Could sanctions have saved Ukraine?

Can economic warfare really work? What can we learn from the 21st century historical record of American sanctions policy?

To find out, we interviewed Eddie Fishman, a former civil servant at the Department of State and an Adjunct Professor at Columbia. His new book, Chokepoints: American Power in the Age of Economic Warfare, is a gripping history of the past 20 years of American sanctions policy.

In this show, we’ll talk about…

• The evolution of U.S. sanctions policy, from Iraq and Cuba to Iran and Russia,

• How Reagan’s deal with the Saudis turned the dollar into an economic chokepoint,
• The incredible success of sanctions against Iran, and how that playbook could have been used to punish Russia,
• Historical lessons in enforcement that are relevant for export controls on China today,
• The role of great civil servants like Stuart Levey, Daleep Singh, Victoria Nuland, and Matt Pottinger in building state power,
• Institutional challenges for economic warfare and the consequences of failure to reform,
• Strategies for writing groundbreaking books about modern history.

Financial Chokepoints

Jordan Schneider: Let’s start with the Bosphorus. How does this little corner of our beautiful planet explain the evolution of sanctions?

Edward Fishman: The Bosphorus is the epitome of a maritime chokepoint. It is a narrow strait between the Black Sea and the Mediterranean Sea. Throughout history, maritime chokepoints like the Bosphorus have been critical for strategic power. Sparta was able to win the Peloponnesian War because they won a battle around the Bosphorus and blockaded it, ultimately starving the Athenians into submission. Athens had relied on the flow of grain through the Bosphorus to feed its population — that was really the whole purpose of ancient Athens’ maritime empire.

Historically, these chokepoints have been geographic features. But now, as a result of globalization, there are chokepoints in the global economy that are not geographic — the most critical of which is the U.S. dollar. This is why the book is called Chokepoints.

For thousands of years throughout history, the only way to block a maritime chokepoint like the Bosphorus was a physical naval blockade. What’s changed is that in the wake of hyperglobalization in the 1990s, the U.S. acquired the ability to block chokepoints like the Bosphorus just by weaponizing its control of the U.S. dollar.

Today, the director of OFAC, the unit at the Treasury Department that oversees sanctions policy, can sign a few documents in her office and blockade a chokepoint like the Bosphorus. This actually happened on December 5, 2022, when the G7 oil price cap went into effect. The Bosphorus was backed up with dozens of oil tankers, because Turkish maritime officials were so nervous about violating the terms of the price cap that they didn’t want the ships to cross. It took OFAC days of very intensive diplomacy with Turkish authorities to persuade them to allow the ships to cross.

Jordan Schneider: You open this book with some wild contrast. Historically, you needed triremes. Now, all you need is a piece of paper from the Treasury Department to clog up the strait in Turkey halfway around the world.

Like you, Eddie, I was a sanctions nerd in college. I wrote my thesis about the origins of the UN and did papers on sanctions policy. I remember very vividly reading this literature arguing that sanctions are useless and don’t have any big impact. There was this great quote from George W. Bush in your book where at some point in the 2000s, he said, “We’ve sanctioned ourselves out of any influence” when it came to Iran’s nuclear program. You put the spotlight on one civil servant who takes that as a challenge and through ingenuity, creativity, and a whole lot of elbow grease, is able to discover and leverage a whole new lens of American power. Let’s briefly tell the story of American sanctions pre-Stuart Levey before we discuss Iran’s nuclear program.

Edward Fishman: When Stuart Levey came in as the Treasury Department’s first undersecretary of terrorism and financial intelligence in 2004, the most recent big case of sanctions that the U.S. had was a 13-year sanctions campaign against Iraq from 1990, when Saddam originally invaded Kuwait, until 2003, when George W. Bush launches the invasion of Iraq. That embargo required full UN backing and was implemented by a 13-year naval blockade. You had literally a multinational naval force parked outside of Iraqi ports inspecting every single oil shipment going in and out of Iraq.

The lesson from this situation was that sanctions didn’t work — Saddam didn’t come to heel. He seemed to be just as aggressive, if not more so. Over time, this embargo wound up leading not only to humanitarian problems in Iraq, which are very well documented, but also significant corruption. Saddam was siphoning away oil money under the nose of the UN.

