fore must proactively update sanctions and forge new transatlantic coordination on this critical policy challenge Thank you for the opportunity to speak with you this morning and I look forward to your questions Chairman CRAPO Thank you very much Next we will hear from Mr Lorber VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 6 STATEMENT OF ERIC B LORBER SENIOR ADVISOR CENTER ON SANCTIONS AND ILLICIT FINANCE FOUNDATION FOR DEFENSE OF DEMOCRACIES Mr LORBER Chairman Crapo Ranking Member Brown and distinguished Members of the Senate Committee on Banking Housing and Urban Affairs I am honored to appear before you today to discuss U S sanctions on Russia I would like to focus my testimony on the effectiveness of the current U S sanctions targeting Russia as well as what the United States can do to responsibly ramp up economic pressure to convince Moscow to cease destabilizing activities in eastern Ukraine stop committing human rights abuses and reduce malicious cyber activities targeting the United States and its allies To date U S sanctions on Russia have a mixed record of success Many macroeconomic indicators and recent studies suggest that the sanctions have had an impact on overall Russian economic health Likewise Russian Government officials repeatedly push for sanctions relief both in public statements and by trying to undermine EU sanctions suggesting that Russia is feeling the pinch Nevertheless the United States has not achieved many of the core objectives it sought when deploying these tools and Russia continues to engage in threatening activity across a range of areas In eastern Ukraine Russian-backed forces continue to violate the cease-fire routinely attacking Ukrainian villages and military personnel Moscow also continues to target opposition leaders often with lethal means In the cyber realm Russia has continued its efforts to influence and undermine U S allies in recent months focusing these efforts on upcoming elections in Western Europe Beyond the activities for which the United States has imposed sanctions in Syria Russia continues to support President Bashar al-Assad with direct military intervention including during the Syrian Government’s brutal assault on Aleppo This Committee should make no mistake Russian activity in these areas poses a serious threat to U S interests and the United States should be prepared to use all elements of its national power—including its economic power—to blunt Moscow’s ability to undermine U S interests at home and abroad Additional responsibly crafted U S sanctions can be a powerful tool to impact Russia’s decisionmaking Specific types of sanctions that if properly calibrated could be particularly effective in increasing the pressure on Russia include The codification of certain executive orders as well as additional statutory designations under these EOs Establishment of a FinCEN-led task force to identify and seize assets of targeted Russian persons including those with close to ties to Russian President Vladimir Putin Certain restrictions related to the purchase or facilitation of Russian sovereign debt And certain primary and secondary sanctions on elements of Russia’s oil and gas industry However any new sanctions on Russia must take into account four important considerations VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 7 First while additional sanctions are appropriate Congress should be wary of imposing sanctions that are too powerful If the United States attempts to impose broad Iran-like sanctions on Russia that target large swaths of the Russian economy this could limit critical European willingness to participate in our sanctions campaign Similarly such sanctions could do serious damage to the Russian economy in ways that actually threaten our interests While we want to pressure Russia to cease its activities destroying the Russian financial system or cratering its economy would have worldwide impact threatening markets across the globe Second Congress should think through how it can unwind sanctions pressure in the case that Moscow—even partially—changes its behavior As we have learned over the past few years unwinding sanctions can often be a difficult and fraught process Any such new sanctions legislation could include built-in ‘‘off ramps’’—namely elements of the sanctions regime such as specific designations or directives—that could be undone in a situation of partial Russian compliance with its various obligations such as those under the Minsk agreements Such partial sanctions relief could be traded for Russian fulfillment of these obligations and this approach while not achieving all of our objectives certainly could help the United States limit challenges to U S interests Third any such sanctions must be nested in a larger strategy of pressuring Moscow including aggressive diplomacy and responding in kind to malign Russian activities such as offensive cyber operations Sanctions are a means to an end and Congress and the Administration must be clear as to what that end is and how they intend to achieve it Ramping up economic pressure on Moscow without clear objectives the employment of other coercive tools and buy-in from the Administration is unlikely to be effective in getting Moscow to fully change its behavior Fourth the United States must be prepared to address Russian retaliation for these sanctions including in the form of countersanctions increased cyber attacks and even kinetic action in ways that threaten U S interests Congress has a key role to play in ramping up pressure on Moscow and the various sanctions proposals put forth in recent weeks are excellent steps in this direction I look forward to discussing these proposals during the question-and-answer session Thank you Chairman CRAPO Thank you very much Dr Ludema STATEMENT OF RODNEY D LUDEMA PH D ASSOCIATE PROFESSOR SCHOOL OF FOREIGN SERVICE AND DEPARTMENT OF ECONOMICS GEORGETOWN UNIVERSITY Mr LUDEMA Chairman Crapo Ranking Member Brown and distinguished Members of the Committee thank you for the opportunity to testify at today’s hearing assessing U S sanctions on Russia My name is Rodney Ludema and I am a Professor of Economics at Georgetown University Earlier this year my co-author Daniel Ahn and I published a report titled ‘‘Measuring Smartness Understanding the Economic VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 8 Impact of Targeted Sanctions ’’ and I would like to take this opportunity to share some of the conclusions of that study with you As you know Russian intervention in Ukraine in early 2014 prompted the United States and the European Union to impose series of targeted sanctions aimed at specific individuals companies and transactions believed to be involved in the illegal annexation of Crimea and the ongoing crisis in eastern Ukraine Sanctions of this type are often referred to as ‘‘smart ’’ and their defining feature is that they seek to impact their intended targets with minimal collateral damage Our study seeks to understand just how ‘‘smart’’ these sanctions have been in practice and what we find is that the sanctions have indeed inflicted significant damage on the intended targets with relatively little short-run impact on the overall Russian economy or on neighboring economies such as the European Union Just to put sanctions a little bit in context decades of experience with economic sanctions indicate that sanctions are most effective at altering the behavior of the targeted government when they are multilateral focused sustainable and clearly contingent on an achievable goal Smart sanctions are meant to achieve these ends They are focused because they target the government and its domestic constituencies responsible for the offending policy rather than the general population which may have little political influence They are sustainable because by minimizing collateral damage they lower the cost to the countries imposing them and this is especially important when we are talking about a target country that is large and internationally integrated such as Russia So how do we go about assessing the smartness of Russian sanctions First we look at the sanctioned companies themselves All told we were able to find 584 companies that are either listed by the United States or the European Union in one or more of their sanctions lists or are associated with individuals on those lists In addition there are another 2 000 or so subsidiaries of these companies Our method is to compare the performance of sanctioned companies to nonsanctioned peer companies before and after the sanctions were imposed Our main finding is that sanctioned companies are indeed harmed by sanctions relative to their nonsanctioned peers On average a sanctioned company loses an estimated onethird of its operating revenue over half of its asset value and about one-third of its employees after being sanctioned compared to nonsanctioned companies These estimates suggest that the targeted sanctions do indeed have a powerful impact on the targets themselves The second part of our study estimates the collateral damage In particular we consider the impact that the sanctions have had on Russian GDP and on Russia’s imports from the European Union The challenge in doing this is the fact that the conflict coincided with a series of powerful macroeconomic shocks most notably an enormous decline in the price of oil which is Russia’s main export We find that the vast majority of the decline in Russia’s GDP and the vast majority of its import demand from the European Union is caused by the decline in the price of oil and other VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 9 long-term trend factors with very little left to be explained by sanctions or other short-term factors Thus we conclude that either sanctions have had only a small negative effect on Russia’s GDP as they were designed to do or other positive factors coincident with sanctions largely canceled out their effect Finally we find that sanctions have had only a small effect on the economies of most European countries Adding together the impacts of sanctions imposed on Russia along with Russia’s retaliatory countersanctions on agricultural products we find that EU exports declined only slightly causing less than two-tenths of 1 percent reduction in the GDP of the median EU country Those are the results of our study and I am happy to entertain questions about that in the Q A session Thank you Chairman CRAPO Thank you very much Dr Ludema Let me go first to you Ms Rosenberg Moscow remains undeterred in its Ukraine ambitions despite at least 2 years of sanctions which were even compounded by an oil shock What are the limits of employing sanctions against a large economy like Russia’s And what sanctions tend to be the most effective to deter Russian aggression Ms ROSENBERG Thank you for the question As you note Russia is a massive economy and even in the period from 2014 to now when we have seen the Russian economy shrink somewhat it still represents one of the largest economies globally Furthermore it has a tremendous volume of external assets that are traded actively including by U S financial entities and individuals So the cautionary note on sanctions is to be careful about collateral damage for the United States Going after Russia particularly in the financial services realm in ways that could affect U S institutions may be damaging to U S economic interests Also if the United States oversteps and goes too far on sanctions in addition to the consequences my colleague laid out it could invite retaliation I would offer the same cautionary note about aiming too aggressively at its energy sector given the effect that that could have for consumers globally including in the United States Chairman CRAPO Thank you very much Mr Lorber some proposals put forth for increasing sanctions against Russia include various sanctions on Russian sovereign debt Could you please explain what placing sanctions on entities transacting in issuances of Russian sovereign debt would have on the Russian economy and on global financial markets Mr LORBER Absolutely Senator The macroeconomic impact of going after prohibiting purchase or facilitation of Russian sovereign debt is fairly uncertain However what the impact likely would do is it would put additional pressure on those SSI designated entities from 2014 that have effectively been to an extent propped up by the Russian Government So it would continue to target entities that we have gone after previously But the unknown about what the overall impact of sanctioning Russian sovereign debt would be is part of the reason that in my testimony I suggest ways that you can in effect ratchet up that pressure in a graduated manner so that you can in effect see what that impact is and if the economic impact on those entities is not VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 10 what we want it to be you can sort of come back and have a second bite at the apple Chairman CRAPO Thank you very much Dr Ludema your study finds that while targeted firms are impacted by sanctions Russia’s GDP is largely unaffected noting that the most plausible candidate factor for this would be the Russian policy response Explain what you mean by the ‘‘Russian policy response ’’ and how do you think the Russians responded to the sanctions within this context Mr LUDEMA Thank you for the question I would say that there are actually two reasons why the sanctions have had very little effect on the Russian GDP One is that they were designed to not have an immediate effect The biggest companies that are under sanctions are sanctioned under the SSI regime which simply restricts their borrowing of long-term debt and certain technologies That is designed to kick in later as these companies start to roll over their debt They are not likely to have a short-term effect and we find that they generally do not But yes you are right there are things that the Russian Government can do and has done to also counter the effects For example the biggest thing that they did was allow the ruble to depreciate quite dramatically in 2014 Another thing that they can do is bail out certain firms so they have a list of firms that they refer to as ‘‘strategic ’’ that are strategic by virtue of their economic or national security importance and these firms qualify for state largesse in the form of state loan guarantees capital participation extra government contracts tax breaks and so on I would point out however that all of these policy responses are costly to the Russian Government so even if you see a company that is not obviously affected by Russia sanctions if it is being bailed out that cost is being imposed on the Russian Government in a different way We have a saying in economics which is that ‘‘There is no free lunch ’’ And there is no free lunch for the Russian Government when it comes to dealing with sanctions Chairman CRAPO Thank you very much Senator Brown Senator BROWN Thank you Mr Chairman Ms Rosenberg if I could start with you you described four principles you think policymakers should observe maintaining broad support of allies using sanctions as a tool while including other diplomatic political economic and military measures tying sanctions relief tightly to specific policy goals and fourth crafting a policy that is tough and constructive and also flexible enough to be workable What are the greatest obstacles to maintaining these principles on Russia policymaking in this environment Ms ROSENBERG Thank you for the question One of those principles that is most vulnerable is finding unification and multilateralism on Russia sanctions The reason why I say that is because of the conflicting political suggestions that we have seen coming out of the current U S administration as has been mentioned by you They suggest that there is an interest in pulling VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 11 back or reversing sanctions measures Also signaling from within Europe including from a couple of the leaders on European sanctions France and in Germany not to mention the Brexit vote which suggests movement toward strong nationalism and away from the project of EU unification and transatlantic unity that has underpinned these sanctions on Russia The difficulty in holding together that coalition is the greatest challenge to advancing further strong cogent meaningful and strategic sanctions policy Senator BROWN You are suggesting as I think you mentioned in the response to Chairman Crapo’s question that there is a danger—you may not have used the word ‘‘danger ’’ but you said if we are too aggressive especially on energy when you think of how bound so many countries especially those that were long-time Soviet—a long time part of the Soviet Union how bound they are especially on energy Talk about that effect with our allies and how other proposed measures imposing secondary sanctions on those who facilitate Russia Soviet debt transactions how that plays out and what concerns you have and which countries are most affected that way Ms ROSENBERG On energy in particular the challenge here about being too aggressive I would like to condition that and say there are two challenges one is being too aggressive too fast It would be appropriate to move incrementally toward a more aggressive posture The second one is that sanctions should always aim at what is realistically achievable This is particularly important on energy where aiming too aggressively is infeasible ultimately It would be impossible for the United States to implement aggressive sanctions on the Russian energy supply European leaders would not join the United States on something that aggressive For them it would constitute a decision to cutoff some of their most significant energy supply sources Literally the lights go out the heat goes off That is a very difficult thing for many countries particularly in Russia’s near abroad its periphery that rely so heavily on Russian refined products and natural gas in particular The energy market is so large and so many nodes and relatively unregulated globally that it would be near to impossible to achieve broad implementation and even if it were what it could do—even if there was to be broad implementation of strong sanctions that go after Russia’s energy supply it would have the effect of increasing prices which some may welcome in the current oil price environment But of course that benefits producers including Russia and disadvantages consumers such as those in the Baltic States and all of us as consumers Senator BROWN Thank you Real quickly Mr Lorber talk about what conditions you think Russia should have to meet besides abiding by Minsk and stopping cyber attacks before any future relaxation of sanctions Mr LORBER Thank you Senator I actually think that the Minsk II agreement does provide for 13 very specific obligations that Russia should meet and frankly is not meeting at the current time And so it gives us in a sense a road map for sanctions relief If Russia meets these objectives then we should be willing to provide them at least partial relief as—— VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 12 Senator BROWN They are meeting none of them now of the 13 Mr LORBER That is my understanding so the major ones for example allowing Ukraine to have control over the Ukraine-Russia border the removal of heavy weaponry the allowance of OSCE monitors into the country the return of Crimea to Ukrainian control My understanding is that they have not met—they have certainly not met those but they have not met many of the others of the 13 Senator BROWN Thank you Chairman CRAPO Thank you Senator Rounds Senator ROUNDS Thank you Mr Chairman Mr Lorber I am just curious We have talked a little bit about the issuance of sovereign debt and the challenges that we may place on the Russian economy and so forth if we were to restrict either in a primary or primary and secondary basis the purchase of Russian sovereign debt How would that impact the individuals who are the decisionmakers or the impacters within Russia today Would we be able to actually impact those individuals who are the decisionmakers Mr LORBER Thank you Senator I think so yes The rationale behind the sovereign debt restriction is basically that when Russian entities were designated as SSIs they were unable to secure new debt or in some cases new equity And so the Russian Government injected capital assets into them to basically keep them going in effect And then Russia turned around and wanted to offer sovereign debt issuances so that it could then continue injecting more funds into those SSIs and SSI entities To the extent that you can hurt those of the largest companies in Russia the CEOs and major leaders of whom many are within Vladimir Putin’s close inner circle I do think that will have an impact on their decisionmaking Senator ROUNDS How practical is the imposition of both primary and secondary attempts anyway at limiting the purchase of that debt Would we have any support in the European Union Mr LORBER So I think that is actually a fantastic question because I think that in terms of the imposition of primary sanctions that would prohibit U S persons or any transaction with a U S nexus from going forward from doing transactions in that debt That would not directly impact foreign financial institutions in the European Union for example but there would still be a significant market impact So many of the sort of top-line European banks financial institutions would be unwilling to transact in that debt for fear that they might accidentally run afoul of U S sanctions So I do think that there would be a practical effect of it yes Senator ROUNDS Thank you Ms ROSENBERG Senator may I speak to this issue Senator ROUNDS Yes Ms ROSENBERG Thank you I wanted to point out something that all policymakers contemplating this kind of a sanction should bear in mind going forward which is of course that aiming at Russian sovereign debt is a major escalation It may be appropriate as circumstances merit but particularly because you are going after the ability of the sovereign to raise money there will be a VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 13 major public perception in Russia and elsewhere that this will constrain the ability of Russia to provide social services This has worked to President Putin’s favor in bolstering his domestic popularity and support and so this has to be carefully calibrated in order not to have the reverse effect which is to say empowering President Putin at the expense of the pressure it is supposed to create Senator ROUNDS I think your point is well made and the reason why I asked the question is specifically that Does the emphasis actually fall on the decisionmakers or does it fall on the general Russian economy itself Let me just continue on and I do have a question for Dr Ludema A significant portion of your testimony focused on smart sanctions and minimizing collateral damage specifically as we just discussed with regard to the imposition of any sanctions on the purchase of sovereign debt As you know the United States has implemented a ban on the investment and now prohibits essentially all trade with Crimea which is in essence an embargo on Crimea To what extent does the U S trade and investment embargo on Crimea cause collateral damage on the average citizen of that Ukrainian population And what role does this policy play in the grander strategy of course in Russia and Russian-supported groups to cease their malicious and destabilizing activity in the region And does the value of this coercion outweigh the collateral damage to the majority of Crimea’ Ukrainian citizens now under Russian rule A three-part question Mr LUDEMA Thank you for the question I think that if by collateral damage you mean damage to the general population in Crimea I would say that there is collateral damage certainly Crimea is a relatively small entity so it does not have substantial impact on the European Union or the United States And so in that sense I think sanctions of that type would nevertheless remain sustainable I think the idea behind the sanctions on Crimea is that it will make it difficult for the Russian Government to solidify its control in the area and I think that is the purpose of it Whether it succeeds is something that is beyond that Senator ROUNDS Thank you Thank you Mr Chairman Chairman CRAPO Thank you Senator Reed Senator REED Thank you very much Mr Chairman and I want to thank the panel for their presence here today and their testimony Senator Rounds brought up the European Union and I have just three general questions I would like to pose to everyone beginning with Ms Rosenberg What is their role today Second can that role be enhanced to benefit the doing—and I presume they are—to undermine the European Union as they are trying to undermine so many institutions So if you could generally respond to those questions Ms Rosenberg Ms ROSENBERG Thank you for the question The role of the European Union as counterpart to the United States in imposition of VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 14 these sanctions is significant primarily because it has great economic integration with Russia—trade investment et cetera for banks companies and the like So the EU’s holding the line on these sanctions constitutes a bigger economic sacrifice for them in many respects particularly for those countries heavily linked to Russia through trade on Russia’s periphery The sanctions can be enhanced by the European Union and in fact they are well placed to do so There are a number of what have been referred to as loopholes in the European sanctions on Russia by comparison to the United States sanctions involving the grandfathering of certain business and the availability of certain Russian firms to raise funds in European capital markets That could be closed off That would be at a great sacrifice to the European economy one which many in Europe believe is worth it And what is Russia doing to undermine the European Union What we witnessed in the United States in terms of Russia’s malicious cyber intrusion into our electoral process in 2016 is occurring in Europe It is active It is well documented including support for political parties and disinformation campaigns Senator REED Just let me qualify The European Union is an institution itself with an elected President et cetera Are they targeting the European Union as an institution as well as the countries Ms ROSENBERG I think it would be fair to characterize the effort by Russia primarily aimed at individual countries because giving rise to nationalist political currents in these individual countries undermines the project of European unification which is Russia’s aim and undermines transatlantic unity Senator REED Mr Lorber and Mr Ludema any other comments that you think would supplement Ms Rosenberg’s comments Mr LORBER A couple Thank you Senator On the first point what is the EU role I agree with Ms Rosenberg and would also like to say that the EU program is actually very very similar to the U S program They have an SSI type of program They have a list of designations There are a number of designations which are different so they do not have a number of people on their list that we have on ours and vice versa And so that is one particular area where we could align better and have them ramp up pressure Also building off of her comments in ways that we can enhance the EU sanctions or have the European Union enhance their own sanctions one area in particular is related to entities that are owned by Russian companies that are operating in the European Union In general these entities are not subject to the EU SSI sanctions and that is a European decision to limit the damage to their economy That could be a particular area where we focus on to have them go after And then on your last point the question about what is Russia trying to do to undermine EU unity in effect in addition to the cyber activity Russia has engaged in and the empowerment of far right parties Russia has actively engaged in trying to pull one or two EU countries out of the sanctions sort of cooperative regime because EU voting rules require unanimity and the sanctions must be renewed every 6 months They were actually renewed a couple VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 15 days ago And to the extent that the Russians can basically buy off one or two EU countries such as Hungary that can actually undermine the entire sanctions campaign from the EU side Senator REED Doctor your comments Mr LUDEMA Yes I think that EU participation in this has been extremely important The European Union is much more integrated with the Russian economy than we are They have potentially more influence but of course they are also more sensitive when it comes to collateral damage On the question of what is Russia doing they are constantly— constantly—filling the airwaves in Europe with negative news stories about the impact of sanctions on European companies claiming way beyond the evidence that these things are having a devastating effect on European economies And part of the reason that we wrote our paper was to demonstrate that by and large that is not true Senator REED Thank you very much Thank you Mr Chairman Chairman CRAPO Thank you Senator Senator Sasse Senator SASSE Thank you Chairman Thank you to all of you for being here How rich is Vladimir Putin Ms ROSENBERG We should assume very rich although the amount of his assets has been a longstanding question There is no full disclosure Mr LORBER Again there is no full disclosure so it is unknown My understanding based on public source reporting is that it is in the billions if not tens of billions of dollars Mr LUDEMA Yeah I do not have a number on that either but certainly his ability to tap into vast sums of money through his cronies and his network is—well it is enormous Senator SASSE Can you remind us of his sort of resume his work history How did he get rich Mr LUDEMA Corruption Mr LORBER I am not a Vladimir Putin expert but obviously he was in the KGB as a colonel for a long time and then—— Senator SASSE They make tens of billions of dollars right Mr LORBER They make tens of billions of dollars primarily through corruption and proceeds from state enterprises is my understanding Senator SASSE So could you bound the illicit economy for us in Russia What are its key industries And how did it happen Give us sort of a sweep—you know Nebraskans when they think about the demise of the Soviet Union we remember sort of Warsaw Pact versus NATO And in 1989 the wall falls In 1991 the Soviet Union dissolves Nineteen ninety-one 1991 to 1994 or 1995 we have this vision that there is going to be this sort of rise of democratic capitalism in Russia That does not happen So from 1995 until maybe 2 years ago give us a 20-year sweep of the Russian economy and sort of the role that illicit industries and cronies play How does this develop Pause Senator SASSE Not all at once please VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00019 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 16 Mr LUDEMA I will take a stab I do not know if I would call them ‘‘illicit industries ’’ but certainly crony capitalism has been on the rise ever since Putin took power One of the reasons despite high oil prices prior to the sanctions regime despite high oil prices the Russian economy was underperforming was precisely because of crony capitalism that is almost all of the big industries are controlled by Putin cronies They used them as their personal piggy banks They failed to invest adequately and it has significantly sapped the dynamism of the Russian economy such that even if oil prices were to recover and sanctions were to be removed I do not think you would see a miraculous rebound of the Russian economy Mr LORBER Thank you Senator Important I think to add to this point as well is that as Putin’s cronies were enriched and took over state-owned enterprises Putin also privatized—or sorry made public certain Russian Government entities oil-producing and put his individual sort of inner circle in charge of them to see the proceeds And then of particular note I think to this Committee Russian oligarchs set up a large set of shell companies of mechanisms for transferring illicit funds and frankly got a lot of those funds out of Russia And so we know now that through Cyprus and other jurisdictions with lax anti-money-laundering laws and regulations Putin and his oligarchs have actually managed to get all these funds into Western economies into real estate both in the United States and in London and other parts of Western Europe Ms ROSENBERG I think my colleagues have offered a number of strong comments and so I will not add more Senator SASSE Great Well we would love to follow up with you My team will reach back out because I think one of the core questions we face is the efficacy of the current sanctions regime the possibility of a new sanctions regime and its cooperation with EU and other members but also to what degree is it going to be efficacious if we do not have a lot of clarity about other places where money is housed that is not actually on the books in ways that can be transparent Please take a final word We have a couple seconds left Mr LORBER Thank you The Counteracting Russian Hostilities Act of 2017 has a provision in it related as I mentioned in my testimony to a FinCEN-led task force or some type of task force to assess identify and eventually seize illicit funds that are in the United States We know they are here we just do not actually know where they are And so I think that is one good proposal you could walk forward with Senator SASSE We would love to figure out ways to assist you in the work of being more transparent about those assets Thanks Chairman CRAPO Thank you Senator Menendez Senator MENENDEZ Thank you Mr Chairman for holding what I think is an incredibly important hearing and I appreciate the testimony of the expertise we have here I look forward to Administration witnesses so that we can actually move forward on developing policy at some point but certainly this is incredibly helpful VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 17 As the original author of many of the networks of sanctions that we have on foreign adversaries and belligerent actors I certainly believe that economic sanctions remain one of the most effective tools we have in our peaceful diplomacy arsenal which is rather limited When you speak about nonmilitary engagement it is the use of aid or trade to induce a country to act a certain way International opinion to the extent that our country is subjected to or willing to be affected by that—I do not think that Kim Jong-Un really cares that much—and the denial of aid or trade and or something that we have used as an increasingly effective tool which is financial sanctions to the most significant economy and financial system in the world And so when we do not want to engage militarily this is the universe that we have in peaceful diplomacy engagement So I do not believe it is a sword to take out all the time but I do believe that in certain cases it is incredibly important In the case of Russia they have violated the international order by invading and occupying sovereign countries interfering in elections across the globe to sow distrust in the foundations of democracy including here in the United States and oppressing their own citizens And if we want to ultimately have Russia and send a global message that there are going to be consequences for violating the international order and to send it not just in Russia’s case but in the case of others who may consider violating the international order it is sanctions that very often can be the tool I particularly get concerned about Russia not only interfering in our elections but violating arms treaties which has lost some attention but is incredibly important So I was pleased to join my colleagues in sponsoring the Countering Russian Hostilities Act Like anything it can be perfected but I think it is a way forward So I want to ask our witnesses I know that some of you have talked about the reticence of sanctions use and getting our partners particularly Europeans on board But isn’t it true that when we started the sanctions on Iran we did not have European partners on board at the beginning We brought them on board There are times in which the United States must lead and in leading it then creates an international coalition Isn’t that a fair statement Any one of you want to answer Ms ROSENBERG Yes certainly Someone has to lead and this body has in the past very effectively Senator MENENDEZ And if we waited for a coalition to take place first before we led we would not have brought Iran to the negotiating table as we subsequently did So I get concerned sometimes when I hear about that we will have reticence from our partners Our partners very often will have reticence but it is when we lead that we ultimately—and it is a robust diplomacy that is necessary to assure that and to show them why it is in their interest as well Do you believe that among your discussion—which I have read your testimony and got a synthesis of what you said—is that having targets—do you believe for example that the violation of the Intermediate-Range Nuclear Forces Treaty that Russia recently conducted a violation of by deploying a ground launched cruise missile system do you believe that sanctions play a role in ensuring VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 18 for example Russia complies with international arms control treaty obligations Ms ROSENBERG Sanctions have not traditionally been a tool used to address that kind of violation and as was demonstrated by the previous U S administration There are other messages of diplomacy or engagement that have been a first step toward addressing and disclosing those and working toward a remediation of them I would offer that I think that kind of diplomatic and direct engagement and disclosure is a first most important step and would reserve the option to consider sanctions but not as a first step Senator MENENDEZ Well I hope that the Administration engages Russia on its violation of that treaty That to me is one of the most significant violations that have taken place that are a real consequence to U S national interest and security as well as of course what they have done here in the cyber attack against our own democracy I consider that an attack against the United States one that if it was in any other dimension we would be responding to vigorously And we seem not to have been engaged in responding to it vigorously and I hope that we look at sanctions the perfecting of sanctions in that regard Thank you Mr Chairman Chairman CRAPO Thank you Senator Kennedy Senator KENNEDY Thank you Mr Chairman Mr Lorber do you believe the current sanctions against Russia have had any meaningful impact on Mr Putin’s behavior Mr LORBER Yes Senator I do I think that there are multiple indications of this impact The first element of this impact is from a deterrence perspective So there were indications so I have been told that Russia was persistent to engage in even more aggressive activity in 2014 and they stopped short because of the fear of sanctions Senator KENNEDY Well how do you know that That is like saying let me tell you how many fish I did not catch on Saturday because I did not go fishing You do not know that do you Mr LORBER That is a fair—I do not know that for certain Senator KENNEDY It did not stop Mr Putin from—it did not stop his aggression in Syria did it Mr LORBER No We did not have sanctions on Russia in response to Syria but that is correct It did not stop his activities in Syria Senator KENNEDY It did not stop him from trying to influence the American elections did it Mr LORBER I do not know—I assume it did not no Senator KENNEDY It has not stopped him from implementing a disinformation campaign in countries in the European Union has it Mr LORBER I think that is correct Senator KENNEDY OK What would be the most Draconian sanctions that the United States could impose upon Mr Putin unilaterally Mr LORBER So the United States—I am not recommending to do this—— VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 19 Senator KENNEDY I understand This is just information gathering Mr LORBER Yeah sure The United States could take a number of actions It could basically shut off the Russian financial system from the U S financial system It could order all of the U S banks to close correspondent accounts on behalf of Russian financial entities which would very likely have the impact of crashing the Russian financial system Senator KENNEDY Right Now you talked about—the three of you any of you could answer this I do not mean to pick on Mr Lorber You talked about Mr Putin in response to Senator Sasse’s questions and his net worth He is only the tallest hog at the trough There are others at the trough right Do we know where their assets are Mr LORBER We have some indications of where some of their assets are in the United States That was information that has been developed through FinCEN through one of their geographic targeting orders But we do not have a broad understanding of where their assets are Senator KENNEDY But you know where some of them are Mr LORBER We have been told that there is information suggesting that a lot of their assets are New York and San Antonio and Miami and San Francisco real estate properties Senator KENNEDY And you know where some of Mr Putin’s assets are do you not Ms Rosenberg did you not say we could trace some of their assets to real estate in Europe and in the United States Ms ROSENBERG Well that may have been Mr Lorber’s comment but I would agree that there is a broad perception backed up by certain evidence disclosed by the geographic targeting order from FinCEN indicating that Russian elite assets not specifically Mr Putin’s which—— Senator KENNEDY Do you know where Mr Putin’s assets are some of them Ms ROSENBERG I do not know—— Senator KENNEDY Do you think anybody does Ms ROSENBERG Yes I think someone does Senator KENNEDY OK What would happen if we froze his assets and those of his participants in the crony capitalism Ms ROSENBERG That I am not sure is—that seems to me a very challenging proposition in part because—— Senator KENNEDY Let us assume for a second we could do it What would be the consequences of that in terms of the global economy And in answering that what percentage of the world gross national product is the Russian economy Ms ROSENBERG I can speak to the first one first So if we are thinking about this hypothetical situation the assets of President Putin and his close associates what may be beneficially owned by them directly as well as indirectly are talking about a massive amount of money If it were possible to go after that I think there would be profound collateral consequences across the global economy and certainly in the United States This is—— Senator KENNEDY He owns assets of that size that would affect the global economy if they were frozen VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 20 Ms ROSENBERG What I said was his assets both direct beneficial ownership as well as indirect beneficial ownership and those of his associates Senator KENNEDY Well what would be the collateral consequences other than changing his behavior Ms ROSENBERG Well I will set aside changing his behavior but as far as the economic consequences I think it would be profound probably for all large U S global banks which would be in the position of implementing such a sanction It would be a compliance and liability nightmare for them as well as—— Senator KENNEDY I have got 6 more seconds so I have to interrupt you We have just been nibbling around the edges here The man is your testimony is worth tens of billions of dollars Time Magazine says he is the most powerful man in the world You cannot seriously believe that nibbling around the edges is going to change his behavior we either put sanctions on or not I went over I am sorry Mr Chairman Chairman CRAPO Thank you Senator Warren Senator WARREN Thank you Mr Chairman And thank you all for being here today Our intelligence community has determined that Russia engaged in cyber attacks on the United States to interfere with our election and several members of the Trump administration and campaign have questionable ties to Russia There is good reason to believe that President Trump himself has substantial financial ties to Russia only we do not know the details because he will not release his tax returns None of this is normal We are not even 2 months into the Trump administration and FBI counterintelligence investigations and congressional inquiries have already been launched Senior officials were caught lying to Congress A national security adviser resigned in disgrace because he misled White House officials and the FBI about his Russian ties And in the middle of all of this Donald Trump incredibly continues to consider lifting sanctions against Russia Now last week a Senate Subcommittee held a hearing with Ambassadors from six European countries—Ukraine Poland Georgia Latvia Lithuania and Estonia Four of these countries are members of the European and the NATO Alliance They are all American partners living on the front lines of Russia’s destabilizing influences At this hearing the Ambassadors agreed that the United States should not ease sanctions on Russia unless Putin actually makes some changes So let me start there Ms Rosenberg if we ignore our allies and ease sanctions without meaningful changes in Russia’s behavior does that increase or decrease Putin’s ability to destabilize countries along its border in the rest of Europe and around the world Ms ROSENBERG Certainly that would increase it Russia thrives in that kind of environment With its information campaigns and its destabilization conducted through information and funding of political parties we would throw our European allies under the VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 21 bus It would be difficult and damaging to transatlantic unity which is challenging for the pursuit of our national interests Senator WARREN Yeah and let us start with that basic principle that the purpose of sanctions is to discourage and change bad behavior If Russia stands firm and we drop our sanctions in exchange for nothing we are just weak So sanctions work better as you note when we coordinate with our allies and our partners Right now the United States and the European Union coordinate sanctions on Russia’s financial energy and defense industries for invading Ukraine’s territory and undermining its sovereignty These sanctions have taken a toll on Russia’s economy The EU sanctions must be renewed every 6 months and they did just that renewing them now until the end of July Ms Rosenberg is it fair to say that it is not easy for the European Union to keep doing this given the close economic ties between Europe and Russia Ms ROSENBERG Yes I think that is fair to say and particularly for some more economically exposed countries than others Senator WARREN And yet they keep doing it Why Ms ROSENBERG For a variety of reasons I would suggest that they value their unity with the United States and the messaging effect that this has They want to send a clear signal about what it means to violate Ukrainian sovereignty And notwithstanding the economic pain for them they still believe that this project and the self-sacrifice economically is worth it for the political and strategic benefit they may gain Senator WARREN And I understand from what you are saying here that one of our strongest tools against Russia is joint EU–U S economic pressure that this is much stronger if we are working together But if the United States unilaterally lifts its sanctions on Russia which of course then encourages the European Union to do the same how effective will U S and European efforts be to hold Russia accountable Ms ROSENBERG Well it may be very difficult to reestablish a united transatlantic front with economic measures toward Russia particularly given the nationalist political currents that are more prominent now than they were in 2014 So that is one primary problem that will be an impediment Also I would suggest that the United States and the European Union will lack credibility if they try and do this again because we look fickle if we impose and then remove particularly with no behavior change on the part of Russia Senator WARREN Fickle and weak Congress must be able to review any attempts by this President to roll back our sanctions against Russia I have cosponsored legislation that would do just that We still do not know what is going on with this Administration’s ties to Russia but as we wait for the facts to come out strong congressional oversight is needed to ensure that the President does not throw away our leverage against Russia for nothing Thank you Thank you Mr Chairman Chairman CRAPO Thank you Senator Senator Tillis VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 22 Senator TILLIS Thank you Mr Chair Thank you all for being here First and foremost I think it is an absurd notion to think that this Administration would act unilaterally to ease sanctions on Russia knowing what this President knows now So that is great for talking points great for the midnight news cycle but not a practical reality This body would probably vote unanimously against any of that activity so we need to make it very clear that is not on the table except for the political rhetoric And my answer to Senator Sasse’s question is Putin is as rich as he wanted to be He is a totalitarian dictator who is putting the lives of 140 million-plus Russians at risk in terms of them being able to feed themselves and live a secure existence What I think we need to talk about—look I am all for projection of U S might but I happen to agree right now that Vladimir Putin is probably the most powerful man in the world He does not happen to lead the most powerful nation but either legally or illegally he can bring weapons to bear and devices to bear that the United States would not And so we have to recognize him for what he is But by the same token we should not take the bait and overreact at the expense of hopefully winning the hearts and minds of the Russian people Right now the Russian people—you know it is kind of difficult to figure out in the mind of somebody who you call up and ask what is your opinion of Vladimir Putin if you live in Russia You are probably inclined to say you like him whether you do or not But the reality is he is polling at 80 or 83 percent in terms of public opinion So if we attack Putin and I think to use your words Mr Lorber our response is too powerful it could be at the expense of ultimately achieving what we want to achieve So my question to you all is What would be a more exquisite more sustaining regimen of sanctions that—you know we can talk about the money laundering we can talk about their weapons laundering We can talk about any number of manipulative practices that either Putin knew about or should have known about We can talk about their sovereign incursions and everything else But have you all thought about like an idealized framework a multilateral engagement with the EU or NATO partners what you would consider to be an idealized framework to really get to a point where you do not harm the individuals in Russia who are really I think peaceful people that we would like to develop a good relationship with but these greedy lawless leaders at the top what sorts of regimens could we put into place that would make them start producing a better behavior that is to our mutual best interest And in that we talk about energy policy relating to sanctions making it harder for them to extract and distribute their natural gas in particular because there is a heavy reliance in Europe and I understand that and the effect that it would have on our partners which would make them apprehensive about going that direction But I do believe U S energy policy can play a very important role in providing European nations with a choice that will make them have more options as we have to move forward and ratchet up sanctions So in my remaining time if you can give us an idea of—let us cut the politics out of this let us get to a good sustainable place VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 23 in sanctions—what does that look like from an idealized perspective your idealized perspective We will just go down the line Thank you Mr Chair Ms ROSENBERG Thank you for the question I think this is a really important question to think about the framework and the strategy for an incremental and sustainable imposition of sanctions escalation of sanctions I would offer two principles right at the beginning and the first is that sanctions should not be the only policy tool used to increase pressure on Russia and furthermore that in addition to pressure on Russia economically I would suggest and urge a corresponding outreach to the people of Russia to try and counteract along the lines that have been used in other sanctions programs people-topeople exchanges encouraging that to counteract the narrative that will be prominent in Russia even more prominent than it is now that these sanctions are meant to punish and penalize the Russian people The first best step for enforcing and strengthening these sanctions is to further enforce sanctions already in place authorities already on the books and there is plenty of scope within the existing authorities So in your capacity of oversight of the Administration urging them to do things like add additional entities or sectors to the SSI list further restrict new kinds of financial products that are restricted for those entities on the SSI list and adding more names that will all have an economic effect and a strong signaling and deterrence effect and that is an area apropos of Senator Menendez’s question where the United States can and should lead partners who can and should do that in addition There are opportunities there for Europe along with the United States After