By the time Levey comes in, sanctions had been seen as something that had been tried and failed against Iraq, and in fact had paved the way for the U.S. invasion of Iraq. In many ways, the 2003 invasion of Iraq was a direct result of the perception that sanctions had failed.

When Levey started working on the Iran problem around 2004, the prospect of even doing an Iraq-style sanctions campaign against Iran was off the table because there was no way to get the UN Security Council to agree to that at the time. Bush’s comment about having sanctioned ourselves out of influence with Iran was a result of the fact that without the UN, the U.S. thought that the only type of sanctions we could impose were primary sanctions, like an embargo where U.S. companies can’t buy things from Iran or trade with Iran. The only issue is we had had an embargo in place since the mid-90s, so there wasn’t any trade to speak of between the U.S. and Iran. The two avenues of sanctions were closed off — sanctions through the UN had been discredited by the 90s, and the other, primary sanctions on Iran, had already been maxed out and had been for a decade by then.

Jordan Schneider: The other seminal piece of sanctions in American 20th-century history is the embargo on Cuba. That is the same story — we cut off trade with this country, yet Castro’s still there in 2004, some 50-odd years later. It’s interesting — if you go back even further, there was this real hope after World War II where the UN at one point was even going to have its own air force. The idea was that sanctions were going to be this incredible tool to deter bad actions by different actors around the world because the U.S. and the Soviet Union were friends and we would all police the planet in a happy-go-lucky way. That was not how the Cold War ended up working out.

In 2004, Stuart Levey started to understand that he can leverage the dollar’s role in global financial flows. Eddie, can you tell the story of how the U.S. dollar became globalized in this way?

Edward Fishman: Bretton Woods, the conference that set the rules of the road for the post-World War II economy, happened in 1944. It put the U.S. dollar at the center of the global economy and established the dollar as the global reserve currency. It made the dollar as good as gold — the dollar is convertible for a fixed rate of $35 per ounce of gold.

At the same time, it explicitly prioritized the real economy and trade over finance. John Maynard Keynes, who was one of the architects of the Bretton Woods system, said that capital controls were a very important part of the system. For the first 30 years of this new global economy that emerged after World War II, you had the dollar at the center of the world economy, but it wasn’t a particularly financialized world economy. Most states had pretty significant capital controls, and banking was a very nationalized and, in some ways, even just a regionalized type of business.

By 1971, the U.S. dollar had been losing its value for quite some time and we were running significant deficits because of the war in Vietnam. Ironically, this is when Richard Nixon unilaterally took the dollar off of the gold peg. The dollar was still at the center of the world economy, but it was no longer tethered to gold. Exchange rates were now set by the market instead of by government fiat.

In the years after that, the capital controls of the Bretton Woods system fully erode and the dollar winds up becoming even more integral to the world economy as we see financialization take off from the ’70s through the Clinton era. You get to the point where we have a foreign exchange market that is turning over seven or eight trillion dollars every single day, which is by far the largest of all financial markets.

Jordan Schneider: How did oil come to be traded in U.S. dollars?

Edward Fishman: The dollar’s role in trading oil is arguably the most important chokepoint for a number of the key sanctions campaigns of the 21st century.

After World War II, the U.S. was a large oil producer and a big exporter. The 1973 Arab oil embargo shifted our perspective, and the U.S. realized just how vulnerable it was to being cut off from Middle Eastern oil.

In 1974, Richard Nixon — who was wallowing under the political pressure of the Watergate scandal and massive deficits that we had no reasonable way of plugging — sent his treasury secretary, Bill Simon, to make a deal. Simon was a former bond trader, a New Jerseyite, a chain smoker…

Jordan Schneider: A chain-smoking New Jersey native, described by a peer as, “far to the right of Genghis Khan.”

Edward Fishman: He’s a really colorful figure. The book includes a photo of him testifying before Congress with a giant plume of smoke around him.

Bill Simon tried to think about how to plug these deficits using his financial background as a bond trader. He proposed cutting a deal with the Saudis such that, not only do they agree to keep pricing oil in dollars into perpetuity, but they actually take the dollars they earn from selling oil and reinvest them in U.S. government debt — they basically plug our deficit with the money that the U.S. is paying them for oil. He wound up taking a flight to Jeddah in the summer of 1974 — getting copiously drunk en route.