that is a good opportunity for new sanctions authorities as are being considered in the Senate and the House right now Chairman CRAPO Our time has expired and we are going to be really tight getting through all of our Senators so if the remaining two witnesses have anything to add you could briefly do so please Senator TILLIS Actually I would prefer just to defer and if you would contact my office this is particularly important to me I sit on Senate Armed Services so I would like this feedback I would like to act on this not just hear your comments and wait for the next hearing Thank you Mr Chair Chairman CRAPO Thank you Senator Senator Tester Senator TESTER Yeah thank you Mr Chairman for holding this hearing and to you too Ranking Member Brown I think this is a critically important hearing It is important for the American public and all of their elected representatives to remember this Russia attacked the United States and sought to undermine our bureaucracy It is not a partisan issue It is not something we should be playing politics with though I am increasingly concerned that we may be heading in exactly that direction We all took a solemn oath to this office to defend our Nation from foreign threats and we must not lose sight of that duty Before I talk about the sanctions I want to talk about where this Nation and Congress is currently We have become far too VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 24 politicized which really threatens our national security and I am troubled when I see respected voices like John McCain and Lindsey Graham hear their voices fall on deaf ears of their leadership when they call for a bipartisan transparent investigation into Russia’s action I am troubled when the American people are stonewalled from learning more about the connections between Trump’s team and Russia Just this past week we had a close associate admitting that he communicated privately—a Trump close associate admitting that he communicated privately with a hacker who was believed to be a front for the Russian military Before that General Flynn lost his job for misleading the Vice President of the United States over the contents of conversations that he had with the Russian ambassador Americans deserve an independent transparent view of these types of relationships and that will strengthen our democracy Failure to do so would play into the hands of nations like Russia and Putin who seek to do us harm I believe that the sanctions that are in place in response to Russia’s attacks on our democracy and aggression in Ukraine are a starting point but I believe more needs to be done I will cut right to the chase We have put sanctions on a lot of different folks out there I need to know from the folks here—and I thank you for being here by the way—your opinion on what would be the impacts if we sanctioned Putin How would that be viewed Anybody can jump in on that Ms ROSENBERG I think that would be an incredibly aggressive step particularly as a next step And as I was suggesting in my previous comments I think there is a range of appropriate steps that could and should be considered before then There are very powerful implications of going after a head of state in this way that I think may not be the next step amongst the variety of tools that Congress should consider Senator TESTER And before we get to you you have laid out your steps—you do not have to do it again but you have laid out the steps that this Committee should be looking at Ms ROSENBERG I have laid out a number of them in my testimony and would be happy to discuss them further Senator TESTER OK Go ahead Mr LORBER I agree with Ms Rosenberg’s assessment I think it would be a very aggressive action that might not have economic effect on Vladimir Putin but certainly would send a very strong and perhaps too strong diplomatic signal Senator TESTER OK Good Mr LUDEMA I think that putting aside the wisdom of taking such an action from a political point of view the economic effect of doing that would be—according to our research would probably be quite negative for Mr Putin and probably would not have a substantial economic effect on the United States or the European Union Senator TESTER OK Could you just quickly go through—and then I will give up the rest of my time—the steps you think we need to be considering Elizabeth Ms ROSENBERG I would offer that the first of those would include encouraging the Administration to enforce—as well as EU VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 25 counterparts—existing sanctions further That may mean adding new entities—— Senator TESTER OK Ms ROSENBERG ——or sectors to the SSI list restricting different kinds of financial services that are—— Senator TESTER OK Ms ROSENBERG Right And then perhaps additional authorities some of which have been discussed or proposed in legislation before the Congress right now having to do with financial services and energy Senator TESTER OK Thank you very much Thank you Mr Chairman Chairman CRAPO Thank you Senator Senator Heitkamp Senator HEITKAMP Thank you Mr Chairman You know billions and billions of dollars if you were just into this for money you would take the money and go someplace else Obviously this accumulation of Putin’s is really related to power and continuing and maintaining power And obviously what you get from this Committee and the discussion that we are having today is that sanctions on Russia do not necessarily curb behavior when someone is accumulating enough power that he can in fact continue to behave with impunity on the world stage in ways that all of us should find reprehensible including the absolutely brazen attacks on our electoral system And so we continue to be concerned about the amount of power that Putin has accumulated especially given that he has made this seemingly in the interest of the Russian people It makes this really complicated on how you deal with changing his behavior There are two things I want to talk about Number one is this sense that if we cooperate with Russia if we turn the page and have a different relationship with Russia Russia will be on the same page in the fight against ISIS That was one of the expressed theories of this Administration going forward I would like to hear your comments on whether you think that is a wise course even assuming that we have the same interest as it relates to ISIS Mr LORBER Do you mind if I take that first So putting aside whether or not Russia would be a good partner in the fight against ISIS which I know there is a lot of debate about I still think it would be a mistake to trade sanctions for cooperation in the fight against ISIS in large part because that would signal to Russia— for example if we said ‘‘Well you know what We are going to drop sanctions against Crimea that we have imposed ’’ it would signal to Russia that they can go ahead and continue their types of destabilizing activities in Eastern Europe and it would also signal frankly to the rest of the world that principles of international law such as sovereignty are not as important to the United States as are other potential norms Ms ROSENBERG If I could add to that I think it is important to bear in mind that the bilateral relationship we are talking about with the United States and Russia is very broad It of course includes a variety of different files even in just the security domain It is completely feasible to envision a relationship with Russia that may involve some element of cooperation or coordination in VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 26 perhaps the Syria file where there could be some kind of transactional politics and agreement and simultaneously envisioning in for example the Ukraine file a maintenance of current sanctions and a relationship of pressure That was the case with Russia in the last Administration for example when we saw the amplification of Russia sanctions while seeing simultaneously coordination with Russia on the Iran file to remove sanctions I think that principle of a variegated relationship is one we should hold forefront Senator HEITKAMP We have spent a lot of time talking about the European Union We have not looked much into Asia and the relationship that Putin has with China that Russia has with China and the opportunity that he sees right now with the Arctic opening up and the challenges that we have in the Arctic I would like just a quick—I only have about a minute left but anyone who feels comfortable talking about how we need to engage with China in this discussion and also what opening up the Arctic has meant to his potential expansion on energy Ms ROSENBERG Speaking to the Russia-China relationship this is one in which Russia is the junior partner to China which has been very aggressive with Russia in its contractual demands for energy for example It has not as some feared it might been the backfill for European and U S sanctions providing lots of capital where it was not available from the United States and European Union Senator HEITKAMP We want China to continue to drive really hard bargains Ms ROSENBERG And for that reason this Administration and Congress should set a tone of communication with China rather than antagonism in order for China to continue to set those hard bargains Senator HEITKAMP I am out of time and I want to respect the Chairman’s desire that this move along But I did want to maybe follow up with you on the Arctic question I think it is critical Chairman CRAPO Thank you Senator Mr LUDEMA Can I just give a quick answer on that one I think the ability of the Russian energy companies to take advantage of the Arctic is already being severely limited by the existing SSI sanctions because that is precisely the technologies that are being restricted Senator HEITKAMP Thank you Chairman CRAPO Thank you Senator Donnelly Senator DONNELLY Thank you Mr Chairman I think that weakening sanctions against Russia is like saying that we support their invasion and occupation of Crimea of Eastern Ukraine of their actions in Syria of their destabilizing Eastern Europe of their attack on our election system and our country and their cyber attacks as well And so I think to even discuss that is astonishing to me for any Government officials to be talking like that Mr Lorber the question I wanted to ask you is that you noted in your testimony the fact that large sums of Russian money have been flowing into U S real estate markets Russian oligarchs close to Putin are likely laundering funds through a network of shell VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 27 companies and depositing them in the United States through real estate investments How can we work with the Financial Crimes Enforcement Network to discover these suspect investments and to better find them and to seize them Mr LORBER Thanks Senator So the Financial Crimes Enforcement or FinCEN has over the past 2 years established geographic targeting orders which track cash payments or cash purchases of high-end real estate in a variety of markets and that has provided FinCEN with information as to who is actually making these purchase And often in cases it has turned out apparently to be Russian oligarchs That is kind of the first step which would be not only identifying that information but then having FinCEN work with the Department of Justice and with OFAC to identify who those individuals are if any of those individuals are sanctioned entities sanctioned persons to seize those funds—— Senator DONNELLY Have any of these real estate purchases been seized here in the United States Mr LORBER Not to my knowledge but I—— Senator DONNELLY So why would they be hesitant to continue to launder their money through this if zero have been seized at this time Mr LORBER So I do not have particular knowledge of where FinCEN is in terms of the information that they already have If I had to guess it would probably be to say that they are developing cases against particular individuals But I do not know that Senator DONNELLY I think a very cursory effort could provide them with about 100 quick targets throughout the United States don’t you I mean you know the joke in New York is all you have to do is walk through Midtown at night and you can see all of the luxury developments where you know floor after floor after floor are completely dark Mr LORBER I agree I think that these targets are sort of lowhanging fruit or ones that we probably have readily available to us to be the subject of enforcement Senator DONNELLY So what do we have to do to get FinCEN to move on these Mr LORBER Again I do not know where FinCEN is specifically in terms of this process They could be just at the cusp of going after them though Senator DONNELLY Well my next question is There are public reports indicating that the FBI may be investigating in one way or another Alpha Bank which is a Russian bank My understanding is Alpha Bank and its key stakeholders are not on the U S or EU sanctions list Is that correct That is for any of you Mr LORBER I do not know off the top of my head I can run their names through the SDN list and come back to you with an answer Senator DONNELLY OK Elizabeth Ms ROSENBERG I believe that is correct Senator DONNELLY OK Are any of you familiar enough with Alpha Bank to assess its relationship to the Russian Government and to the network of oligarchs tied to Putin Mr LORBER Unfortunately I am not no VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 28 Senator DONNELLY OK It seems the most effective sanctions are the ones against the financial sector I mean that is just what it seems to me What can we do to make those sanctions against the financial sector more effective If you had one suggestion—I just have a minute to go—I would love to hear each of your suggestions about what we can do to make financial sector sanctions more effective You each have 20 seconds Ms ROSENBERG Broadly expand the entities targeted by SSI sanctions and certain of the financial products restricted to them Mr LORBER Increase the OFAC and relevant European Union and EU member state enforcement authorities so that they clamp down and make sure that no sanctions violations are occurring Mr LUDEMA Well you could ban holding of existing paper rather than just new issues of paper Senator DONNELLY OK Thank you all and I just want to say one other thing Mr Chairman I want to thank Adam Szubin for his service to this country over the years He did an extraordinary job at great sacrifice to his family and we are much safer and better off because of his efforts Chairman CRAPO Thank you Senator Senator Van Hollen Senator VAN HOLLEN Thank you Mr Chairman I want to thank all the witnesses My State of Maryland is home to the U S Cyber Command and I think we all know that cyber attacks cyber warfare cyber interference is sort of the new dimension of international conflict So I just have a few questions with respect to how we can use sanctions to deter that kind of interference We see it of course on the commercial side as well as on the political side On the commercial side my understanding is that the Department of Justice actually just announced that it is going to indict two Russian Government officers for the cyber hacking wire fraud and trade secret theft regarding Yahoo’s breach of about 500 email accounts That has obviously been an ongoing investigation Under President Obama we also had the sanctions targeted against certain Chinese individuals who were engaged in cyber theft But I want to just focus for a second on using sanctions with respect to cyber interference for political purposes We have all talked about how the Russians interfered in our elections There is no dispute about that They use cyber they use fake news They did it to support Donald Trump’s candidacy That is the unanimous verdict of our intelligence agencies And we also know they are doing it on an ongoing basis to interfere in the elections of our European allies—France Germany—and we are going to get the results later today of the Netherlands elections And they are doing it for the purpose of trying to undermine cohesion in the NATO Alliance trying to undermine the European Union because they want to encourage these nationalist sentiments that try to disrupt the unity that has been the cornerstone of our defense and our economic relationship So we know what their strategy is My question is—and I could not agree more with my colleagues that not only should we make sure we pass legislation to prevent the rolling back of any sanctions currently in place by the United States and others but I think we also need to join with our VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 29 European partners to respond with sanctions to the interference in our elections these cyber attacks My question for all of you is What do you think the appetite of our allies would be to ratcheting up sanctions against Russia specifically for their interference in our elections through cyber attacks and interference and hacking And how would we best go about doing that persuading our European partners that it is in our collective security and economic interest to do that Ms ROSENBERG Thank you for the question In answering this I want to step back for a second and say I think that there would be appetite in Europe and here to use policy instruments to respond to malicious cyber activity However in the framework of cyber deterrence I would suggest that these are still very early days and the development of a broad strategic doctrine for cyber deterrence may take decades as it did for nuclear deterrence during the cold war And there are no set rules of the road or a concrete escalation ladder for deterrence And once those are in place there will be an opportunity to discuss in more specific terms which measures would be amenable or advisable for European colleagues as well as in the United States However I would just say in this hybrid warfare including cyber activity and others there is certainly a place for sanctions amongst other tools Mr LORBER I agree with Ms Rosenberg I think the first step here is deciding for ourselves what the rules of the road are and then once we have made that decision then we target actors in a public way that we feel step outside those bounds And the sanctions for cyber activity in many cases may not have as much of an economic pinch as they do sort of a symbolic deterrence effect And so I think that making sure that we have established those rules first will send clear signals to our adversaries that this activity is outside the bounds of what we consider to be acceptable Mr LUDEMA We have already identified quite a number of cyber companies and individuals associated with the cyber attacks and singled them out for sanctions I would say that we would need to continue to find them and continue to sanction them What our analysis shows is that when you impose blocking sanctions upon these individuals it does have a significant effect and will degrade their ability to conduct further action Senator VAN HOLLEN Thank you I think that the prosecutions we brought against the Chinese actors certainly helped establish the U S -China cyber agreement So I appreciate your testimony I know time is limited but I look forward to following up with you Thanks Chairman CRAPO Senator Cortez Masto Senator CORTEZ MASTO Thank you Thank you Mr Chair I appreciate the opportunity to participate in this important discussion Thank you to the panelists I apologize for my tardiness I have a competing Commerce Committee meeting going on at the same time But thank you for the discussion and I have had the opportunity to review your written testimony as well Let me turn to the G–7 As we all are aware Russia was suspended from the G–8 after their incursion into Crimea in disregard for international law Has Russia’s suspension from the G–8 had VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00033 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 30 any meaningful impact on their economy their security or their influence And I am going to open that up to the panel And then along with that what can the coalition of G–7 countries do to be most effective in influencing Russia to abide by international norms and the laws moving forward Ms ROSENBERG I can start I think that it may be difficult to disaggregate the effect of removing Russia from the G–8 from other effects taken effectively and simultaneously including sanctions U S and EU sanctions and a reinvigoration of NATO with respect to the Russia threat However I think that a primary effect of this removal had to do with signaling and the message that it sent to Russia and the global community about the interest of this group in holding to norms particularly global norms sovereignty and what it means for Russia to no longer be welcome in that group of nations holding these norms Senator CORTEZ MASTO Thank you Mr LORBER I agree Thank you for your question And I think that the primary thing that the G–8 now G–7 could do is offer as a carrot for Russia’s reintegration in the case is that Russia fulfills its obligations laid out under Minsk or reduces its cyber activities et cetera So I think that is a very serious carrot that we can offer Senator CORTEZ MASTO Thank you Mr LUDEMA Yeah I would say that it was a political move and not an economic one I do not think that there is a great deal of economic benefit per se to being part of the G–8 or G–7 despite the fact that it is an important body for coordinating economic policy Senator CORTEZ MASTO No and I agree it is a symbolic move like the hearing we are having today I think is a symbolic move that is important for the United States You have also discussed expanding sanctions or improving on the current sanctions regime in some way And while there certainly must be repercussions for Moscow’s actions and they cannot be allowed to act with impunity how is this not just more of the same In other words what in Putin’s behavior or in Russia’s current standing makes you believe that this will produce any of the behavioral changes we are seeking from Moscow Ms ROSENBERG I do not think it is redundant to engage in the active reaffirmation of principles particularly when political circumstances change including in the United States and in Europe So reaffirmation of the posture toward Russia and condemnation of its aggression and foreign adventurism has political and messaging merit and it may have economic effect as well So I see it more as a reaffirmation rather than redundancy Mr LORBER And I think there is some indication—as I was speaking about with Senator Kennedy there is some indication that the sanctions have had an impact on Russian decisionmaking So for example you see Vladimir Putin and Foreign Minister Lavrov coming out on fairly regular occasions saying ‘‘We want to get the EU sanctions off of us we want to get the U S sanctions off of us They must be pulled down ’’ And so I do think to an extent it is impacting their choices Senator CORTEZ MASTO OK Mr LUDEMA I would say that standing pat is not the same thing as standing still The existing sanctions that we have particularly VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 31 the SSI sanctions will tighten over time as more companies roll over their debt as the Russian energy companies are forced to move out of conventional drilling and into more exotic drilling These things are going to slowly and systematically degrade the long-term growth prospects for the Russian economy So I do not think that we should think that just because we have not imposed new sanctions up to this point that these sanctions are not going to have a continued effect Senator CORTEZ MASTO Thank you My time is running out and I just want clarification on one thing you were talking about Financial Crimes division FinCEN And as the Attorney General of Nevada I had the opportunity to work with them So let me just clarify It was not that you were saying they were not taking action with whatever information they are gathering with respect to real estate purchase by Russian oligarchs correct Mr LORBER That is correct Senator CORTEZ MASTO You just do not know of the action Mr LORBER That is absolutely correct I do not know what action they are taking but I do not—— Senator CORTEZ MASTO That does not mean they are not taking that action—— Mr LORBER That is correct Senator CORTEZ MASTO ——as a body that gathers that data and working with those law enforcement agencies correct Mr LORBER That is correct Senator Senator CORTEZ MASTO Federal law enforcement Thank you I appreciate it Thank you so much for the comments today Chairman CRAPO Thank you very much Senator And I want to thank all of our Senators and our witnesses for following the time We made it almost by 5 minutes to 12 We just ran over a little bit To our witnesses I want to say thank you again also for coming I do ask that you respond promptly to questions that you will receive from the Senators who have 7 days to submit follow-up questions to you You have been very helpful to us When I hit the gavel I am going to be heading out the door fast because I am already late to another meeting But once again we appreciate this It is a critical issue and we will be working together to try to move forward on making sure that we develop the right policy for this country This hearing is adjourned Whereupon at 12 01 p m the hearing was adjourned Prepared statements and responses to written questions supplied for the record follow VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6601 S DOCS 25434 TXT SHERYL 32 Center fora New American Security March 15 2017 Testimony before the Senate Committee on Banking Housing and Urban Affairs Assessing U S Sanctions on Russia Next Steps Elizabeth Rosenberg Senior Fellow and Director Energy Eoonomies and Security Program Center for a New American Security Chainnan CrApo Ranking Member Brown and distinguished members of the Committee thank you for the opportunity to testify today on the topic of U S sanctions on Russia The nctions that the United Stttcs and the European L nion imposed on Russian entities and individuals O 'Cr the last se 'cral ye-ars have been among rltc most innovati 'C tllrgetcd and forceful examples of modem coercive economic statecraft Designed to respond to Russia's illegal ann tion of C' rimea and aggression in Eastern Ukraine the most powerful of these sanctions targeted Russia's financial services energy and anns sectors as well as individuals dose to President Vladimir Putin l11ese multilateral measures de vered a powerful message of transatlantic unity regarding Russia's breach of Ukrainian sovereignty and cultivated substllltial economic le 'erage for the West 'llteir impact and b·erage were significantly augmented by the oil price collapse in 2014 and Russia's resulting loss of hard currency to cope with the sanctions ' ce Transadantic leaders have linked implementation of the finsk agreements including a cessation of hostilities withdrawal of heavy weapons from the front lines restoration of Ukraine's borde sovereignty and political refonn to removal of sanctions ' Sanctions linked to Crimea can be removed when Russia returns control over the peninsula to Ukraine ' Additional recent U S and EU sanctions have exposed Russia's human rights record its destabilizing im·olvement in the conflict in Syria as well as its insidious cyber intrusions into U S institutions and political processes The e onomic force of these sanctions has diminished orer time as investors haYe adapted their business operations the Russian e onomy has stabilized and U S and EU leaders have not kept up the pressure of sanctions Now political sigmls from the new U S administration as well as from nationalist political movements in Europe that could impact upcoming ele rions and leadership in France and Germany that a warmer relationship with Russia may be forthcoming indicate to the 1 Andmt 1nomas Gcnn m Chancellor Mtd d Sars No Quick End 10 Sant lion Ag tinsl Ru ssia 1'htU7JISirttljfNmftt October23 2015 hups v vov ' '$j com articln gtnnan hancdlor-m rktl-sa '$- nO-quick cnd-lo-saoctionwgainst­ russia·l W561 J095 «J ackag e of Mtasucts for tbt lmpkmeotatioo of he- Mt sk Apemtnts » FtbNal ' 12 2015 cceS Cd brc h 10 2017 bup v v ·vu-1 -s« fr lS stts t p cnds P tek f-Mtasurts-for-lhe-lmpJemcnUiion·-of-the­ linsk-Agrtemeols pdf Nikki Halty RtmarL at a Ur Securit ' Council Brieftng on Ukr tine '-' U't' Security Counca Briefing on Uk 'lline New Yodc Ftbruary 2 2017 hnp$ USUlUI ote gov mnt ks 7668 Bold lnnovat1ve VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00036 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517001 eps B1part1san 33 pri tC sector that sanctions may present event less of an impediment going fol v-ard 'fllc U S Congress is in the position to enhance pressure through new sanctions in response to Russia's increasing aggression in Eastern Ukraine as well as its deeply concerning cyber interference in U S insti1Utions and ele 1oral processes Congress can offer leadership on the direction for an updated economic response and set the tone for appropriate diplomatic ovcr1Urcs to both European allies and Russian counterparts The Effects of Russia Sanctions The powerful economic effects of Western sanctions on Russia in 2014 arc dear and they have had an influence on Russia's forcign policy since that time J'inancial sanctions' locked major Russian entities out ofWestem capital markets and forced a scramble for hard currency and pressure on state savings to quickly repa ' massive debts ' They compelled U S and European oil companies to pull back from frontier oil development with Russian firms' and hampered Russia's access to military technology necessary to its broader security modernization efforts ' 'flle record of Russian economic performance o ·er the last few years demonstrates a period of distress From the beginning of2014 to December 2016 Russian external debt shrank from $729 billion to $519 billion ' and oflicials drew down t he Resel ·e Pund one of the country's two SO 'ereign wealth funds from $87 billion to S16 billion' In an effon to s abilize the economy Russian officials put in place a series of spending cuts to take effect over t he 2017-2019 period in education 20 percent in real terms ' healthcare 25 percent in real terms and defense 17 percent in real terms Russian economic managers also allowed t he ntble to plunge in value from 33 15 rubles per U S dollar at the beginning of 2014 to as low as 83 59 ntbles per U S dollar in January p ecuti• Order 13662 of Marth 20 2014 Blocking Prop rty of Additio Co tributio g to lhe Si tioo o1 t kninc c de ofFtdmJ g h tide 3 2014 16169·16171 bup wv w trt1 Suty ff '' rtsou« · ccntcrhaoctioruo Prognms Documents uk ninc_co3 pdf See Directi 't$ l 2 and 3 under Executive Otdcr 13662 'SCmond JftGalhcrt A YurofSanctK nsAg tin c t RU$su A European Asstssmcnt oithe Outc m and Puturt of Russi a Sanctioo s Cmtc r for S rntegic and International Srudj Octobtr 2015 hups csisprod S n l l O v '· '' Jfs·pubhc legtcy_file• fiks pubtiootioo 150929_deG b rt_S o crio l$Russi•-Wcb pdf 7 s Ibid See tlso Dirccti 't 4 under Executi'-c Otder 13662 Guy Chazan and Jack Ft cthy 'Rw na Arc1ic Enctgy Ambitions J pa rdis« by V -tem Sanction Fi JM ia Timu Septemb 'f I 2014 huP' www fLCom cO IIm1 41dl9b 16-31c9-llc4·al9b OOJ44Icabdc0 'Ex ulivt Orckr 13661 of M toch 16 2014 Blocking Pro rty of Additional Persons Contributing to the Situation in Uk inc c Je jl' krui · ' ' 3 2014 1m 1 38 huJ ' wv w trearury ff v resoutt t· ceoter s tioos Programs Doc umcnl$ ukr1in _eo2 pdf 'C nttal Bank of R a Bolan« of P•Y and Other Sut tic Comp cd under th Melhodology of th 61h Edition of Balanct of Payments and lntcm alional hl lt$lmcnt Position ManuAl 8PM6 Exttmal StiJqr SJaJish·a 111uary 17 lll17 hup • w d r n eog sutislic• P OO •· ' GnisllT of Fintnce of the RW$i11n F« crtti oll Key Figures of Res l' 't Fund Mttlf gtmel'lt Rtsmv FHd Mtr h 9 2017 hup old minfu1 1u cn fuod soatisoocs re•_key Russia's Restl' 't fund LiuJc Clungcd OverJ t ntl21' ' Rt tlm February 2 2017 http v 'W rtUIC S com article russi afwuls·idUSR4NICJ02C 9Andrt ' Movchan f Pt nOOns and Securicy Rus$lan Budgtl Rt 't llls Go ·emmml POoritif S Carnegie Moscow Centcr D«nnb r 1 2016 hnp c nt gi ru eommcnta' ' fa 66-1 4 JO lbicl 11 Luct ' Ikrtud-Sudrtau and Dougb s Bamc Russia's Ckfcncc Sptnding The fmpact of Econormc Contr tetion Miii 'JIJnlm r Jll g P•IIsf-iht ISS Dtfi»« J Miit 'J AM Jsis Prog m Mon h 6 2017 http • w uss org en militarybolanccblog blogsections 2017 c fll1r h·ro 5 russiu- lcfm« sp nding·1dc6 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 C ASDC PO 00000 Frm 00037 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517002 eps C AS ORG 34 2016 Capital has Aed Russia roughly $210 billion in 2014 and 2015 combined '' and GOP gt'0 '1h con racted from 0 7 percent in 2014to negative 3 7 percent in20l5 and while it climbed back last year growd1 remained negative Russian officials have acknowledged publicly that sanctions had an economic effect President Putin stued in January 2016 that sanctions are hurting us Sanctions were a meaningful contributor to Russia's agreement to the Minsk accord in September 2014 and the Minsk II revil·al in February 2015 Arguably Russia refrained from more expansionist political and territorial aims because of Western sanctions pressure Despite the ongoing and serious violence in Eastern Ukraine Russia and separatists are not pushing deeper into Eastern Ukraine or seeking a potential land bridge to Crimea During this time howe ·er under the cover oi a retaliatory sanctions campaign President 1 Jtin implemented an import-substitution program to prop up the Russian agricultural sector and decried Western economic attacks His popularity grew from 61 percent prior to dte conflict in Ukraine to 84 percent in February 2017 A Diminishing Economic Force Over the last couple of years the effects of Russian sanctions have significandy diminished This has been one tmportant f lctor in the recent Russian economtc stabilization Cautious investors scared off by the sanctions are beginning to return and Russian fums have succeeded in bringing in financing that can be shifted to some of the state owned finns direcdy targeted by sanctions a loophole in the sanctions on Russia For e' 'mple the 2017 Eurobond issuances are expected to be almost t riple the 2016 amount Also in 2016 capital flight 's d1e lowest since the iinancial crisis in 2008 and one tenth of the 2014 rocord'' Russian economic growth is expected to rebound to 1 1 percent growth in 2017 19 and currency value has smbilized at 58 91ntbles per U S dollar Oil prices have risen roughly 108 percent from lows in Januat ' 2016 and Russia has expanded its ak ady massive energy output by 4 4 percent between January 20 1 and January2017 drawing in ctitical new revenue streams for smte budgetS In February 2017 Moody's upgrAded Russia's outlook to Srnble from the Negative rating it had given in ilpril2016 Exchange Utt A«hn· S by Moo th lnttmatiooal ' ' ' 'Fund M u h 9 2011 hnp w•w imf otg Xtemal np fin dafl P'ro m ms Jllth tSpx u Leonid kl'$hidsl · ' Ocutf Chc nJ 's Ru i m Scheme lsntr Netdcdin 2011 '' 8 h9m January 31 2017 http$ v -v A• bloombtrg com 'iC'Y · arti ks 2017 01 431 drut ht-bank-Hwsian s hcme-isn n« kd-in-2017 14''Subdued 'mand Symptoms and Remedies Wtm'J 114f ri OtttWM lnttmalional lonttary Fund Octolxor 2016 hup I ' unf otg tx ttnul pubs ft weo 2016 02 #21 nex 15 Kenneth R Jpou •Putin Admits Sanctions Sapping Russia Fltbu O tobtr 21 2016 hnps • •w folb •- om sit ken poz J llll6 10 21 putin ldmiiS·S»Ktions·s lj ping·ruci• #6505•76c25d4 '' ''Putin's Appro ·al Rating Yuri u ·ad t ArWytical Ctnter February 2011 hnp ·wwJewda ru en 17 Kira z s ' 'l O 't stars Align for Russil n Euroboad $$U S After Thrte-Y Drought RtN1d1 February 21 2017 http •' w rtut n « on atticle ruci - uroboods idUSI SNI G61QS 11 6el'$h ici$J y Deutsche Ba-ok's Russian Sch¢roe Jsn't N'« kd in 2017 19• Subducd cm md IV'orkll tr «mtit0ullt»l 3l As of March 3 2017 Bxch ange Rate Archi 'fs by Month ' U S lln rgr lofonn tion Agen y EIA Europ Brent Spot Price FOB larch 3 2017 Act Ma h 13 2017 https •- w eiLgo • do •• pe• hist LetrH dkr shx n PilT s rone f D 12 Ministry of Enrrgy of RU$$i21l F«ien tion St ttishcs Acct'S$ed h n h 9 2017 http rnincnerrp ffJ'· ru ro acti ity statistic l Arney Stone ·· food $ Sees Rw s ia'' Crtchtwor1hineu Stabaiting Bartrms Ftbru-uy 17 2017 http bl barrom oo n in omeio ting 2017 02 17 mood 's ' ' lt j ' ohi ' ' bilizu g VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 C ASDC PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517003 eps C AS ORG 35 Surely the Russian economy is nor li ing up to its t 11 potential with property ownership rules and macroeconomic 1mnagement ar significant faul However the resilience and smbilization of rhe Russian economy confirms that re ent impediments ro investment and growth specifically sanctions are no longer cultirating truly difficult economic conditions At presen cl1ey do not appear to be impeding plodding growrl1 and seem highly unlikely to compel President Putin ro make any concessions to the West All sanction programs will lose their force over time as economic aCtOI'$ find work -arounds and circum ·ention opportunities Simply put the leverage d1at sanctions generate is a perishable asset If policymakCJ'$ do nothing to alter or update sanctions or enforcement authorities do not mke actions against violations the effects of sanctions will continue to diminish In the Russia case diminishing sanctions cffccri •cness redounds to the benefit of Russian econonric and inremational business interests 13roadly speaking the reason for declining economiC efti rs of the Russ1a sanctions is due primarily to alack of their maintenance U S and EU policymakers made only very limited cffom in this area in d1e last couple of years signiticand ' due to a lack of political will in Europe to craft and impose new sanctions European leaders hare increasingly struggled over the last two years ro hold the line on these sanctions doubting their utility and advisability Since the U S presidential election President Donald Trump's friendly smnce toward President llutin has given rise to the perception that the L nited Smtes will pull back from sanctions or ar least from their enforcement President Trump has stated I would love to be able to getalong with Russia For m 1ny this indicateS an impending removal of U S sanctions on Russia and dte viability of signing new contracts with Russian firms Upcoming ele tions in France and German ' in which Russia-friendly parries are making a strong showing also contribute to the perception that Russia will soon come in from the cold and sanctions will ce sc ro be the threat the ' once were ' Additionall • the slow departure of the United Kingdom Europe's major fmancial center from the European Union signals to the business community the appearance of crJcks in the oommon European foreign policy that hold e onomic sanctions in place Russia is actively exposing and seeking to deepen these various tissures among transaclantic partnCJ'$ and pushing back against the weakening sanctions edifice Through military posn1ring media and cyber manipulation and selected economic intenoention President Putin has bt en trJnsparently engaged in a reprO'ach of Western interests and unity Ht has directed an aggressive role in Syria in Michatl Bin•baum Europun lttdtrSihtttttL t'IC 1 sanctions against Rooia ' Thr U7t1JliR f JR PM Oetober 20 2016 hups v ' 'W -'1 - iogtonpost oom world european·ktdct$·thtt uen · lltW•sancoons·agtinst• Nssia 2016 10 20 c6f82-l % e tle6·9ote 2a357 fc296 6_stocy bunl utm_lenn 9bf•9f l79 0 25 Brim Naylor 'Nobody that I know oP Trump lftnics Clmpaign Contxts lh Rtmla NPR l ebruacy 26 2017 http v ' w npr org 2017 02 16 1 S624391 oobody that-i-know-o -trump dcnies-campaign ontac l$· th-nmia 'M mhcw Dahon FaoC l'oised for Pro Ru ja Pi•'OI Tbr lflaO Shu J - Occ mbcr28 20t6 hups •- w wsj om artick frtn«·poiS«J for-pro·NSSi a·pi ol·l482946472 S tfan ' agst i G nna politi ' Russi2's nrX I targtt Fi t MJT mr Januuy 29 2017 hltJ» v 'YI w flcom conl rnl 31 758 - '3d8- ll c6-%4 4 c93 7a7 844 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00039 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517004 eps n Lturtn e Nonnan Brexit Likdf to Alte-rEU's Sanctions Polic- - Tht WJ SimiJwn al Ottobcr 6 2016 hups '' ''· j com utic b brtxil· k lr·•o-th Hu an li ns·poticy-147S726 l l 36 support of President Bashar al- ssad under the guise of counterterrorism Russia has backed continued hostilities in Eastern Ukraine which have ticked up recendy and in a newly provocative step has recenrly begun ro recognize passpons from the break-away Republics of Luhansk and Donetsk Russia is in ongoing ·iolation of the Intermediate Range uclear Force Tre-aty a conterstone of post-Cold War nuclear arms control Russian airplanes rccendy buzzed a U S aircraft carrier in the Black Sea ' and they have approached the airspace ofJapan and allegedly violated cl1e airspace of the Baltic states all allies of the United Stares'' At the preeminent global energy forum last week in Houston a massive Russian delegation boasted about lucmtive and ·ast ntw opportunities for Western firms with Russia the world's largest oil producer Energy minister Alexander ovak told the industry Russia is open it is open to invcstmenL' ' ·n ese projections of Russian force and the assertion of its economic strength clarify that Russia is a serious if more limited international competitor The West increasingly wdl have to contend with Moscow to advance its security interests and leverage Evaluating New Sanctions Choices The new U S administration and Congress are now contemplating policy tO vard Russia and how to handle sanctions measures as part of that policy 1be White House has not yet charted a definitive path forward with the Kremlin or for that matter with European allies Just before tlking oflice President Trump suggested d1at a removal of sanctions is possible ifRussia helps the United States to counter the Islamic State of Iraq and Syria QSJS and achieve other goals He said if you get along and if Russi is r ly helping us why would anybody have sanctions if somebodfs doing some reall ' great things ' ' More recendy Secretary Tillerson has aitirmed the adminismuion's intent to hold d1e line on sanctions'' Members of Congress have met re1•elations by the U S 8 'Eastem Ul r Uoe itness ' t o cnt' v 'ttk in o ·er a year $t S OSCE '' Dtlt stlx 111tl lr February 10 2011 http vlYi'Yi1 dw com tn ta$ttm·ukninr-witutsScd nost- ioknt-Wttk·illoQ 'tr·t· 'tU·S2 'S c •·3750256S 'Gemta ll ' 'Unacceptable' Tlut Rw si1 Aocepts SC'ptn tiH Uk raiJ e Pus portst Dr1111thr Wtlk F' b®ty 2017 http v Vi w dw oom cn gtwmy·uJUC«ptttble-th at-ru lN c«pts·sepa uiUt·uk rmne·plssports a- 7 l9 Michael R Gordon Russial-hsOcployed Missile lhrrtdbr T a ty U S Gener t1 TdhCon ss Ntw Yo rk 7iMts Mardt 8 W17 hHps www nytim s com 20t7 03 08 us politics russia-in -mWil -ln aty htmt _r O » h·an Watson aud Sebastian Shukla RU$Si ao Fighter Jeu tBw t US Wa rs hip in Blaclt Photos Show CNN erJM Febtu'l ' 16 W17 http www am com 20t 7 02 t6 us U U-us·ship· ly-by Frmz SttJ m Gady 'Japll l Scrunblcs Fighl_cr Jets to Intercept 3 RU$ S ian StDtegic Bombers Tbt Vipt at Ja nuary 26 2017 http thcdiplomalcom 2017 01 japan·m'llmhlcs·f-ighttr· ls·l o·int rccpl·3·nw an·stnt bomber s l2 DamienSha Xo · 4 Ru isit PromplS 20 ato Air Forte Scr unbles In Baltic Nn•f11 rtk October 10 2017 hnp v ' W t'lcv 'S-wttk c om russi a-prompL s·2il-nAtO·air-for««n mbles-bahic SOS727 Lia Fcrdinando RussUn ll Airspoce Violotions in Noroic·Baltic Region Dtngtroos Wo k Say• 1 v Oetobcc7 20t7 http f w w ddeo gov No Artidc Mi lc %$ 71 IUS'i n· Urspocc·•iolatioos·oH ordic ahic· gion- bo g rous· wort·Sl '$ Altundec No•- k RIWia'sEn rgy Futwt CERA Veok Houston Ma eh 7 20t7 Pet r Nicbob Paul B«kott OOGo Jd F Scib 'Trump Optn toShiCt on R • Sane1ioos 'One Chint'Policy J'hr IJ'1ttUSlrttt j6Hmo JtnW r ' 13 2017 hnps u w wsj oom t1rtKks dooald-trump-sets·t·b ar·for·N$Sia· d-dUna· 148436QjW C d Schn ck Uimmi n l t S ys TiDmoo Pttdg s U S Suppott Against 'R an Aggre n RFI RI Ma h 7 2017 http f• w n d org o ukrnnNays-u tili IS n-pi dg HuppOtt-vs-nusia-aggression 2S356t88 hunl · tini st r of Fon igo Arfai Ukrou c Pavl Klimkiu hddo m ting th d U S S n lal ' fS at RexTilknon finistl 'O Fomg Arfai o Uk ai '· N - M•rch 7 2017 http m o gov u l en press-cent r •leu• 5538t-mini11r· zskordonnih-spnt '·ukrajini-pavlo-klimkin-pro iv-zu i-ltich-z erzhamim ·sekrctarem·ssha·reksom ·till nomministr· ukordonnih· prA '·ukrajini-podra kuva '· a-solidamis ty-l polochenih- hllli ··u-borotybi-uknjilli-proti-agrmji­ VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00040 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517005 eps rfposlidoma·pral tichna·pi 37 intelligence community of Russian intruSion inro the U S electoral process with larm and critique Man ' have indicated the in rent to conduct full investigation intO chese practices 36 Members of me Senate ha1·e also propooed strong new sanctions on Russia and an effort to prevent me LJ S administration from withdrawing sanctions without congressional approval If LJ S policy leaders do decide tO alter Russia policy specifically by making changes to sanctions the primary challenge will be creating a unified srance between Congress and me administration If for example the U S Congress adopts tough new sanctions on Russia over and agJinst the wishes of the U S administration it may ironically empowc1' President Purin and creaic serious confusion in me business community Pri1 ate sector ftrms ma ' be unconvinced mat the Trump administration will enforce harsh new congressional sanctions They will also face conflict of law problems as U S and EU sanctions move out of step creating a complex web of potential liability Cautious firms will hang back and opporturlliric entrepreneurs will move forward to sign deals with Russian firms President Putin has demonstrated acumen leveraging this kind of confusion and disunity in Western political relationships to deflect attention and ad1-ance Russian interests Looking beyond this hypothetical scenario for Russia sanctions there arc two other li kd ' policy courses d1at also would have the effect of empowering President Putin eoonomicall ' and strategically at the expense of LJ S interests and transadantic leverage First if rransadanric partner maint1in stAtus quo san•'tions on Russia but neither update nor enforce them the effects of sanctions will diminish further over time The business community and Russian poliricallcader will infer a lack of commianent by the West In this environment new business dl sanctioned Russian firms will emerge and Russian political leaders will perceive an opportunity to pur ue foreign ad1·enn•rism unchecked The second alternative policy course is one in which the U S administration unilaterally rolls back sanctions on Russia perhaps as part of a deal with Moscow signaling greater politicallcC 11ay to President Putin in his imem 1tional dealings Appearing to appease President l'utin in this way will suggest to him that his hybrid warfare approach milit1ry posturing direct interference in U S and omer elections and adventunsmare acceptable It could serve to encourage an escalation in such aggressive behavior particularly on Russia's periphery Additionally it would constitute a truly historic signal from the new administration that imerference in a U S presidential elecrion will go unaddressed and invite our enemies to violate me sanctity of U S elections and our democracy openlyand wimout restraint Moreover unilaterally lifting U S sanctions will create a very dif6cuh sirumion for allies in Europe There may be some European articulations of concern about the current sanctions approach and its impact Howe ·er there is no popular desire to capitulate to Russia rescinding the demand that Russia implement the finsk agreements and throwing out sanctions European leader prioritize and 'lliue d1eir alliance with me United StAtes and the international inAuence mis confers Without Austin Vrlght and Martin Matishak Sc-tutors $ 't lO hudcUI ' on Russia ru dcing probc t Politico February 2 2017 hup w w polili o con ol ' 'lf t7 f'f2 ru ia-hodcing nate·i -·esligation·23 156 l U S SctUte CA mttr 1i RMssitt•llosti iJits Ad Mil S 94 11jd• Cong 1•1 scss https wv w rony fpv IIS b ls $94 BILLS-tt 5s94is pdf U S S n t RHS W S di mt P Att of Oil S 341 II • Cong t• ' ' hups www oongrm fp • ll5 b b •34 1 BI LLS-115 J ltis pdf VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517006 eps 6 38 U S sanctions on Russia they will scramble to push oock on Russia and simultancouslr maintain alliance 1 m the United States Countries on the European periphery particularly the Baltic countries 11 be left vulnerable by the abandonment of Washington on sanctions and the policy chaos that will ensue in Europe The f jthuaniln Ambassador to the United S atcs praised the U S sanctions at a Senate hearing last week call in them the strongest tool we have in our toolbox and indicating that they ' vill unite Europe In the economic realm unilaterally remo ing U S sanctions will create some confusion for the private sector as U S sanctions move awa ' from Et sanctions This move will also create new commercial opponunities with Russia The United States is a more aggressive enforcer of sanctions than Europe and is perceived to set a very strong bar on sanctions compliance So in the absence of U S sanctions and a clear signal from the U S administration that it is rejecting this economic check the White I louse will be validating Russia's message that it is open for business The only effective strategy for cogent and credible sanctions on Russia in the furure is one in which the U S Congress and admims n tion are at least looselycoordinated Whether sanctions are expanded or if they are pt llcd back policymakers must coordinate signaling and clearly express legal expectations for the private sector loreover a new direction for sanctions will be forceful if d1e sanctions are coordinated th European counterparts Notwithstanding me previoosly mentioned political views in Europe and the United States that undermine or call into question common European foreign policy NATO and the tr tnsadantic alliance it is not impossible tO envision a coordinated transadanric po cy emerging on Russia in the furure t ltimately coordination between the U S Congress the U S administration and EU leaders on sanctions is essential for clarity of messaging and to prevent them from being in practice a sham policyeffort rife with opportunities for cil'C Jmvcntion The Role tor Congress ongress has an important role to play in the adaptation and management of future U S sanctions policy toward Russia There is considerable e 'pertise in cl1is policymaking body on both the crafting of sanctions and the exercise of U S policy tow u d Russia Congress plays a fundamental role in offering ideas for sanctions policy It can also deepen me public conver l3tion over the strategic basis and consequences of sanctions enforcement or non-enforcement for the United States and other smkelloldcrs Pundamentall ' legislators hare a powerful ability to signal polic ' imperari1·es to the U S administration its allies in rope and in this case direcdy to President Putin and his associates about the economic consequences of aggression and foreign ad ·enturism More broad ' on Russia policy members of Congress are ma unique oversight position capable of soliciting and making public expert C vs on the threats that Russia poses to U S institutions and core interestS at home and abroad Mentbers of Congress working to set d1e right tone for U S engagement with Russia is crucial they can be a source of important leadership in the overall e 'ecurion of U S policy toward an aggressive adversary Moreover d1e decisions of Congress VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517007 eps l9 U S Congrtss nate Commiucc on AppropriabOn$ Subcommittee on St ttc Fortign Optr ttions and Rdated Programs HNringon Rus s ian PoGtie s lntentiom Toward Specific Europc'1n Cou nllie Ll5th Cong • ht SC sll 2017 230 39 regarding appropriations and law mker ' guidance on force posture and projection and foreign assisrnnce is fundamental ro advancing U S national sa uriry intereslll On Russia sanctions going forward Congress can and should eng•ge me administration to urge continued enforcement of sanctions and make clear the follyof an ' policy ro remore 1nctions without Russian fulfillmem of tinsk oomn tments or cessation of malicious cyber intn1sions Congress must also ensure hat outcomes of congressional investigations into Russian actions during the 2016 U S elections are factored into his discussion Additionally given me technical expertise of me Banking Committee in particular members can offer a sober reminder to ad nistration officials and colleagues in Congress of some of the core principles necessary to carry out a successful sanctions policy There are four principles in particular to bear in nd wi h regard to Russia sanctions Pin t among mese is the necessiry to mainttin a broad coalition of support for d1e economic measures for clariry of message and to prevent circum1·ention This requires U S policr leader 10 coordinate and mo1·e together 'th ropean allies as prenouslymentioned Second sanctions cannot be me only foreign policy tool 11 usc against Russia to advance U S interests in Ukraine Syria or with regard to Russian cyber intrusion They must be accompanied by broad and imensi1·e diplomatic engagemen a sustained commitment to NATO and thot1ghtful use of U S foreign assistance and securiry assets abroad When it comes to Ukraine mey must also be accompanied by trdllsatlantic allies' provision of a serious pacbge of economic securiry and technical a sisrnnce with specific conditionalities and assurances A mird policymaking principle mat is particuL1rly importmt in the Russia sanctions case is the need to keep sanctions implcmcnrntion consistent ' tied to specific foreign policy objec civcs Decision maker cannot