The deal worked. He cut a deal with the Saudis in which they agree to recycle their petrodollars into U.S. Treasuries. This agreement largely still exists to this day. Oil, by and large, is priced in dollars no matter who’s buying it or selling it.

Chokepoints in the global economy are typically formed by the private sector. They kind of develop naturally as businesses evolve. However, there are important moments when government intervention becomes critical.

Simon’s original deal in 1974 solidified the petrodollar, but then a few years later, as the dollar continued to slide in value, oil exporters and OPEC started getting upset because the weakening dollar was in turn reducing the real value of their oil earnings. Jimmy Carter’s Treasury Secretary, Michael Blumenthal, actually went back to Saudi Arabia and cut a new deal in which he agreed to give Saudi Arabia more voting shares at the IMF in exchange for Saudi continuing to price oil in dollars.

Jordan Schneider: Why did the Saudis even cut the deal in the first place?

Edward Fishman: The Saudis got two things. First, they got access to US military equipment, which was pretty beneficial to them. Second, which I think is more of a direct part of this deal and one that’s more easily provable through historical documents, the Saudis were able to buy U.S. government debt in secret outside of the normal auctions. Instead of participating in the public auctions for U.S. Treasuries, they had their own side deal where they could buy Treasuries. That was a big benefit to them because they were able to lock in prices and also do so without facing potential political opprobrium.

Jordan Schneider: That’s crazy.

Edward Fishman: It’s a remarkable turning point in the financial and economic history of the 20th century. There was a real shot that oil could have been priced against a basket of currencies, which in some ways makes more sense. For these countries in the Middle East and OPEC members, their entire economy basically depends on generating oil revenue. If you want stability and predictability, you don’t want to take exchange rate risk. But people like Bill Simon and Michael Blumenthal intervened and were able to get the dollar enshrined as the key part of the oil market.

The Iran Sanctions Formula and JCPOA Diplomacy

Jordan Schneider: Let’s talk about 2006, when Stuart Levey was trying to figure out how to make sanctions work against Iran. Can you explain his light bulb moment during the January 2006 trip to Bahrain?

Edward Fishman: Levey realized other countries hadn’t stopped doing business with Iran — only the U.S. had, and that’s why the sanctions weren’t working. But he realized that he could use access to the dollar as a lever to pressure foreign banks.

Typically, when you’re trying to get other countries on board for sanctions, you would go negotiate with their foreign ministry and say, “We think what Iran’s doing is bad. You should impose your own sanctions on Iran.” That was the paradigm before 2006. What Levey realizes is that he can go directly to the CEOs of foreign banks, bringing declassified intelligence demonstrating how Iran uses their banks to finance their nuclear program, and funnel money to terrorist proxies like Hamas and Hezbollah. To start, he could just present the facts and potential reputational concerns would often persuade these banks to exit Iran. In more extreme circumstances, when banks wouldn’t go along with him, he could threaten their access to the dollar to try to get them out of Iran.

What Levey really pioneered was the direct diplomacy between him as a Treasury official and his team at the Treasury Department with bank CEOs. You might ask, how did Stuart Levey get meetings with CEOs of banks all around the world? He was lucky — right when he had this epiphany, Hank Paulson, who had been the CEO of Goldman Sachs, came in as Treasury Secretary. Paulson is arguably the most well-connected banker in the world at the time. Hank winds up opening a lot of doors for Stuart and getting him meetings with ultimately more than 100 of the key banking CEOs around the world.

Jordan Schneider: Interestingly, you have to convince all the banks to get on board, because even the slightest institutional leakage would allow Iran to sell as much oil as they want.

How did Levey and his team go about convincing the Russians, the random Chinese banks, the Azerbaijani banks, and all of these other banks?

Edward Fishman: What Levey succeeds at doing between 2006 and 2010 is getting the big name-brand global banks to exit Iran. By and large, there are a few stragglers like BNP Paribas. Most of the big main global banks are out of Iran by 2010, though there are still some banks in places like the UAE, Turkey, and other countries doing business with Iran.