let them evolre into mere expressions of blunt hostiliry punishment or antagonism Any new sanction must be accompanied by an artiet1larion of the behavior change that U S leader seek from Russia and there must be a practical pam laid out for re lief from sanctions if Russia changes its behavior If this is absen sanctions cannot be the deterrent or inducement of beha or change that they are meant to be A fitr d principle to guide Russia sanctions is that the development of new sanctions ideas and their possible deplormen should not preclude a U S approach to Russia policr mat can be bod1 constructive and tough It can feature sanctions on one policr issue area such as lJkrnine but engagement and potential collabor •tion in another issue area such as Syria and countering ISIS The U S -Russian bilareral relationship is of course broad featuring a variery of serious security interests Over the last several years mis relationship was able 11 accommodate strong coordination in me n''gOtiation of me Iran nuclear deal and remo1·al of sanctions while simultaneously experiencing a sharp dererior•rion in relations due to Russian actions in Ukraine and the expansion of targeted sanctions on Russia Going forward d1e U S approach 11 sanctions c-atl and must be as variegated as it has been in d1e past featuring adaprntion and tightening of sanctions in some areas and possibly relief in others if poli'J circumstances merit New Measures for Consideration VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517008 eps Members of mis Committee and other legislators in the Senate and House arc considering a variery of approaches to maintain and deepen the effects of Russia sanctions These include efforts to 40 compel the adminismtion to hold the line on current L kraine-linked sanctions codif ng existing e 'ecuti1·e sanclions authorities imo law by statute and urging enforcement of these executive aucl1orities These ideas ha1·e considerable scope and merit and should be seriously considered In addition newlyproposed legislation to address Russia's malicious cyber activit ' would create new financial penalties for such action any legislators expect and demand a penalty for d1ese intrusions and are looking expectancly to sanctions options This is reason enough to carefully sn•dy and refine these new cyber sanctions ideas along with additional cyber imelligence coven action and other poliq• options to expose and counter Russia's insidious q·ber acti' cies New sanctions proposals introduced in the Senate to deepen the penalties on Russia for its aggression in Llkmine would create aggressil'e new authorilies to tighten Russia's access to financial sen ces and its ability to gamer investment in its 'ast oil and gds producing or pipeline deli1·ery and expon sector These energy-focused m 'l Surcs could be tremendouslydamaging to m 'lrkets to U S credibility and to the enterprise of U S economic statecraft more broad ' Specifically d1e aggressil'e new Russia energy sanctions currencly under Senate consideration w uld be inually impossible to implemem even with full European cooperation gi 'en the tremendous size and scope of the Russian energy and transporntion sector Europeans will not participate in such sanclions even if they are inclined to strenuouslyexpand economic pressure on Russia given the disastrous economic consequences of in effect suddenly cutting ofi one of their most impornnt sources of energy U S lawmakers will look unscrious if they impose policy that is impossible to implement Even worse it will undermine the ability of U S policymakers to use sanctions in any future instance because it will strengthen the impression of some that U S sanctions are a paper tiger lacking force and credibilil • Even if such sweeping energy sanctions could be implemented they would be deeply d 1maging to the econontic interests of dte United States and its allies Russia is the largest oil producer and cl1e second largest producer of natural gas severelycrippling thts suppl ' by halting foreign investment into its production and pipeline distribution would cause painful energy spikes and volatility that would ripple through the entire global economy Any new energy sanctions on Russia should be the subject of serious discussion with European counterparts and U S economic managers There are oclter more targeted ways that U S policy leaders can expand financial and energy pressure on Russia if they determine that sud• steps are appropriate to address Russian threats I believe this chamber is considering the idea of crtllcing restrictions on the participation of U S individuals and irt titutions in the issuance of Russian sovereign debt a powerful cscailltion in s llcrions pressure Legislators are also considering narrowing cl1e access of Russian firms to U S capital markets by shrinking the maturity length of debt instruments or access to deri1o tti es trdding available to to Russian firms These ideas would make it significantly more difticult for Russian entities to raise money and access hard currcncy ll1ey could be rclati ·ely argeted and implemented in an incremental fashion to minimize unintended consequences Oaudia Caq nttr Russia Ovtnakcs Saudi Anbia ' ' 'odd's TopCrudt Oil Prodootr 81oomb February 20 2017 http v v w bloom com news l rlidcs 2017 4J2-1fJ N$$ia v«t l kts-saudi-mbia- u-world-s -la st rude­ produ«r 10 2017 hups W l 'W C'iil g 1 bett inlemalioual anslysiufm iso RUS VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00044 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517009 eps •t U S i J l·rgy lnfonnallOn Adminis1ntion Ru'SSla b st updat« Oe1olxr 2 2016 acce latth 41 Other ideas that I believe this chambet is considering in the energy domain include dte expansion of restrictions on U S firms from providing teclmology equipment and services to the Russtln refining sector Additionally under considen tion is the idea of expanding the shale deepwater and Arctic restrictions in current sanctions to co ·er Russian oil venrures outside of Russia's territorial boundaries These ideas would create some limitations on Russia's ability to upgrade its refining fleet to be able to deliver higher qualil ' and higher Yalue products for domestic use and e xpon prim 1rily to Europe It would also impose limirntions on Russia's abilil ' to launch frontier oil projects abroad in the furure In the current oil price cm·ironment and given Russia's abundant untapped domestic crude resources the new frontier oil measure would have no real immediate effect but would instead represent a clip on prospective enerm•developments and a symbolic gesture to limit Russia's international economic expansion lleyond d1ese new sanctions ideas Congress could lobby European leaders to expand economic pressure on Russia by toughening their own set of sanctions European sanctions currendy allow for some grdndfathering of European business with Russia as well as some European financing for projects with Russia where such activities arc not offered by U S Clltitics 1llcrc nmy be opporrunil ' for Europe to more closely circumscribe these permitted business arrangements Congress should urge European counterparts to consider such options while being cognizant of the broader economic burden European businesses shouldered when it comes to sanctions and their greater economic 'ulnerabilil ' to Russian retaliation These ideas and others are worth the careful consideration of the Congress 'Otey can be measures to prepare for deplorment along with othex policy options to address Russian aggression and incursions in the furure They can also be a set of ideas to form the basis for discourse and negotiation between Congress and the administration to ultimately formulate a coordinated Russia poli T· Additionallr they can be discussion poin in a conrers 1rion with European allies about how to proceed on Russia pol icy Wicl1 a wide array of diplomatic relationships in Europe foreign policr leaders in Congress can play a crucial role in this domain i s previously mentioned any sanctions approach on Russtl is stronger and more credible if it is coordinated between brooches of the U S go ·cmment and multilatemllr underpinned by dose transatL1nric communication and a clear-eyed appreciation oi stal cholders' goals and challenges Conclusion The grave n trure of U S securil ' concerns at home and abroad regarding Russia means that the stal es are high for sanctions policy 1 ow as U S Ieaders are contemplating recalibration of this policy they have less leverage than they did a couple of years ago and a much more challenging footing to keep transatlantic ties strong and respond to Russian aggression The only path for continued cffecti ·c s 1ncrions on Russia is a difficult one It involves negotiation and coordination among various leaders whose political and worldl'ie vs may render such activity distasteful and frustrating Yet the altematives srnsis or conflicting sanctions policy delivers economic security and political benefits to President Putin and undero1ines U S interests These arc losing propositions It is fur preferoble to mainrnin Western economic leverage with Russia and negotiate from a position of strength whether or not an ultimate goal is a deal with the Kremlin In this VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517010 eps tO 42 context U S lc tdcrs must pro- ctivcly take on the project of updating sanctions and forging what will be a new sctge in transadantic coordination on this critical poliq•challenge VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00046 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517011 eps II 43 Biography Elizabeth Rosenberg Senior Fellow and Director Energy Economics and Security Program Center for a New American Security F li abcth Rosenberg is a Senior Pellow and Dirwor of the Energy Economics and Sccuri · Program at rhe Center for a New • mcrican Sccurity Jn this capacity she publishes and speaks on the national security and foreign policy implications of energy market shif S and rhe cn1ironmcntal effects of climare change She ha • restified before Congress on energy issues and been quoted 11idely by leading media oudets in the United States and Europe f'rom May 2009through September 2013 Ms Rosenberg served as a Senior dlisor at the U S Department of the Treasury to the Assistant Sttrerary for TerroriSt Financing and Financial Crimes and then to the Under Secretary forTerrorism and Financial lmdligcnce In these senior roles she helped ro dc1·clopand imptemenr financial and energy sanctions Key initiatii'CS she helped to oversee include the tightening of global sanctions on Iran the launching of new comprehensive sancrions against Ubya and Syria and modiflcarion of Bumta sanctions in step 11 rh normalizarion of diplomaric rclarions She also helped ro formulate anti-money laundering and counrcr·terrodst financing policy and OYcrsce financial regulatory cnforcCnlCnt activities From 2005 to 2009 Is Rosenberg ll'liS an enetro• policy correspondent at rgus Media in Washington D C analyzing U S and fiddle Eastern enetro· policy regulation aod trading She spoke and published cxrens ively on OPEC strategic reserves energy sanctions and narional security po1ic ' oil and oarurnl gas innstmcnt and production and renc ab1e fuels Ms Rosenberg studied Cnttg · subsidy reform and Arabic dw Utg a 2 0 1 2005 fellowship in Cairo Egypt She '' an editor of the Arnb Studies Journal from 2002-2005 and researche-d and wrote on fjddte Eastern politics at the Council on Foreign Relarions in 2003 She received an MAin iear Eastern Studies from New York UniYcrsityand a B in Politics and Religion from Oberlin College VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 I CNASDC PO 00000 Frm 00047 12 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517012 eps CNAS ORG 44 CONGRESSIONAL TESTIMONY FOUNDATION FOR DEFENSE OF DEMOCRACIES Senate Banking Housing and Urban Affairs Committee Assessing U S Sanctions on Russia Next Steps ERIC LORBER Senior Advisor Center on Sanctions and Illicit Finance Foundation for Defense ofDemocracies Senior Associate Financial lnttogrity Netll'ork Adjunct Fellow Cemerfor 11 New American Security Washington DC March 15 2017 ·IDe vic s c xpresW in lbis lcstuoooy art my O n nnd do ' Jqn'S fllli viC s of10 ' inShlutiXl 11h •bKb lamllffilgtcd FDD VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517013 eps w11w defenddemocracy org DEIT NSEOPDEM CRACI FS 45 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network lntrodur tion Cl1ainnan Cmpo Rrutking Member Brown and distinguished members of the Senate Committee on Brutking Housing Urban Affairs I am honored to appear before you today to discuss assessing U S sanctions on Russia rutd ne 1 steps I would like to focus my testimony on the effectiveness of the current U S sanctions programs targeting Russia as well as what be United States can do to responsibly mmp up economic pressure on Russia to convince Moscow to cease destabilizing activities in Eastem Ukmine reduce malicious cyber activities targeting the United States and its allies ru1d limit their military operations in Syria To date U S sanctions on Russia have a mixed record of success Many macroeconomic indicators and recent studies suggest the variOtiS fonns of sanctions- in particular the sectoral sanctions imposed on key Russian economic sectors-have had an impact on overall Russiru1 economic health Likewise RtiSsian Govemment officials continually push for S lllctions relief eitl1er in public statements' or by trying to undennine EU sanctions 2 suggesting that Russia is feeling tlte pinch Nevertl eless the United States has not achieved many of the core objectives it sought 1ten deploying these tools while the United States has imposed one oftl1e most sophisticated sanctions regime ever constructed- iucludiog list-based sanctions targeting Russian individuals supporting separatist activities in ea tem Ukraine as well a individuals engaged in human rights ab11ses a comprehensive embargo on Crimea sectoml sanctions focused on key sectors of tl1e Russian economy srutctions targeting Russian malicious cyber acti ty and secondary sanctions authority- Russia continues to engage in threatening activity in a range of areas In Eastem Ukraine Russian-backed forces continue to violate tlte ceasefire routinely attacking Ukminian villages and military personnel Likewise Moscow continues to target Russian opposition leaders often with lethal means Last year rutd again more reoently Russian opposition leader Vladimir Kam-Murza was poisoned after speaking out about Russian h11man rights abuses and comtption with many believing the Russian Govenunent was behind the attempt on his life l This poisoning 1 David Haszenlx m Putin Calb for End to Use of Sanclions and Criticizes U S in Afghanistan Tire New l'orl Times July 10 2015 hnns l www n 1imrs com 20 5 7 1 worldleurooe putin- riticizcs-us-role·inafghanistan html Russia Can't Mend Time$ with U S While it Bach Sanction Lavrov Reute11 Dec 10 2015 htto www reuters cgmffirtjclelus-l l §ia- i -lav W-jd JSJ ' lNOTTQYR OJS ' 0 Roland Oliphant Cancel Swlctions and Scale Back NATO' Russia Tells US as Vladimir Putin Nuclear Deal The Telegraph Oct 3 2016 htto1 www telegrnph co uklnews Nt611 03 putm-sgaos-deal-to- lispose-of-bomb-grnde-plutonium-mswipe-atl ·Russia Demands U S End Sane ions l'lly Compensation if Plutonium Accord to be Resumed Drllfi Law ReuJtrs Oct 3 20t6 http1 www reutet eom articlelus- 111Sia-wa-nuclear-lawm aking­ idUSKCN1231HA il O ' Putin Steps Up Dril'clOKill Sanctions Amid Signsof EU Disunity Voice ofAmerica N s July29 2016 http www voancws comlalputin stepo uR irivc-kill·sanclions igns u disunitv 3440262 html 3 Andrew Kramer MoreofKremlin'sOpponents Aie Ending Up Dead 11 tNew Yorl Times Aug 20 2016 https www nytimes CQm Nl6108 21 world eurqpe mO ow-kremlin-silence-critics-poison html VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00049 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517014 eps 2 46 Eric Lorber Center on Sanctions and lllicit Finance Foundation for Defense of Democracies Financial Integrity Network followed the shooting death of Russian opposition leader Boris Nemtsov in Febmary 2015 a killing widely perceived as a response to Nemtsov's outspoken protests against tl1e govenmlent • In Syria Russia continues to support President shar al-Assad with direct military intervention ' including during the Syrian Govemment's brutal assault on Aleppo 6 And final ly in the cyber realm according to the intelligence community Russia has continued its efforts to influence and undennine U S allies across Europe in recent months focusing these efforts on upcoming elections u1 Western Europe 7 l11is Committee should make no mistake Russian acti ty in these areas poses a serious threat to U S interests and the United States should be prepared to tll e all elements of its national powerincluding its economic power-to bhmt Moscow's ability to undem1ine U S interests at home and abroad Additional responsibly crafted U S sanctions can be a powerful tool to unpact Russia's decision making and reduce its nefarious activities in each of these areas Specific types of sanctions that if properly calibrated could be particularly effective in increasing the pressure on Russia include • The codification of certain executive orders C'EOs including EOs 13660 13661 13662 13685 and 13694 as well as additional statutory designations w1der tl1ese codified EOs • Establishment of a task force potentially led by the Financial Crimes Enforcement Network FinCEN to identify and seize assets of targeted Russian persons including those witb close to ties to Russian President Vladimir Putin • Certain restrictions related to U S and European financial institutions' purchase or facilitation of Russian sovereign debt which has been a way for Russia to prop up Russian state-owned enterprises and financial illstitutions in the face of sectoral sanctions and • Primary and secondary sanctions on elements of Russia's oil and gas industry with possible carve-outs for certain countries particularly dependent on the Russian energy sector However any new sanctions on Russia must take into accotun four important considerations Firs while additional sanctions are appropriate here Congress should be wary of imposing sanctions that are too powerful If the United States attempts to impose broad ran-like sanctions on Russia U1at target large swaths of the Russian economy and do not contain carve-outs for allies and 'AndrewKrruner Boris Nemt sov Putim Foe Is Shot Dead in Shadow of Kremlin T11e New York Times Feb 27 2015 bun rffwww nvtjmes CQ Df2 1 5 0 n8JwoddfeytooeJboris-oemt QY·NS$jM OO Q§jljon-feader·i$·SboJ· l Sam Heller Russia in Charge in SyTia How Moscow Took Control of the Battlefield and Negotiating Table War On The R XIa J111e 28 2016 hnoo lwarontherocks com 2016106 russia-is-in-eg-in-svria-how-moscowtook-eootrOI-of tht haulefJOid and-n gotiating-table • Auson Meuse U N Rcpon Says Syrian Forces and Rebel fa tions Coo miucd Aleppc ·war Crimes' National Public Radio Mar 3 2017 ht p www npr om se ionsiwallels 2017 031031518134951 u-n-r pOn-s 1Vs·syrian­ forces-and-rebe1-factionS CQmmitted-aleppo-war-crimes VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00050 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517015 eps ' Background to ' Assessing Russian Activities and Intentions in Recent USElections' The Analytic Process and Cyber Incident Altribution • DirectorofNotionallntelligence ntelligmreCommunii IAssessmem Jan 6 2017 huoo1 www dni lQII files documenJs ICA 2017 Ol odf 47 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network panners this could backfire limiting critical European willingness to participate in our sanctions campaign and making it more difficult tor Moscow to fultill- at least partially- U S demands Similarly such sanctions C·ould do serious damage to the Russian economy in ways that tltreaten our interests while we wru1t to pressure Russia tocease its malign activities destro ing the Russian financial system or cratering its economy would have worldwide blowback threatening markets across the globe Second Congress should think through how it can unwind sanctions pressure in the case that Moscow-even partially-changes its behavior C •rrent sanctions bills including the Countemcting Russian Hostilities Act of2017 Cow1temcting Russian Hostilities Act mmp up tlte pressure on Russia significantly Ye as we have leamed over tlte past few years unwinding sanctions can often be a difficult and fraught process and Congress should think abotrt how and when it will unwind sanctions even as it builds pressure Any such new sanctions legjslation should include buill-in off-ramps - namcly elements of the sanctions regime such as specific designations or specific Directives- that could be undone in a situation of panial Russian compliance with its various obligations such as those under the Minsk agreements Such panial srutetions relief could be traded for Russian fulfillment of tl1ese obligations and Ibis approach would increase the chances tlte United States could limit- though not completely eliminateRus ian challenges to U S interests Third any such sanctions must be nested in a larger stmtegy of pressuring loscow inchldiog aggressive diplomacy and responding in kind to malign Russian activities such as offensive cyber operations Sru1ctions are a means to ru1 end and Congress and the administration must be clear as to what that end is and how they intend to achieve it Ramping up economic pressure on Moscow without clear objectives tlte en1plo 1nent of otl1er coercive tools and buy-in from the administration- is unlikely to be effective in getting Moscow to change its behavior Fourth rutd as I discuss below the United States must be prepared to address Russian retaliation for such sanctions including in the fonn of countersru1ctions increased cyber attacks and even kinetic action in ways that threaten U S interests I will focus my conmtents today on four main areas First I discuss the various elements of t11e U S sanctions program on Russia including srutctions on Russia related to Ukraine cyber activities and corruption together the U S Russia Sanctions Program Second I discuss whether the U S Russia Sanctions Program has been effective both in impacting the Russiru1 economy and in chru1ging Russian behavior in desired ways 1l1ird 1 discuss ways to further increase the pressure on Moscow in responsible ways drawing in pan on existing legjslativc proposals such as tl1e Counteracting Russian Hostilities Act Finally I provide lcgjslative suggestions to ensure that we are able to mmp down sru tetions pressure when appropriate as effectively as we can mmp it up increasing the likelihood tl1at we will at least limit many of M ow's malign activities • s 94 CounteractiJ'4 Russian HostililiesAct of2017 t 15'Cong 2017 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00051 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517016 eps 4 48 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network I Current U S Sanctions on Russill Taken together the current U S Russia Sanctions Progmm constitutes one of the most sophisticated economic sanctions progmms ever devised and implemented Because each component of the sanctions program is a targeted and justified response to a specific fom1 of Russian aggression many of our partners around the world- including European states as well as Canada Australia and Japan- have joined tlte United States in emplo 'ing economic and financial restrictions TI1e U S Russia Sanctions Program- which is now comprised of sectoral sanctions list-based designations secondary sanctions authority and a comprehensive embargo-expanded most rapidly in 2014 following Russia's destabiliziug activities in Ukraine-including the annexation of Crimea Despite its sophistication however the Program is not comprehensive and a number of avenues exist for a measured expansion Assessing the benefits md drawbacks of those recommendations requires a baseliJIC understanditlg of the current types of sanctions the United States has imposed on Russia including the tmderlying mtionale for their imposition The current se tion provides an overview of U S sanctions already in place with respect to Russia's activities in Ukraine cyher-enabled malicious activities and human rights violalions It explains the reasoning beltind each sanctions imposition- reasoning that infonns when and how tl1e U1tited States should eventually unwind sanctions components based on changes in Russian beha1 or Destabilizing Activities in Ukraine In late Febntary 2014 shortly after Uknine's ex-president Vik1or Yanukovych was forced out of Kievby mass protests Vladimir Put in gave an order for Russian Special Forces to begin ''retuming Crimea to Russia Gumnen planted the Russian flag at the local parliament in early March selling tl1e scene for a sham March 16 referendum in which Crimea purportedly voted to join the Russian Federation to Russian aggression continued following this de facto annexation of Crimea Russian-backed separatists began seizing cities in east em Ukraine when Ukrainian forces appeared able to retake separatist-held territories Russian reinforcements pushed tlte Ukrainians back 11 An initial peace deal called the Minsk Protocol or Minsk failed but in February 2015 the Minsk II ceaseftre agreement Minsk fl was negotiated by the leaders of France Gennany Ukraine and Russia Minsk II contains 13 points including firs a commitment to the witl1drawal of heavy weapons by both sides monitored by the Organization for Security and Co-operation in Europe OSCE • Mat · EUen Connel and Ryan Evans Russia's ·Ambiguous Warfare· and Implications for U S Marine Corps Centerfor Naral Analy sis May 2015 httos1 www cna org CNA filos POFIDOP-20JS-U J0447-Fiml pdf Alissa de Carbonnel How the SeparatistsDtlil'ered Crimea to Moscow Reu1ers Mar 13 2014 http in rc'Utcrs comfarticleluknlinc-crisis-russia-aksyoool' -id NL6NOM93AH201403 13 Agreements TheEc Jitomist Sept 14 2016 http www ecooomistcom blog leoonomist-explains 2 16 091eC l ist-explains-7 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00052 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517017 eps 11 What Are The Minsk 49 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network Minsk l1 also calls for the restoration of Ukmine's full control over its borders and for oonstillrtional refom1 in Ukmine among otl1er points tl In response to Russian aggression the United States has employed three general categories of sanctions First tlte United States has imposed blocking sanctions on designated individuals and entities adding them to the Treasury Department 's Specially Designated Nationals List SDN List thereby freezing their assets and prohibiting transactions with U S persons The blocking sanctions have been imposed on those undennining democratic processes and institutions in Ukraine threatening the peace security stability sovereignty and territorial integrity ofUkmine and contributing to the misappropriation of Ukraine's assets