What winds up happening at that time is Congress, which has very little faith in Barack Obama’s willingness to come down hard on Iran — namely because Obama had very explicitly run for president in 2008 saying he wanted diplomacy. He even exchanged letters with Ayatollah Khamenei.

Even Iran hawks that are on the Democratic side of the aisle, like Bob Menendez, don’t really have much confidence that Obama is going to be tough on Iran. Democrats and Republicans basically form almost a coalition against the Obama administration on Iran sanctions and wind up passing progressively harsher sanctions legislation.

The key part of these sanctions laws, the first one called CISADA (the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010), is that they require the Obama administration to impose what’s called secondary sanctions. That’s not sanctions directly on Iran, but sanctions on Iran’s business partners — for instance, the UAE or Turkish bank that I mentioned before.

Levey was a Bush appointee retained by the Obama administration (he’s one of only two very senior officials, along with Bob Gates, who’s kept on). He uses this law with the mandatory secondary sanctions as a significant cudgel. He goes to places like Dubai and talks to banks saying, “Look, if you don’t get out of Iran, I will be forced by American law to impose sanctions on you. You will lose access to the dollar and all of your assets will be frozen.” That threat is very significant. When the choice is between Iran and the United States dollar, it’s a pretty easy choice for most banks around the world.

Secondary sanctions had been tried before in the mid-90s, but the U.S. effectively wound up blinking and not imposing secondary sanctions on Total, the French oil company that had been investing in Iran’s oil sector. Even the George W. Bush administration decided not to impose secondary sanctions. This tool was very controversial. You can imagine it didn’t go down well with other countries. If you’re an American diplomat and you go meet with one of your counterparts abroad and say, “Sorry, we have to sanction your biggest bank if they don’t stop doing business with Iran” — that just feels like mafia diplomacy, not something that goes down very easily.

One of the virtues of Obama being so beloved around the world was the success of sanctions on Iran. Obama built international consensus that Iran’s nuclear program was a problem.

Jordan Schneider: We also had multilateral sanctions from the UN alongside U.S. action. What did that end up doing for the Obama psyche and the global push to limit Iran’s oil revenue?

Edward Fishman: Obama successfully got a major UN Security Council resolution done in the summer of 2010, right alongside when CISADA, the secondary sanctions law, passed Congress.

Jordan Schneider: In the Medvedev era, mind you.

Edward Fishman: Yes, exactly. Historical contingency matters — the fact that Medvedev was president of Russia at the time meant that Russia didn’t veto UN Security Council Resolution 1929. In retrospect, the benefit of that resolution wasn’t so much the specific sanctions it imposed on Iran. Rather, it explicitly drew connections between Iran’s banking system and energy sector with its nuclear program. This meant when Obama officials traveled the world to tell foreign banks and their governments that they’d be forced to impose sanctions if they didn’t stop doing business with Iran, they could credibly say they were just complying with UN Security Council Resolution 1929 and that international law was on the side of the United States. The legitimacy that Obama’s sanctions campaign derived from the UN was ultimately very significant.

Jordan Schneider: Iran was completely unprepared for this. They literally took out ads in newspapers in Austria to beg for help financing their nuclear program.

Edward Fishman: Exactly. This speaks to assumptions about how the global economy worked at the time. People just trusted that banking networks wouldn’t be weaponized. Iran really thought that they could publicly advertise these fundraising activities with no issue. Foreign banks weren’t aware of what Iran was doing and weren’t particularly worried about being penalized for it. They probably viewed sanctions as something that were unlikely to happen to them — and if they did happen, they could just be chalked up as a cost of doing business.

Jordan Schneider: Let’s talk about the penalties. One of the remarkable accomplishments of the Treasury Department, which the export controls regime on China over the past few years hasn’t been able to do, was the billion-dollar fines thrown on violators — $2 billion on HSBC, and almost $10 billion on BNP Paribas. How did this work?

Edward Fishman: This is a very important part of the story and one that often goes unnoticed. It’s not that sanctions didn’t exist before this period in the early part of the 21st century — it’s that the cost of violating them wasn’t particularly high.

One of the most important strategic legacies of the campaign against Iran pioneered by Stuart Levey is conscripting banks to be frontline infantry of American economic wars. This wasn’t because banks decided that this was morally righteous, it was because they realized that violating sanctions was existentially dangerous for their businesses.