Shortly after their initial imposition tltese sanctions were e 1ended to cover Russian govenmtent officials and persons operating in tlte Russian anus or related material sector Second tl1e United States has developed sectoral sanctions targeti11g selected entities in the financial energy and anus sectors of the Russian economy These entities are listed on the Sectoral Sanctions Identification List SSJ List Such sectoral sanctions generally prohibit U S persons fromengaging in certain kinds of medium -and long-tenu transactions but generally allow day-to·day business activity tltey also prohibit U S person involvement in many activities related to deep· water Arctic offshore or shale oil projects lltird the United States has imposed an investment ban and prohibition on tlte exportation or importation of goods technology or services to or from tlte Crimea region These prohibitions constitute in effect a comprehensive entbargo on Crimea TI1e following authorities related to sanctions on Russia in response to its invasion ofUkmine are codified in the Ukmine Related Sanctions Regulations 31 C F R Part 589 11 The core 13 components of the Mnt k fl Agreement include I Immediate full bilateral ceasef e as of 15 February 2015 at 00 00 2 Withdrawal of aU heavy weapons by both side$ to be COOtpleted within 14 days 3 Effective monitorin8 regime for the oeasefrre and withdrawal of heavy weapons by the OSCS 4 l aunch of dialogue on modalities of local elections in accordanct wilh Ukrainian legislation 5 Pardon and amnesty of figures involved in the eonOict 6 Release of all hostages and other illegally cktained people bosed on the all forall principle 7 Safe delil·ery ofhumanitariM aid to hose in need b t ed on an intermtional mechanism 8 Restoration of full $0Cial and economic links with affected 3f a$ 9 Full Ukrainian con1tol Wer its border wilh Russia throughout lhe conflict zone I0 Withdrawal of all foreigJ anned gr weapons and mercenaries from Uk'llliniM territory II Constitutional reform in Ukraine wilh decentralisation as a key element a new constitution by the end of2015 12 Local elections in Donetsk and Luhansk regions to be held according to OSCE starxlard l aud 13 lntensifying of lhe wOfk of the Trilaitntl Contact Group Su Naja Bm Un Ukraine and the Minsk DAgreement In a Frozen l'lnh to Peace Europeo11 Porliomentory Rmon h Smice PE 573 951 Jan 2016 http www ell'opar eurow euiRegData etudes BRIF 20161573951 EPRS BRI 2016 573951 EN pdf VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517018 eps 6 50 Eric Lorber Center on Sanctions and Illicit Finance Foundation for Defense of Xmocracies Financial Integrity Network • Executive Orders 136601' and 13661 1 Mar 6 and 16 2014 99 and 107 designations respectively By authorizing additions to the SDN List these Orders block the property and interests in property of individuals and entities who have been detennined to be responsible for or complicit in actions or policies that undermine democratic processes or institutions in Ukraine or that threaten the peace security stability sovereignty or territorial integrity of Ukraine ht general these designations include fomter Ukrainian public officials working with the Govenmtent of Russia as well as individuals close to Russian President Vladimir Put in and other senior Russian govenuuent officials involved in planning activities in Ukraine • Executive Order 13662ts Mar 20 2014 258 entities listed ·ntis Executive Order authorizes tlte use of U S sectoral sanctions which impose transaction-specific prohibitions on designated entities U S sectoral sanctions are divided into four Directives which target the Russian financial defense and energy sectors o Directive I financial sector prohibits U S persons from transacting in new debt oflonger than 30 da -s maturity or new equity of designated financial institutions o Directive 2 energy sector prohibits U S persons from transacting in new debt of longer than 90 days maturity of designated energy companies o Directive 3 defense sector prohibits U S from transacting in new debt of longer than 30 days maturity of designated defense companies o Directive 4 energy unconventional oil prohibits U S persons from providing goods services except for financial services or technology in suppon of exploration or production for deep-water Arctic offshore or shale projects that have the potential to produce oil in Russia • Executive Order 1368514 Dec 19 2014 47 designations 11tis Executive Order establishes a comprehensive embargo oo the territory of Crimea aod U S persons are prohibited from investing in Crimea and importing goods from-or exponing goods totlte area • Ukraine Freedom Supp011 Act 17 Dec 18 2014 Congress passed tltis Act to assist Ukraine in restoring its sovereignty and territorial integrity and to deter Russia from fun her destabilizing activities Wllile the Act did not result in new sanctions designations it does establish new secondary sanctions authority It provides the President with tlte autl1ority 11 E xec Order No 13 660 79 Fed Reg 13 493 Mar 10 2014 tn•azfable at hups www l easurv •ov reso -cecenter g nctionsiProgmm$ l ocumentshtrajne eo rxff E xec Order No 13 661 79 Fed Reg 15 535 Mar 19 2014 tn•ailable at httoo www lr l SllrV gov resoorce enterlsanctiozWI'r0 11 msiDocumentslukraine eo2 pdf E ec Order No 13 662 79 Fed Reg 16 167 Mar 24 2014 tn-oilablt at hht pS Iwww treasury govlresoureeoenterlsanctions ProoramsiDocumentsluknline eo3 odf E xec Order No 13685 79 Fed Red 247 Dec 19 2014 tn'tlzlabk at hti JSJ www lrea$Uf ' govlresourceoenterlsanctions Prosrams1Documentsl trnine_eo4 pdf 11 Uialline FreedomSupport Act of2014 Pub L No 113-272 128 Stat 2952 2014 httm llwww congress govn 131pJaws oobi272 PLAIV-1 13publ272 odf VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517019 eps 7 51 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network to impose sanctions on foreign companies that make significant investments in special Russian cnade oil projects which include Russia's deep-water Arctic oOsbore and shale projects The Act also allows the President to prohibit or restrict the dealings of foreigJt financial institutions with the U S banking system if he detemtines that they have knowingly engaged in sigJtifical 1 transactions involving srutctionable activities or sanctioned entities To date the President has not designated entities under this atnhority Malicious Cyber-EnabledActtvities In late December the United States acted in response to tlte Russian govenunent 's cyber operations aimed at tlte United States According to multiple U S intelligence agencies Russia's cyber activities were intended to sow doubt about the integrity of our electoral process and erode faith in liberal democracy ' A pre-existing version of Executive Order 13694 of April 2015 bad created a targeted authority for the U S Govenuuent to address cyber-enabled malicious activities that i hm n or significantly compromise the provision of services by entities in a critical infrastructure sector ii significantly disrupt the a ' lilability of a computer or network of oomputers or iii cause a significant misappropriation of funds or econom ic resources trade secrets personal identifiers or financial information for oom mercial or competitive advantage or private fimUicial gain Yet Russia's use of cyber-euabled melUIS to undenuine democratic processes at home and abroad made clear that a tool explicitly targeting attempts to interfere with elections wa also warranted 19 'll1e Exectrtive Order wa thus amended to authorize sanctions on those who tamper witlt alter or cause a miS ppropriation of infomtation with the ptrrpose or eflect of interfering with or undem1ining election processes or institutions Using this new authority the United States added nine entities and individuals to the SDN List two Russian intelligence sen ces the GRU and tlte FSB four oflicers of the GRU and three companies tltat provided material suppon to the GRU's cyber operations The Treasury Department also desigJiated two additional Russian individuals under the pre-existing Executive Order one is responsible for the tlteft of over SIOO million from U S finns tutiversities and agencies the other compromised the computer networks of major U S -based e-commerce companies and misappropriated personal identifiers for financial gain 20 Backgroond to· Assessing Russian Activities and Intentions in Recent US Elections' The Anal tic Prooess and Cyber lro ident Anribwon Direcwr ofNalional nteHigenct nulligence Commrutity Assmmoll Jan 6 2017 hnps1 www dni govlfile fdocumentsiiCA 2017 Ol odf 19 FACf SHEET Actions in Response 10 Ruosian Maliciou Cyber Activil ' and Harassmem The White Hou re Dec 29 Wl6 https1 obamawhilehoose archive •ovlthe-prcss-offioe 2 16fl21291fa l-sh e -aelions resp91 C- VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00055 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517020 eps russian malicious-cvber acti ·itv-and 'ld 52 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network • Executh•e Order 1369411 amended by E O 13757 of Dec 28 2016 22 II designations E O 13694 authorized the imposition of sauctious on individuals and entities detennined to be responsible for malicious cyber-enabled activities 01at constitute a significant Om at to the national security foreign policy or economic health or financial stability of the United States Human Rights Violations Following Ote death of Sergei Magnitsky a political activist who suspiciously died in prison on November 16 2009 after uncovering fmud involving Russian tax officials 23 Congress passed the Magnitsky Act This act aimed to punish Russian officials involved in his de-ath and in the comtption be lutcovered as well as individuals detennined to be responsible for gross violations of human rights Most recently on January 9 2017 the United Stales designated five additional Russians including powerful senior law-enforcement official Aleksandr Bastrykin and lawmaker Andrei Lugovoi who has been aCCJJSed in Britain in the poisoning of Kremlin critic Aleksandr Litvinenko H • SHgei Magnitsky Rule of Law Accountability Act of 20122 1 Dec 14 2012 44 designations 'lltis legislation requires that sanctions be imposed on individuals determined based on credible infonnation to be responsible for the detention abuse or Math of Sergei Magnitsky who have participated in efforts to conceal tlte legal liability for or who have financially benefited from the detention abuse or death ofMagnitsky or were involved in the criminal conspiracy uncovered by Magnitsky 26 11tis legislation also req11ires thai sanctions be imposed on individuals detennined to be responsible for extrajudicial killings torture or other gross violations ofintemationally recognized hwnan rights committed against individuals seeking to expose illegal activity carried out by ofilcials of the Russian Govenunent or seeking to obtai1 exercise defend or promote internationally recognized human rights and freedoms in Russia 27 11 Gauging the Effectiveness of U S Sanctions on Russia 21 Exec Order No 13694 80 f -d R 18 077 Apr 2 2015 available at hll § lwww trruury gov rcsourcectntcrlsanctions Proornms Documcntslcyber oo pdf Exec Order No 13757 82 Fed R I Jan 3 2017 m'11ilab e at hltps J www trcawrv gov resourcecenler sanctions Progrnms DocumenL cyber2 00 pd •Announcement of Sanctions Under Jhe Sergei Magnitsl y Rule of Law AcoounJabilily Act · TreasUf ' Department Pnss Center May 20 2014 https www treasurv gov press-centerloress-releases Paw'ii24Q8 asnx Carl Shreck U S SanctionsRussia'sllasuykinandAII ed LitvinenkoKille · Radio Free Europe Radio liberty Jan 10 2017 http·f www rferl org altu Sia-bos yJ in-lugovoi-magnitsky-$3JICiionsl28222295 html Russia and Moldova Jackson-Yanik Repeal and S¢rgei Magnistsky Rule of Law Acoountability Act of201 2 Pub L No I 12-208 c 2014 hlllJS IIwww congross ov J t21plawslpubJ2081PLAW-t 12publ208 pdf Announcement of Sanctions Under Jhc Sttgei Magnitsky Rule of Law Acoountability A Treo sury Department Press Center May 20 2014 https llwww treasurv gov press- entulpress-releases Pages jt2408 aspx 11 d VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00056 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517021 eps 9 53 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network TI1e effectiveness of these various sanctions programs is mixed economic and political indicators suggest that they have had an impact on tl1e Russian economy and Russian decision·making though not sufficient to coerce Russia to cease its aggressive cyber act i ty relinquish control over Crimea or cease its support for separatists in Eastem Ukraine28 Imposing Economic Costs The Russian economy has clearly stn•ggled since the broadest sanctions were imposed in 2014 2 but the downturn was likely driven both by the collapse in global oil prices and the imposition of sectoml sanctions For example the Congressional Research Service notes that most sanctions hit just as tl1e oil price was dropping by more than 60% between the start of2014 and tl1e end of 2015 0 Yet the sanctions do appear to have had an independent impact at the macroeconomic level a 2015 L 1F estimate that U S and EU sanctions in response to the conflict in Ukraine and Russia's countervailing ban on agricultural imports reduced Russian output over the short tcrn1 by as much as 1 5% 31 h1 April 2015 speaking to tl1e lower house of parliament in Moscow about w1precedentedly harsh sanctions pressure Russian Prime Minister Dmitl ' Medvedev said that 1e sanctions had cost Russia 6 7 billion in 20 I4 and would cost $80 billion more in 2015 32 The sanctions may have exerted their grea1est impact tlmmgh changes in foreign investment and at the firn1level As the work of one of my fellow witnesses showcases the sanctions created an atmosphere that discouraged foreign direct investment and tltat tl1is lower investment in Russia could lead to a cumulative loss of output of up to 9 percent of GDP ' ll Likewise her work also found that U S targeted sanctions while not specific to the Russia program ca LSe countries to face significantly e levated levels of political risk depressing investment in the target's economy 34 Data compiled by tl1e Congressional Research Service corrobomtes this finding ' The question of whether ID $C san tions hm been effective touches on a wid raJ'4l• of olhet issues not addressed here such a s 'hethet the empiO 'lllent oflhese tools in the current siruatioo will deter fUiure aggressioo by Moscow or by olherstnes whooe leaders are observing Russia's laCtics with great inter st This tts imony fo 's directly on the coonomic impael of these tools and wt ther and how they mve changed Russian decision making in the short Iron related to the 1ssues of Ulcraine cyber activities and human ri s abuses 19 Note that it is diflicuh to differentiate beh1 en the economic impacts of the Y11rious sa Xtions prog13ms desaibed above Most of the studies focused oo the economic impocl of lhese sanctions poy particular atttntioo 10 the UlcrainHelated sanctions and in particular the SS progn m a s ID $C are the broadest coerci1·e measures the United States and the EU have employed against Russia ln rtality thtst sanctions progmms have internctil'e effects to an extent fO tlOimple additional designations related 10 Russia's maliciow c - nablcd activities likely signal to foreign inrestors thaltemions will continue bctween the United Slates and Rwia likely depressing FDI Rebecca Nelson lJ S Sanctions and Russiis Economy Congmsitmal Research Sen ce Feb 17 2 17 httosJ fa orWp crs row R4 895 pdf d At6-7 nEd Adamczyk Medvedev Sanctions Co Russia$106 Billion UP Apr 22 2 15 hnp www upi com Top News World-Newsl2015i W221Medvedev ' anctions OSt-Russia·I06· billionl3551429nl 8511 31 Elizabcth Rosenbelg Daniel Dremer Julia Solomon·Sitauss and Zachary Goldman The New Tools of Economic Warfare Effects and Effectiveness of Con1tmponuy U S Finaocial Sanctions Centerfor a New Americmr Secruity Apr 2 16 https'i www cms org publicati01'6ireoonsilhe·new·tools-of- eonomie warfare· effccts - and effecti 'enssoOf-contemporary-u-s-fmancial-sanctions Jd at I VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00057 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517022 eps 10 54 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network showing that net inward FDI into Russia essentially came to a halt in late 2014 and early 2015 consistent with the general finding 15 As a former economic ad1 sor to the Russian government stated in 2015 the sectoral sanctions in particular had worked out as far more severe in their effect than anyone seems to have believed 16 Likewise research conducted by another witness on tl1is panel suggests that targeted fim1s are also feeling this impact finding tl1at ''the average sanctioned company or associated company loses about one·third of its operating revenue over one·half of its asset value and about one·third of its employees relative to their non-sanctioned peers 'm That U S sanctions are hitting their intended iargels without causing too much collateral damage as tl1e paper concludes is important as it suggests that designations can be carefully ran1ped up to respond to funl1er Russian provocations As former Deputy National Security Advisor Juan Zarate and Russia expert at the Center on Sru1ctions and Illicit Finru1cc at the Foundation for Defense of Democracies Doris Zilhenuan argue ''Russia's corporations particularly tl1c titans of industry arc heavily liked to Putin and his ituJer circle As sucl the Kremlin is often forced to bail 01rt companies via corporate debt assistance as theydeal with fallout fromsanctions ru1d low oil prices By maintaining and potentially increasing economic pressure 011these companies the U S and E U can force the Kremlin to spend more of its money more often to prop up a growing list of state-dependent corporatior s 38 Despite the macroeconomic and finn-level impact of the U S sancti011s on Russia both the IMF and the Bru1k of Russia's research and forecasting department project positive Russian GDP gro11th in 2017 39 This does not nec$sarily mean that sanctions have ceased to cause macroeconomic pain a survey of experts suggests that the Russian economy would receive an additionallift-of0 2% this year and 0 5% in 2018-if U S sanctions were relaxed40 Still Russia has weathered d1e sanctions program and the concurrent oil price collapse ru1d improvements in its economy do suggest that U S restrictions impose less cost now than they have in the past The bottom line is that these sanctions have had an impact on tlte Russian econom ' though that impact appears to be diminishing Rebeoca Nelson -u s Sanctions and Russia's Economy CQ' gr ssional Research $mice Feb 17 2017 httos lfa org sgplc MowiR4389S pdf Priyanka Boghani Whal'sBeenlheEITectof Vestern Sanctions on Russia PBS Frontline Jan 13 2015 bttp·I Www obs prg wgbilffrpndine anjcle wbats·heen-ti MO'ecc Of·weS cm§W ions 9D· I SSia Daniel Ahn and Roch y Ludtma Measuring Sma r1ncs Undci'Slalldi the Economic lmpoct ofTargeted Sanctions Woricing Paper 2017 I US Department ofS alt Office ofthe ChiefEcunomist Doc 2016 31 httos1iw 'V Slat gov documentslorgani ation 267500 pdf Juan Zatatt and Boris Zilbennan U S Russian Financial Wetfare Conduct-Based Approachto CoWJtering Russian influence and Increasing Western Le1·etlltle Vo Paper Center on SIDlCtions and fllicu Finance Fo•mdanonfor Defense o DtmO rat ies on file with author 'IMF StaiTConclude$ Visit to Russian Fed ration lnlimalional Montlill • Fund Press Release No 161529 Nov 29 2016 htrp·ll vw imf oozlen NewsiArticles 20l6111 291PRI6529-Russian-Federation-IMF-StaiTConcludes Visit Ste a sf Anna Andrianova Russia is Running on MOte Than JUS lhe Black Sluff • Bloomberg Mar 7 2017 htt · www bloombem coml wsla rticles 2017-03 07 russia·JS·runnii On·m2re·lhan jl6t·the black· stuff 'Anm Andriaoora Russia is Running on More Than Just 1he Black Stu 8 IJOIIIberg Mar 7 2017 httre11www hloomberg comlnews articles 20t7 0 71russia-is-running-on-more-lhan-just-the-black wff VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00058 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517023 eps II 55 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network Coercing Change in Behavior II is harder to point to tangible indicat ions that sanctions have altered Russian behavior 11 th respect to Ukraine malicious cyber-enabled activities or luunan rights violations Joumalists rights advocates opposition politicians and whistleblowers are still treated harshly and sometimes killed 4 t On the cyber front Ukraine last month accused Russian hackers of targeting its power grid financial system and other infrastructure with a new type of ' rus that attacks industrial processes ' 2 Montenegro claimed in mid-Febn•ary that government and media websites came under Russian anack for severn days ' 3 A French presidential candidate claims that he is being targeted with ijntemet attacks from within Russia with the goal of helping tbecampaigJIS of his pro-Moscow rivals ' In short R11SSia's malicious cyber efforts are continuing Russia shows no sign of relinquishing control of Crimea and it continues to destabilize eastern Ukraine Just last week Kiev threatened sanctions against 1c Ukrainian subsidiary of Kremlinowned Sberbank bec 1use the bank said it would comply with an order from Vladimir Putin to recog 1ize identity documents issued in the separatist-held regiotiS of Donetsk and Luhansk 45 Fighting recently Jared up in places like Sanana a f mning village near 1e Ukrainian-held pon of Mariupol after montl S of relative quiet on the Ukrainian side alone ai least 26 people were killed and 124 wounded in the month after January28 compared to eight dead and 46 wo1o1ded in the month prior44 A new ceasefire to address the flare-up seems to have failed 47 On Febntary 26 the State Department recognizing Russia's unwillingness to meet its obligations under Minsk II called on Russia and the separatist forces it backs to honor the cease-fire cal led for under the Minsk agreement1 and to withdrawall heavy weapons and allow full and unfettered access to the OSCEmonitors • S Nevenheless some organizations and analysts believe that sanctions have had some impact on because in their absence Russia would likely have gone further in Ukraine Forn1er beha or Andrew Kromer More ofKremlin'sOpponentsAreEndingUp Dead The New YorliTmlts Ang 20 2016 httos lwww nvtimes com0016108 21 world eurooelmnscow-bemlin-silence-critics -ooison html NataliaZmelS Ulcra CbargesRussia withNewCybet Attacks on lnfraslnr ture Reuttrs Fell IS 2017 http www reuttrs comronie elus-ukr line-crisis-ovber-idUSKBNISU2CN ' n Farmer Montenegro Asks for British Help after Cyber Attacks in Wake of'Russian-oocked ooup plo ' The Telegraph Feb 28 2017 hnp·l www teleomp too uklnewsl201W2 281montenegro-asl s-briti ltlltl M yber-auacks ke-russiaP backedl France Drops Electtonlc Voting for Citizens Abroad over Cyber urity Fears Reuter Mar 6 2017 hno www reultrs comlanicl ht -franculecrion-cJ1 er-idUSKBNt6D233 i O Ulcra Eyes SancJiomon SubeidiaryofRussia'sSbetballk Reuters Mar 7 2017 hnp· www reuteB comfnniclelus·ukmjne-s nsjs SMctjft'dlJSKBNI§E2KI Mark Maclcinnon As Russia-U S Ties Sttengthen Violence Escalates in Ukraine The Glebe and Mail Feb 26 2017 htm l www theglobear lmail cominewslworld a-s-ll SSia-us-ties-strengthen-violence-escalatesinukr line article34 43679 Euan McKirdy Ubame Ceaseflfe No Sign ofWithdmwal Official Says CNN Feb 23 2017 hnp www cnncom 2017102fn europe ltraine- tas ftre-violationsl Malic C Tontt Unlted States Condemns Allackon Special Mc nitoring issions in Eas1em Ukraine Press Statemen United States Department ofState Feb 26 2017 httP IIwww state gov rffiamrs w I7JWI 6fiJ 9 htm VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00059 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517024 eps 12 56 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network Deputy Assistant Secretary of State Peter Harrell observed in September 2015 that Russia does appear to have made tactical adjustments to its strategy at different points during the crisis to minimize the odds of further sanctions being imposed ' 9 In his view 1e demonstrated effect of sanctions and the threat of broader measures may have helped deter Russia from moving forward andseizing the strategic city ofMariupol in Febmary 2015 50 A March 2016 publication of the European Parliament argued 1nt sanctions were deterring further ' olence again pointing to tbe Black Sea port of Mariupot 51 In addition at least in the contex1 of Ukraine Vladimir Putin and Foreign Minister Sergei La 'TOV have explicitly called fo S2 and even demanded53 an end to sanctions Russia has also worked to undennine EU unity on sanctions including by methodically lobbying southem and eastem EU member states with Italy Greece Hungary Cypms Slovenia Slovakia and Bulgaria as prime targets s Some analy ts believe that Moscow may be aiding populist parties- including in Westem European countries- because it sees these parties as useful allies in pursuing its objectives in Europe such as ending economic sanctions or undcnniniog European support for Ukmine 15 1ltese demands and efforts suggest that even if the sanctions have not fulfilled all of 1e objectives they were initially employed to achieve they do appear to be impacting Russian decision making In addition comments suggest that the sanctions provide the United Stales with le verage it would not otherwise have clearly the Russian leadership would like to have the sanctions lifted and this desire means that the United States can exchange relief for certain concessions from Mosc-ow To unwind them without con ideration of this fact and without seeiog change in Russian behavior would be a strategic mistak lltus whi le our sanctions on Russia have not proven to be a silver bullet there are indications that tey have had an impact on the Russian economy and on Russian decision-making Additional satlC·tions pressure would likely further impact Russia's decision calculus and ifdone responsibly Ptlcr Harrell Lessons fromRussia on the Fururc of Sanctions Ct11 r for a New America11 SlCUri y Sept 2015 httooJ s3 amaronaws comlfiles cnas orgldowmen SitNAS-Reoort-Economic Stat crnft-2-FINAL pdf Id at6 Martin Russell Sanctl lns over Ukraine Impact on Russia EuroJNan Par iamelliQf ' Reuarch Setvi e PE 579 084 Mat 2016 httpJfwww eurooorl europaeu EPRSIEPRS-Briefing-5790$4-S nctions-over-Ukraine-imoa«t· Russia FJNAL pdf Russia Can't Mend Times with U S While it Backs Sanctions Lavrov Reuter t 10 201 5 hn2 www rtuters com artic tlus JUSSia· · avrov idUSKBWOIIQYR O S1210 David H 'rsunhorn Putin Calls for End to Use ofSane1ions and Criticius U S in Afghanistan • 7 v York Times July 10 2015 bttpsJ w ' - vlim com 201 S 07 lllwqld europe pUin-critici7 es-us-ro e-in-afgh miSl an html On statement r gardirG EU sanctions EU Re Details on Exrended Sanctions Agai Russia '' Vcice ofAJ Wrica News June 18 2016 btto· Jwww 'QADYWS comfatewopeM-UQjon-rdeases-degjls-exttnded-SMCtiooS Q SS al338'180 html Roland Oliphant · ·cancel Sane ions and Scale Back NATO' Russia Tells USas Vladimir Pulin Saa » Nuclear Dea The Telegraph Oc 3 2016 http1 www telewph co uklnews 2016 Q IJ31putin-sernps-deal-ux lispose fboml gn de plutonium-m·swipe-t tl l''lin S eps UpDrivetoKiiiSanelions Amid SignsofEU Disunity VciceofAmtricaNews luly29 2016 http www voancws comlalputin-steps uP ivc-kill·sanctions iw u-disunity 3440262 html Arth Beesley EU Leaders to HoldTalks on Russian Political Meddlif€ FinanCJal Times Oct 16 2016 httooJiwww ft comlcootenUtTIflcdc-9227-lle6- lf8-d3778bS5a923 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00060 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517025 eps 13 57 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network could help the United States pressure Moscow to change its behavior in Ukraine cyber and in the realm of human rights abuses Ill Increasing the Pressure on Russia Responsibly l l1e United States and its partners can take a number of steps to increase pressure on Russia in a way that will squeeze its ec onomy and- more importantly- impact its decision making Recent legislative initiatives in the Senate including the proposed Counteracting Russian Hostilities Act of2017 Counteracting Russian Hostilities Act' l6 and the proposed Russia Sanctions Review Act of2017 Russia Sanctions Review Act s1 are right steps in tis direction In particular the Countemcting Russian Hostilities Act would impose powerful sanctions on Russia includ ing primary and secondary sanctions related to its petroleum industry the Russian defense sector and the Russian financial sector However as Congress considers ramping up sanctions on Russia it should keep in mind that while such pressure is importanl tlte United States should try- to tlte extent possible-to ensure that the sanctions are carefully targeted and do not ha1•e unintended rutd undesimble impacts For exrunple ru d as occurred during the initial Sectoml Sanctions Identifications List progrant mmp up in the fall and winter of2014 the sru1ctions pressure on Russia deq ly shook investor confidence and threatened the stability of the Russiru1 financial system Indeed in December 2014 U S sanctions-in conjunction witl1 other f 1ctors- led to a near run on tltc Ruble which was supposedly triggered by the Centml Bank of Russia promising to effectively print money to prop up certain companies owned by Putin's coofederate s and hurt by Westem sru1ctions 58 While the U S sanctions on Russia were meant to impact the R11ssian economy in the medium·t r long·tenn ru d to put pressure on Vladimir Putin and his elite circle they were not intended to cause a nUl on the currency 11i1ich could have seriously undennined the stability of the Russian financial sector While the United States certainly should pressure Moscow undennining the stability of one of the world's largest economies would have serious and detrimental ripple effects ht effect Congress should carefully balance increasing the economic pressure on Russia while making sure tl1at any steps it takes do not risk collapsing the Russian economy or seriously impacting tbe economic health of our partners particularly in the European Union and Eastern Eltrope On this point Congress mtiSt consider the impact mmping up sanctions will have on our Europeru1 partners ruJd in particular 11i1ether they will be willing to join our efforts Over the past tllfee years tlte United States and tlte Europeru1 Union have worked rery closely to ramp up pressure on Russia while there are minor differences between the U S rutd the EU sanctions programs in S 94 Counteracting Russian Hostilities Act of2017 liS• 2017 S _ 'Russia Sanctions Review Act of2017 liS• 2017 hnp lbiussets huffmtonQ t CO I11RU'ISia Sanctions Review Act pd Ptter Feaver and Erie LO ber The Sanctions Myth Tht Naticnal RINitw July·A 2015 http nationalinterCSLorg featur hhe-sanctions-m 'lh·I3JI0 paee•2 Set ais Sergey Aleksashenko Evaluating Westem Sanctions on Russia Atlmttic Cau11cil llc 2016 a110 hnp www adanticoouncit org imagesffi licationYF vatuating Western Sanctions on Ru ia web 1206 pdf VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00061 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517026 eps 14 58 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network response to Russian aggression in Ukraine in geuemlthese progmms- and targeted entities- are the same In fact the EU SSI-type progmm is in some ways more restrictive than the U S SSI program This close partnership has significantly increased the economic impact on Moscow Russian emities were unable to hun to attmctive altemative partners in the EU to secure financing for example when tl1ey were cut off from U S debt markets While certain countries such as Gennany have signaled a willingness to ramp up pressure on Russia other EU countries may be less willing to join U S efforts To the ex1ent that we can secure European buy-in- and pamllel European escalation of economic pressure-our sanctions will stand a greater chance of success Likewise when considering certain s mctions proposals put fortl1 below Congress should be mindful of tl1eir impact on European cooperation For example those proposals tl1ai impose restrictions on the activities of both U S and non-U S companies will likely raise political tensions with the Europeans To the ex1cnl that the United States can secure EU cooperation on many of these matters without resorting to U S domestic legislation that conditions access to U S markets on compliance with our sanctions policy the more likely our approach will be to succeed Recent legislative proposals contain excellent steps for imposing powerful sanctions that will likely impact Russian decision-making By further sharpening tl1ese tools Congress can ensure that it mises the pressure on Russia i11 a way that botl1 directly targets Moscow·s decision makers and limits the impact on our allies and partners llte proposals outlined below are generally ordered from least likely to impose sigJ1ilicant additional economic pain and create possible unintended cnnsequences to most likely io impose such pain and create such consequences In ell'ect each subsequent option is likely more powerful yet also likely riskier than the preceding option 59 For those more-powerful-yet-riskier tools I have suggested adjustments that may limit some of their potential downsides This sanctions rscalation ladder should provide Congress with a range of options depending on how much pressure it wants to put on Moscow • Rung #1 Codification of existing Executive Orders including Executive Orders 13660 13661 13662 13685 and 13694 At a minimum Congress should act to preserve tl1e sanctions currently in place on Russia 1l1e reason for the creation of these executive authorities-and the designations issued pursuant to them- has not changed Russia has nol fulfilled its obligations under Minsk 11 has not meaningfully reduced its aggressive cyber activity towards the United States and as the recent episode with Vladimir Kam- Note that l do not review the proposals contained in the Russia Sanctions Review L While there is oettainly room for congressional apprml and disapproval of waiving certain components of the U S Russia Sanctions Progtam the Russia Sanctions Review AI fOCUS S on now to limit the administration from unwinding cwr t sanctions on Russia not on how to increase the pressure on Moscow Giventhat sanctions on RU$Sia ha •e been somewhat effective and that additional economic pressure may likewise have an impact I have focused on how to responsibly ramp up pressure rather than maintain the status quo VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00062 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517027 eps 15 59 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network Murza suggests has not signilicru1tly improved its human rights record Witholll improvements in these areas Moscow should not be rewarded with tl1e lifting ofsanctions and Congress should take steps to ensure that does not happen Uuwinding these programs and de·designating entities in exchange for Moscow's help in lighting certain extremist elements eitl1er in Syria or elsewhere risks seriously undemtining the international principles that underpinned the U S and EU decisions to impose such measures For exrunple if the United States 1onwinds its sanctions program on Russia as part of a grand bargain for Russian help fighting e 1remism-and Russia is allowed to maintain control of Crimea and continue supporting separatist movements in Eastem Ukraine-states that seek to violate the sovereignty of neighboring countries will know tl1at tlte United States does not prioritize enforcement in response to territorial aggression Such an unwinding also undennines the future etTectiveness ofU S sanctions If srutctions targets crut simply wait for a hange in political circumstances they will not be motivated to make the concl'SSions tl1atthe United States demands Instead violators will take increased hope in the possibility tl1at tltey can o1nlast economic restrictions because the United Stales will inevitably shift its foreign policy priorities In addition to simply codifying tltese Executive Orders Congress could statutorily designate a mnge of other targets pursuant to these autltorities For example Congress could designate additional individuals kll0 11 to engage in cybcr operations against the United States military or administrative officials pla ng an active role in Eastern Ukraine or Crimea or other high·level officials within the Russirut govenunent Such additional pressure-particularly coupled witl1 au increased focus by the proposed FinCEN-led task force discussed bclow- ould significantly impact Ptttin 's inner circle bottom line and decision· making n addition Congress could specify that tltese designations only be lifted in the case of tangible and measumble progress by Russia on a range of issues such as fulfillment of certain obligations 1mder Minsk II • Rung #2 Establishing a task force dedicated to identil ng tracking tracing and-as appropriate-seizin• assets of designated Russian indh1duals pru1icularly those close to Russian President Vladimir Ptrtin TI1e Counteracting Russian Hostilities Act recommends the creation of a Russia task force within 1e Financial Crimes Enforcement Network at 1e Treasury Depanment which will work with the Office of Foreign Assets Control OFAC and the Office of bttelligence and Analysis OIA to identify ceotain illicit Russian assets within tl1e United States Acreation of this type of standing entity could be particularly powerful based on infonnation gathered in recent years from title insurers under the FinCEN Geographic Targeting Order targeting certain high·end real estate marl ets it is clear that large sums of Russian money arc flowing into U S real estate Kramer More ofKremlin's Opponenos Are Ending Up Dead The New l'ork T mts Aug 20 2016 httooJ wWiv nvtimes com12016 0812llwO ldleurope m06Cow-kremlin-silerx e-critics-ooison hlml Hoslitioies Act of2017 I 2017 at 47-48 60 Andrew ts• • 1 S 94 Counleractin g Russian VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00063 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517028 eps 16 60 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network markets '2 It is very likely that designated Russian persons- including Russian oligarchs close to Russian President Vladimir Putin- are laundering their funds through a network of sheU companies and depositing them within the United States Seizing the assets of these designated persons would have an immediate impact ontheir pocketbooks and could put direct pressure on Putin's inner circle To be effective s1•ch a task Ioree would need to focus more broadly Jan high-end real estate and would need to conduct deep dives into company fom1atiou infom1ation and beneficial ownership infonnation of key bank accounts In addition it would need to be properlyresourood effectivelyestablishing such a task force would require properstarting including 1e creation of dedicated positions wi 10ut simply shifting personnel from o 1er important roles within Treasury In addition while FinCEN in some ways is a natural fit for this task force given its acooss to infomtation provided by U S financial institutions Congress should consider including other relevant agencies such as tbe Department of Justice Congress should also consider requiring regular reporting from this task force on its findings and based on tl1at infom1ation statutory PATRIOT Act 311 designations of Rnssian financial institutions engaged in illicit activity Such designations would further squeeze the Russian financial sector and c1rt off illicit financial actors from the legitimate global banking system tllQugh such efforts may take year to reach fmition • Rung 113 Prohibiting the pru-cha subscription to or facilitation of the lssuanre of Russian so •erelgn debt This suggestion- contained in the Countemcting Russian HostiJjties Act- is me nt to address a gap in the current SSI progmm that Russia may be using capital injections to prop 11p govenunent-owned entities as well as designated private companies owned or controlled by Vladimir f l•tin's allies in Russia h1 effect though financial institutions designated as SSJs pursuaJ 1 to Directive I may not be able to secure debt financing Russia itself can and tl1en can provide direct funds to those entities in a scheme that looks very much like sanctions evasion By prohibiting U S and foreign persons from purchasing or generally dealing in such debt this suggestion could cut off this sanctions evasion mechanism and make it significantly more difficult for Russia to prop up a number of its core timUicial institutions According to 1e IMF Russia's international reserves dropped from $509 6 billion at the beginning of2014 to $368 4 billion at the end of2015 but they bave increased sligbtty and remained stable at just below $400 billion since the dccl ine 1 1ltat decline during 2014-15 coincided 11 tb the sharpest oil price drop during which time Russia was forced to sell foreign exchange to support Ote mble ·u s Josh Barbane Samutl Rli enfeld and Laura Kusisto E q allds Real-Estate Data Targeting Order Tht Wall S reet Jcuma luly 27 2016 hum lwww wsj com articleslu·s-exponds-real-estalt- iata·tan tlim- Xdtr· - Note thll this Order was again extended in Febnmy 2017 Russian Federatioo S 1ffRcport fO 1he 2016 Article IV Consullalion lntematiooa Monetary Fund IMF Counlry Repon No 161229 uly 2016 http www imf orglextemal pubs fl scr@l61cr16229 pd VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00064 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517029 eps 17 61 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network Russia has drained one of its sovereign wealth Funds the Reserve Fund from $87 billion in 2014 to roughly Sl6 billion currently its other sovereign wealth fund Ute National Wealth Fund- designed to support pensions and social spending-contains $73 billion but most of that amount has already been allocatedM Still as noted above international reserves have ren1ained stable According to Bloomberg 'by printing mbles for U1e Finance Ministry and crediting foreigu currency to its own account the central bank has kept intemationaln 'Serves- wbich include Ute government's savings- almost intact even as the Reserve FtuJdl has dwindled 65 Analysts expect that tltc Reserve Fund will be drained in201 7 but it is w1clear what significance this will have 66 One of the major unknowns of this proposal is the magJlitude of the economic impact it would have on Russia While it would no doubt impact SS desiguated·entities' ability to balance their sheets and remain solvent concerns exist Utat it would significantly destabilize the Russian financial S tem and create a significant contagion effect To mitigate such concems Congress could stmcture such a prohibition to apply only to U S persons or where a U S nexus is involved Such a stmcture would permit fordgn fin Ulcial institutions to transact in this foreign debt without fear of secondary sanctions However given the expansive reach of U S jurisdiction over the international financial system and U S regulators' willing 1ess to imt OSe significant fines on entities violating U S sanctions regulations most large and reputable financial institutions would be understandably ex1remely reluctant to transact in such sovereign debt l11is reluctance would translate into market impact the decrease in buyers of the debt would mean tl1at Russia would have to offer higher interest mtes to find market partners ensuring that Moscow would have to pay more to borrow Such a move would increase Ute costs on Russia but would also be unlikely to seriously undem1ine tlte Russian tinancial sector In addition Congress could include a provision of the legislation that allows for the imposition of penalties to all persons not simply U S persons who transact in Russia sovereign debt in the case of continued Russian non-compliance on a range of items such as fulfilling its Minsk n obligations For example Congress could build in a six-month assessment review of the impact of these sanctions and-if it was not satisfie-d that sucl1a prohibition for U S persons on dealing in Russian sovereign debt was having a sufficient impact- could automatically expand the provision to apply to all persons Such an expansion could be a powerful escalation but undenaken only after verification tl1at the initial sanction was not ha ng tl1e desired impact Josh Meakins Why Russia is Far Less Threatening Than It Seems Washington Post Menke ' Cage Mar 8 2017 ht lJ Iwww washingtonpost c om newslmonkey-cagefwp l017 0 W81w w-JUS ia-is-far-less-dueatening-lhllnit-sumsl'lutm term 90tbc86a6fal Olg Tanas llya Atl hipov and Evgenia Pismennaya •Russia Said to Shield Reserv as l'ulin Taps Sovereign Fund · 8 oomh rg J111e 28 2016 httosl vww bloomberg com newslaniclts 2016- 16 28 bank of russia said Jo shieJd rescr ·es S·putin-IAps·wcaJJh fund Nadia Kazakova Russian Ruse Keeps Currency Rescr -es AOoot • Saxo Group July 8 2016 httos llwww tradingfloor com posts russian-ruse-keeps-currencv-reserves-afloat-789751 0 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00065 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517030 eps 18 62 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network • Rung 114 lncrmsing the pressure on the Russian oil gas and peti'Ochemical industries Another pathway to significantly pressure Russia would be to more expansively target ils oil gas and petrochemical industries While Directives 2 and 4 of the SSI program target ti1e health of Russia's petroleum industry in the medium-to-long tenus by targeting the development of resources that would come online during that time frame they have not put as much pressure on Russia's economic resources in the shorter tenn Simi larly proposals contained in the Counteracting Russian Hostilities Act also focus on the medium term by penalizing U S and foreign persons that broadly invest in Russian energy resources the United States would certainly impact tl1e ability of the Russian Federation to produce such resources in a cost-effective way Yet with the rising price of oil such measures might not have an immediate or powerful impact in the short tcrn1 and consequently may not change Russia's activity during that time frame In addition to the recommendations proposed in the Countemcting Russian Hostilities Act particularly Section 207 a Congress s l u d consider additional sanctions tl1at pressure Russian energy companies in the short tenn First Congress should consider intposing export restrictions on cmde oil produced by three Russian major companies namely Gazpronmefl Bashneft and Rosneft According to one study these three companies account for almost 50%of Russian cmde oil exports 67 While these targets could still sell oil elsewhere it would cost more to do so and impose limited punishment on the Russian Government To be eiJective such sanctions would need to be constntcted as secondary innatlore i e threatening to cut European and Asian companies off from U S markets if their home countries continue to import certain hydrocarbon producls from these companies Such a step would likely cause significam diplomatic tension particularly with our partners in the European Union To mitigate such tension ti1e statutory provision could be stmctured to give the administration six months to work with the E11topeans to draw down t11eir reliance on petroleum products produced by these entities If at tbe end of that period an insufficient drawdown bad occurred Congress could reserve tile prerogative to impose secondary sanctions on targeted companies in the EU and Asia Congress could also write in a significant reduction or national security exception element to this provisiot much like the provision included in the National Defense Autl1orization Act Sec 1245 in the Iran contex'l to ensure that we would not unduly be punishing our allies or seriously undcnnining the economies of our partners particularly those in Eastern Europe who are highly reliant on Russian energy exports Such a provision could either be in lieu of or in addition to the six-month period to allow tlte administration to convince countries in Europe and Asia to draw down S rgey Aleksashenko Eval ting Western Sanctions on Russia Atlandc Cororcil Dec 2 16 http www adanlicoouncil org imagesffi ticationYEvalualing Western Sanctions on Ru ia web t2 6 pdf VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00066 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517031 eps 19 63 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democracies Financial Integrity Network Second Congress could consider prohibiting correspondeut accounts and payable access for financial institutions providing banking seTVices on behalf of key Russian oil-producing companies S1ocb a move would have an immediate and powerful impact on these companies as the global oil tmde is primarily dollar-based In effect if these companies were unable to do oil transactions in dollars they would need to use altemative currencies a time-consuming and expensive process Note tltat this approach would likelycause major economic damage to the Russian energy sector and its economy as a whole Third and building off this approach Congr ss could go further and in1pose secondary sanctions on any financial institutions doing business witlt these Russian entities Such a step would cut these entities off not only from the U S financial sector but would also limit their access to other markets as wel l It would also likely limit tlteir access to Chinese and other fonns of financing VIrile wielding such a tool might cause a change in Russian b havior it would also likely cause significant damage to tl1e Russian economy and cause a serious diplomatic row with our European allies which bave been working closely with the United States in ramping up tl1e pressure on Russia When evaluating these various proposals two additional considerations merit attention The first is the likelil1ood- and severity- f Russian countersanctions or oU1er responses As a result of U S and EU sanctions on Russia in re$ponse to its activities in Ukraine Moscow imposed countersanctions on the EU Iimiting food shipmeots 68 TI1e United States and the European Union should expect further symmetric and as •nmetric responses in the case tltat we ramp up sanctions pressure Such responses could include countersanctions or increased cyber activity and could be proportional to degree of new pressure we impose on Moscow i e tl1e more powerful sanctions we impose the more significant Moscow's retaliation may be TI1e second consideration is that while Russia poses many challenges to the United States we still want the opportunity work with Moscow on a range of diftlcult issues such as intemational terrorism North Korea's nuclear weapons and ballistic missile programs stability in Afghanistao and a number of other areas Ramping up sanctions pressure on Russia may impact their wiltingness to work constmctively witll tiS on these matters While increased pressure is justiJied in response to Moscow's continued defiance of international law and aggressive actions towards tloe United States we should recognize that further sanctions may make cooperation with Russia in other areas more diflicult IV Ensuring Russian Compliance As this Committee cooosiders imposing additional sanctions on Russia it should also consider how to effectively unwind tl1is pressure in such a way that provides Russia witlt the incentive to change its behavior One oftbe key sanctions lessons oftloe past few years is thai unwinding sanctions is ' Russia lay F- tendCoonter-Sanctoons Umil F nd-2017 Reutm MayTI Wl6 http www reuters comfarttclehis-rus sia crisis-sanctions-idUSKCNOY11GI VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00067 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517032 eps 20 64 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network often significantly more difficult than simplytuming a legal switch btdeed unwinding sanctions C lll often prove complicated and in many cases ill -considered or ineffective blunt unwinding of sanctions provides unnec sary C·Oocessious to our adversaries and lingoes opportunities to continue to pressure these targets for a variety of other malign activities 70 Likewise mmping up powerful sanctions but failing to provide realistic pathways for countries to change tl1eir beha or and enjoy even partial sanctions relief could lead to a situation of sanctions stalemate where the United States has imposed powerful saru tioos but the target is unwilling to abide by every one of our demands and therefore does not see any relief Such a situation can be highly problematic as the target suffers b1 the United States docs not achieve its policy goals Aggressive sanctions ramp-up must be coupled with a thoughtful unwinding process one that provides for meaningful relief to a target ifthat target changes its beha or and one that does not mise the bar for achieving such relief too high In certain respects elements of the current legislative proposals in tlte Senate may raise the bar for relief too high For example Section ll of the Cotmteracting Russian Hostilities Act- which imposes sanctions on Russia for its activities in Ukraine- sets a bigh threshold for tennination of tlte sanctions program namely that Russia ceases ordering centrolling or otherwise supporting or financing sepamtist elements in Ukraine and also halts military opemtions in Syria Whi le the United States should seek to achieve these goals most Russia analysts have doubts as to whether Russia will fully relinquish control of Crimea or totally cease military opemtions in Syria as a result of sanctions pressure Yet in order for tlte sanctions to be lifted that is what is re 1uired Setting the bar for tennination of these programs this high means tbat it is unlikely the United States will be able to IUiwind these sanctions in the foreseeable future Further such a threshold actually disincentivizes Russia from even partially complying with many of its obligations under Minsk II if the only way Russia can secure sanctions relief is with total fulfillment of its obligations under Minsk II it has limited incentive to fulfill only some of its obligations as it will be unlikely to see sanctions relief from doing so Wltile the waiver elements of this legislation do provide for some flexibility- namely permitting the President to waive the imposition of certain sanctions if he detemtines it is in tlte national security interests of the United States and certifies that Russia is taking certain steps in Ukraine and S ia-what is needed is a statutorily constmcted set of ofT-ramps that provide a clear roadmap for tlte Russians to receive limited sanctions relief in exchange for meeting certain obligations under Minsk II or verifiably reducing tlteir malicious cyber activities against the United States and its partners Stt t g Peter Feaver and Eric L l bet Penallyllo ' • ForeignAffairs June 6 2014 hnmilwww f l i•miTairs comlru icleshmit d·slllle 2014 Q6 06 penaltv-box 10 Eric LorlxT Securing American Interests ANew Em of Economic Powa • Cenltr on Sanclibns and Illicit FifUIIICe Foundad »•for Defense ofDemocracies F b 2017 http www defenddemocrncv org contentluploodsfdocumenL- CSIF Securing American lnteresls pdf VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00068 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517033 eps 21 65 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network Such a stat llory construct could work as follows New legislation could include lhe c dilication of the Executive Orders related to Russia and Ukraine along wilh additional sta1Utory designatioas of certain parties e g in an annex involved in destabilizing Ukraine or currently goveming Crimea 111e legislation could nuther specify that these additional designations will be lifted if Congress reviews and agrees that Russia has li1lfilled certain delineated obligations under Minsk II For example if Russia withdraws all of its heavy weapons from the conflict zone the United States will lift these designations 111e level of sanctions unwinding provided oould be queued to the magnitude of lhe obligation Russia fulfills For example if the new legislation includes powerful sanctions related to Russian sovereign debt the lifting of those sanctions could be tied to 1e fulfillment of other more significant obligations under Minsk I such as Russia allowing for full Ukrainian control over its border with Russia troug tout the conflict zone In tis way the United Stales would not be providing significant sanctions relief to Russia in exchange for minor concessions Such legislation could be structured in altemative ways tl1at achieve tbe same effect as well For example the legislation oould rely on a presidential certification that Russia had fulfilled certain of its obligations under Minsk II or tat it bad significantly reduced its cyber-attacks against the United States and its partners but lhen provide Congress Ote opportunity to r view and approvt or disapprove oftbat certific atioo followiog briefings by t11e administration and the intelligence community y upon approval would the statutorily imposed sanctions specified be unwound Any such provisions should include a degree of built-in flexibility such as specifying that if Congress deems it appropriate additional or altemate sanctions can be relaxed as a result of Russian actions Such flexibility will ensure that while Congress demarcates a clear path in from tl1e cold to Moscow it can adjust to changes in the situation as necessary TI1is off ramp approach provides a number of important benefits First it increases the likelihood that the United States will achieve some- albeit not all-of its objectives particularly with regard to Ukraine By ramping up pressure on Moscow and then providing such off-ramps the United States will give Russia a clear path to sanctions relief and will increase the prospects that Mosoow will live up to at least some of its Minsk II obligations Otherwise and based on the current sanctions stalemate it does not appear likely that Russia will change its activities in Ukraine and indeed may simply try to wait 01rt U S sanctions until the pamllel EU sanctions regime falls apart or 111th the hope that the Trump Administmtion will make a decision to relax some of 1e current S nctions on Russia Second while providing limited sanctions relief this approach also keeps the pressure on Russia to change its other undesirable behavior While Russia may receive S ICh limited rcUef it will still be w1der significant economic pressure particularly if some of the more powerful sanctions on the c unlry remain in place As a result Ote United States can continue to pressure Russia even while granting it some relief TI1is approach overcomes one of the primary critiques of a major recent sanctions unwinding episode-the Joint Comprehensive Plan of Action JCPOA between tbe P5 1 and Iran In that case the ObanJa Administration was arguably reluctant to enforce remaining sanctions on Iran for fear of undennining the agreemen and as critics of the deal argue VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00069 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517034 eps 22 66 Eric Lorber Center on Sanctions and Jllicit Finance Fo1mdation for Defense of Democmcies Financial Integrity Network partially as a result Iran oontinued 10 engage in des1abilizing ac ivily througho 11 the region including exporting terrorism ballistic missile developmen and supporting Syrian President Bashar ai-Assad and the HO tthis in Yemen Utilizing this off ramp mechanism may help avoid his pitfall by making it clear tl1at a number of sanctions on Russia will remain in place even with the partial relief and thai Russia should not expectlo see relief related to those remaining sanctions unless and umil it changes its behavior tied direc ly to tl1em V Moving F01ward Russia continues totl1reaten U S national interests in a number of ways including its destabilizing activities in Ukraine and ils cyber-atlacks aimed at undermining democratic institmions lo say nothingof its blatant human rights abuses and bmtal military campaign in Syria l11e United States should be prepared to use all the tools at its disposal-diplomatic cyber eoonomic and militaryto counler these Russian threats But as Congress which bas a key role to play i11these efforts decides whether to ramp up c-oonomic pressure on Russia it should do so in a way that is botl1 responsible and provides Moscow with a clear pathway for drawing down 1ensions and gradually relieving tl1at economic pressure as a reward for improved behavior Thank you for your lime I look fonvard to your questions VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00070 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 31517035 eps 23 67 PREPARED STATEMENT OF RODNEY D LUDEMA PH D ASSOCIATE PROFESSOR SCHOOL OF FOREIGN SERVICE AND DEPARTMENT ECONOMICS GEORGETOWN UNIVERSITY OF MARCH 15 2017 Introduction Chairman Crapo Ranking Member Brown and distinguished Members of the Committee thank you for the opportunity to testify at today’s hearing assessing U S Sanctions on Russia My name is Rodney Ludema and I am a professor of economics at Georgetown University Earlier this year my co-author Daniel Ahn and I published a report titled ‘‘Measuring Smartness Understanding the Economic Impact of Targeted Sanctions ’’1 and I would like to take the opportunity to share some of its conclusions As you know Russia’s intervention in Ukraine in early 2014 prompted the United States and the European Union to impose series of ‘‘smart’’ sanctions—sanctions against specific individuals and companies primarily in Russia and Ukraine The sanctions began in March 2014 and the list of targets has grown steadily now affecting several hundred companies explicitly and thousands more by association Our study seeks to understand just how ‘‘smart’’ these sanctions have been in practice That is have they hit the intended targets with minimal collateral damage We find that with a few notable exceptions the sanctions have inflicted significant damage on the intended targets with relatively little short-run impact on the overall Russian economy Smart Sanctions in Context While broad economic sanctions and trade embargoes have long been used as instruments of foreign policy targeted sanctions focusing on specific individuals companies and transactions are relatively new They are an outgrowth of a recognition that the effectiveness of an economic sanction in gaining compliance from a target government does not depend on the overall economic damage the sanction causes but on whether the target government itself and its key domestic constituencies feel the economic pain from noncompliance Thus sanctions are considered ‘‘smart’’ if they target responsible parties while minimizing collateral damage For this reason assessing the smartness of targeted sanctions on Russia is essential to assessing their efficacy Clouding the picture however is the fact that the conflict in 2014 roughly coincided with a series of powerful macroeconomic shocks especially a dramatic decline in the price of oil Russia’s main export which jolted both the Russian and world economies The Russian economy slowed dramatically in 2014 and entered recession in 2015 This makes it difficult to determine with the naked eye whether the poor economic performance of a sanctioned company is due to sanctions or to the broader economic problems of the country Likewise it is difficult to determine whether the broader economic problems of the country are due to the oil shock or to collateral damage from sanctions The difficulty inherent in attributing Russia’s poor economic performance following sanctions to a single cause has allowed for a wide range of conflicting claims regarding the economic costs of the sanctions to Russia and to neighboring economies Opponents of sanctions in particular claim that sanctions have caused little pain to the specific targets while inflicting untold economic damage on the Russian people and on neighboring countries principally members of the European Union Effects on Sanctioned and Associated Companies The first part of our study examines whether the sanctions impacted the intended targets We assemble all companies listed on the Specially Designated Nationals and Blocked Persons SDN List and Sectoral Sanctions Identifications SSI List along with all companies associated with individuals on the SDN list Together with overlapping targets from a similar set of sanctions by the European Union this comprises 584 unique targets In continuing research we have also considered some 2 000 subsidiaries of these targeted companies and found similar results Our method is to compare the performance of sanctioned companies to that of nonsanctioned peer companies before and after the sanctions were imposed As sanctioned and nonsanctioned companies all face the same macroeconomic environment comparing the two groups is a way to isolate the effect of sanctions Our main 1 The public link to the report can be found at https www state gov documents organization 267590 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00071 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 68 finding is that sanctioned companies are indeed harmed by sanctions relative to their nonsanctioned peers On average a sanctioned company loses an estimated • one-third of its operating revenue • over one-half of its asset value • about one-third of its employees after being targeted compared to nonsanctioned companies These estimates which are large and appear highly statistically robust suggest targeted sanctions do have a powerful impact of the targets themselves Beyond the broader strategic implications these sanctions may therefore be tactically impairing the ability of the Russian Federation through these companies to further the illegal annexation of Crimea and the ongoing crisis in Eastern Ukraine Macroeconomic Impacts The second part of our study examines collateral damage In particular we consider the impact the sanctions have on Russian GDP and on its imports from the European Union In contrast to the firm-level approach it is not possible to cleanly separate out the effect of sanctions from the effect of other macroeconomic factors in the aggregate analysis Instead we pose a much simpler question How much of the post-sanction performance of the Russian economy can be explained either directly or indirectly by falling oil prices The world oil price Brent fell from over $100 in 2013 to under $60 by the end of 2014 and declined further in the second half of 2015 A common rule of thumb for oil exporters suggests a $40 drop in the world price of oil should shrink energydependent Russia’s GDP by 4 to 5 percent Indeed we find that the oil price change explains the vast majority of the decline in Russia’s GDP and import demand with very little left to be explained by sanctions or other factors We conclude that either sanctions had only a small negative effect on Russia’s GDP or other positive factors largely canceled out the effect of sanctions There is good reason to believe that sanctions have had only a small negative macroeconomic effect in the first 2 years of their imposition By far the largest companies on the sanctions list energy companies banks and defense companies which make up a large fraction of the Russian economy were not subject to blocking sanctions Rather they were subject to limitations on long-term borrowing and new technologies that by design should have a delayed effect The reason for this design was to mitigate the potential negative impacts on U S companies and those of our allies As for positive factors that may have countered the effect of sanctions the most plausible candidate factor would be the Russian policy response Notable policy responses were the large depreciation of the Ruble in 2014 and government bailouts certain ‘‘strategic’’ firms The government of Russia designates certain firms as strategic because of their economic and national security importance to be prioritized to receive state largess in the form of state loans guarantees capital participation more government contracts and tax breaks It is important to note that such policy responses are costly to the Russian government and thus this constitutes an indirect avenue by which the sanction effect is felt Finally we find that sanctions have had a small effect on the economies of most EU countries Adding together the impacts of sanctions and Russia’s agricultural countersanctions on EU exports gives a median impact across EU countries of just 0 13 percent of GDP though with considerable variation across the EU members The reasons for this are 1 Russia generally accounts for a small share of total EU countries’ exports and 2 most of the decline in Russian imports is explained by lower oil prices and trend factors Conclusions and Implications for Future Sanctions Economic sanctions are meant to signal international disapproval deter further aggression and create leverage in negotiations with the targeted country aimed at reversing the offending policies Whether the current set of sanctions against Russia will ultimately accomplish these goals is unknown but good sanctions design gives the United States and its allies the best chance of success History teaches that sanctions are most effective when they are multilateral sustainable focused and clearly contingent on an achievable goal The current sanctions on Russia were designed with these principles in mind While not fully multilateral they include the European Union which is a region of great importance to the Russian economy They were designed to cause minimal collateral damage in the short term and thus have proven sustainable so far Our study largely confirms the success of this design element Any new sanctions if targeted at the broader VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00072 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL 69 Russian economy could easily cause collateral damage and thus should be approached with caution The current sanctions were designed to focus their impact on the companies and individuals involved furthering Russia’s illegal annexation of Crimea and ongoing Ukraine policy Our study largely confirms the success of this design aspect as well Any new sanctions targeting different policies should be similarly targeted Finally current sanctions are contingent on certain Minsk II milestones and while they have yet to be reached they are clear Sanctions policies that tie the hands of negotiators in such a way as to prevent achieving the goal should be avoided VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00073 Fmt 6621 Sfmt 6621 S DOCS 25434 TXT SHERYL RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM ERIC B LORBER Q 1 Following the imposition of sanctions many Russians may have believed that sanctions were a cause of Russia’s economic downturn How could sanctions be better targeted to restrict Russia’s capabilities without encouraging anti-American sentiment A 1 Sanctions that focus on Russian President Vladimir Putin and his cronies’ corruption could be particularly effective at putting pressure on Russia while not encouraging anti-American sentiment President Vladimir Putin is adept at manipulating state-controlled media sources to put the blame for Russian’s economic struggles squarely on Western sanctions While factually untrue large swaths of the Russian population believe the United States is the cause of the economic anguish they feel Additional broadbased sanctions that target Russia’s economy or particular sectors within that economy such as sectoral sanctions may exacerbate this problem and while putting additional pressure on Vladimir Putin may also increase anti-American sentiment within Russia Sanctions—and sanctions-like tools—could be better targeted to pressure Russia’s elites and ruling class while limiting the impact on the Russian population more generally One way to do this—as I mentioned in my written testimony—would be to identify track and as appropriate seize assets of sanctioned Russian elites in the United States and in certain foreign jurisdictions Russian oligarchs are well known to launder money coming out of Russia through high-end real estate purchases in urban centers often paying cash for these properties Recently the Financial Crimes Enforcement Network at the United States Department of the Treasury has collected information related to high-end real estate purchases by anonymous parties through its recent Geographic Targeting Order 1 It is widely believed that FinCEN’s information collection has produced substantial relevant information on these flows and where some of these individuals’ assets are Identifying these assets in the United States and partner jurisdictions such as the United Kingdom where Russian oligarchs have purchased large amounts of luxury real estate in London and seizing them if necessary e g if they belong to designated Russian persons could put additional pressure on individuals within Vladimir Putin’s circle of cronies in ways that would not directly impact common Russians An additional benefit of such action would be that it directly plays into one of the primary grievances ordinary Russians do have 1 See e g ‘‘FinCEN Renews Real Estate ‘Geographic Targeting Orders’ to Identify High-End Cash Buyers in Six Major Metropolitan Areas ’’ Financial Crimes Enforcement Network Press Release Feb 23 2017 available at https www fincen gov news news-releases fincen-renewsreal-estate-geographic-targeting-orders-identify-high-end-cash 70 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00074 Fmt 6604 Sfmt 6604 S DOCS 25434 TXT SHERYL 71 against the Putin government and Russia’s oligarchs more broadly corruption As recent street protests have illustrated significant elements in Russia are frustrated with the substantial level of corruption at the highest levels of government 2 To the extent that U S sanctions and sanctions-like measures focus on the Russian elites’ corrupt activities they will in turn be less likely to produce anti-American sentiment Congress should therefore consider focusing its legislative authority on measures—such as setting up a Russian corruption task force at FinCEN—that target Russian corruption and that freeze illicit Russian assets in ways that hurt the bank accounts of key Russian oligarchs While such a task force would put pressure on Putin and his cronies Congress should remain clear eyed that such measures—while powerful—would be unlikely to change Russian activity if not situated as part of a welldeveloped strategy using all means of U S statecraft RESPONSE TO WRITTEN QUESTION OF SENATOR TILLIS FROM ERIC B LORBER Q 1 Can you please outline what a sustained regimen of Russia sanctions might look like I am interested in your opinions on what an idealized sanctions framework looks like one where the United States potentially has a multilateral engagement with EU or NATO partners so that we move toward a goal of isolating Russian leaders oligarchs Putin’s cronies and bad actors as opposed to harming innocent Russian civilians What concrete policies could the United States put in place that would make Russian leaders start to produce a mutually beneficial behavior over the long term How does U S energy policy influence the ability of the United States and other nations to exercise effective sanctions • Please outline a framework and strategy for exercising and implementing incremental and sustainable sanctions and what other policy tools should be used to couple sanctions At what point is an escalation of engagement appropriate What are the next steps when sanctions and other diplomatic avenues in controlling malign activities How do you counteract negative messaging about sanctions in Russia—to win the hearts and minds of individuals in Russia A 1 One of the core tenets of a sustainable sanctions program to effectively pressure Russia is close U S and EU cooperation The EU sanctions have been instrumental in ensuring that Russia cannot offset much of the economic pain imposed by U S sanctions To the extent that the United States and European Union can continue to closely coordinate their sanctions programs those programs will be more effective Any new U S sanctions should—at the very least—take into account whether the European Union will be willing to join with its own regulations With that as background an idealized sanctions program is one that gradually ramps up the pressure on Russia and in particular on Russian oligarchs and cronies specifically by targeting their 2Andrew Higgins ‘‘Aleksei Navalny Top Putin Critic Arrested as Protests Flare in Russia ’’ New York Times Mar 26 2017 available at https www nytimes com 2017 03 26 world europe moscow-protests-aleksei-navalny html lr 0 VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00075 Fmt 6604 Sfmt 6604 S DOCS 25434 TXT SHERYL 72 corrupt activities Such gradual pressure—where the United States tightens the vice slowly but deliberately—will be significantly more likely to achieve EU buy-in than a fast powerful escalation of sanctions such as imposing broad import restrictions on Russian energy products Likewise such gradual and deliberate pressure can help U S diplomats make the case for additional sanctions if Russia refuses to change its behavior as a result of limited escalation the United States can argue to our European counterparts that more means are necessary My written testimony lays out a number of options for incrementally increasing the pressure on Moscow and I reproduce them at a high level here • The codification of certain executive orders ‘‘EOs’’ including EOs 13660 13661 13662 13685 and 13694 as well as additional statutory designations under these codified EOs • Establishment of a task force potentially led by the Financial Crimes Enforcement Network ‘‘FinCEN’’ to identify and seize assets of targeted Russian persons including those with close ties to Russian President Vladimir Putin • Certain restrictions related to U S and European financial institutions’ purchase or facilitation of Russian sovereign debt which has been a way for Russia to prop up Russian stateowned enterprises and financial institutions in the face of sectoral sanctions and • Primary sanctions on elements of Russia’s oil and gas industry with possible carve-outs for certain countries particularly dependent on the Russian energy sector Note that as I explain in my response to Senator Toomey’s question above the FinCEN task force and its focus on Russian corruption may be the tool least likely to engender anti-American sentiment Most of the more powerful sanctions options will likely have macroeconomic effects on Russia’s economy and Putin will be more able to use them for propaganda purposes In terms of coupling sanctions with other policy tools these economic measures must be nested in a larger strategy of pressuring Moscow including aggressive diplomacy and responding in kind to malign Russian activities such as offensive cyber operations Sanctions are a means to an end and Congress and the Administration must be clear as to what that end is and how they intend to achieve it Ramping up economic pressure on Moscow without clear objectives the employment of other coercive tools and buy-in from the Administration—is unlikely to be effective in getting Moscow to change its behavior While it imposes sanctions the United States should be actively combating Russian aggression in cyber space for example Finally Congress should think through how it can unwind sanctions pressure in the case that Moscow—even partially—changes its behavior Current sanctions bills including the Counteracting Russian Hostilities Act of 2017 ‘‘Counteracting Russian Hostilities Act’’ 1 ramp up the pressure on Russia significantly Yet as we have learned over the past few years unwinding sanctions can 1 S VerDate Nov 24 2008 10 42 Oct 25 2017 94 ‘‘Counteracting Russian Hostilities Act of 2017 ’’ 115th Cong 2017 Jkt 046629 PO 00000 Frm 00076 Fmt 6604 Sfmt 6604 S DOCS 25434 TXT SHERYL 73 often be a difficult and fraught process and Congress should think about how and when it will unwind sanctions even as it builds pressure Any such new sanctions legislation should include builtin ‘‘off-ramps’’—namely elements of the sanctions regime such as specific designations or specific Directives—that could be undone in a situation of partial Russian compliance with its various obligations such as those under the Minsk agreements Such partial sanctions relief could be traded for Russian fulfillment of these obligations and this approach would increase the chances the United States could limit—though not completely eliminate—Russian challenges to U S interests I have explained how to construct a sanctions framework that focuses on ‘‘smart unwinding’’ in my written testimony VerDate Nov 24 2008 10 42 Oct 25 2017 Jkt 046629 PO 00000 Frm 00077 Fmt 6604 Sfmt 6604 S DOCS 25434 TXT SHERYL