Between 2010 and 2014, Standard Chartered wound up getting fined about a billion dollars, HSBC was fined $2 billion, and BNP Paribas was fined $9 billion. In each case, the New York Department of Financial Services actually threatened to withdraw banking licenses from each of those banks, which would eliminate their ability to do business in the United States. That was a sword of Damocles hanging over these banks — U.S. law enforcement probably could have extracted even bigger fines.

We’re still living with that legacy today. The reason that financial sanctions in particular are so powerful is a confluence of two factors.

1. The dollar is essential to international commerce. Trying to do business across borders without access to the dollar is like trying to travel without a passport.
2. The U.S. actually can weaponize the systemic significance of the dollar because banks are afraid of going against American government dictates.

Jordan Schneider: The political economy of it is also different than whacking Nvidia or Synopsys, becauce those three banks are foreign. It is one thing to threaten with extinction some hoity-toity French bank that sponsors the French Open and has been doing business with Iran forever. It’s another to threaten a major contributor to America’s national competitiveness, employment, and growth.

Compare the death sentence of being cut off from the New York Federal Reserve versus mere fines in the case of export controls. With Huawei, there were some cases where they threatened to put executives in jail. Over the past few years, the types of companies that the Biden administration has gone after have often been random Russians in Brooklyn smuggling chips into Russia and China. Whereas the Obama administration was trying to put teeth behind big economic warfare efforts by throwing down billion-dollar fines.

Edward Fishman: Is it possible to conscript tech companies in the same way that banks are conscripted? My own view is yes. If the fines were harsh enough and if the enforcement were strong enough — because the other fact we haven’t talked about is it wasn’t just fines for these banks, it was also independent monitors. The Justice Department sent in people to oversee compliance reforms for several years thereafter.

It is possible, though politically challenging, on one hand to be subsidizing American semiconductor companies to the tune of 50-plus billion dollars, and then on the other to say we’re going to take that money back because you’re violating export controls. It is possible.

One thing I would mention though is that with the BNP fine and the HSBC fine, those took many years to come to fruition. These were years and years of bad behavior that then eventually led to giant fines. It is possible that someone right now at the Justice Department is working away at a major export control violation case that we’ll learn about maybe in a couple of years.

Jordan Schneider: You mentioned “Mafia diplomacy” as a sort of derogatory term for sanctions tactics. There are a lot of moments in this story where gentlemanliness appears to be very important to Obama.

After the invasion of Crimea, around the Maidan revolution, Obama had a call with Putin where he warned that “Moscow’s actions would negatively impact Russia’s standing in the international community.” Putin’s response was basically like, “I don’t know, man, it’s hard to take you seriously.”

Why was Obama’s demeanor so helpful in the case of Iran?

Edward Fishman: Obama was very attuned to international law, or as you put it, gentlemanliness. You could argue he was very lawyerly in his approach. With respect to the Iran sanctions, I think it actually wound up being helpful because the secondary sanctions against Iran were beyond anyone’s imagination.

We haven’t talked yet about the oil sanctions, which were put in place in 2012. The U.S. successfully reduced Iran’s oil exports from 2½ million barrels a day to 1 million barrels a day over about a year. This is explicitly a unilateral U.S. sanction.

Would that have worked as well had Obama not been as attuned to diplomacy and invocations of international law? I’m not so sure. You may have seen more challenges from places like China and India and maybe more obstinance. I do think it was helpful in some regards.

Looking at all the various examples of economic warfare that I talk about in the book, this is in some ways the most remarkable because of how unlikely it is to succeed. But it works.

One big exception from the financial sanctions during the Stuart Levey era is the Central Bank of Iran. The Central Bank of Iran is not under sanctions because it’s the repository for all of Iran’s oil revenues. The Obama administration was really nervous that if they sanction the Central Bank of Iran, other countries won’t be able to pay Iran for its oil. All of a sudden you’ll have all of Iran’s oil go off the market overnight, you’ll have a giant spike in oil prices, and everyone will be in a world of hurt.

Senator Bob Menendez, who was the key Iran hawk in the Democratic Party…

Jordan Schneider: For international listeners, Menendez is now in jail for having taken gold bars from Egypt. But anyways, continue, Eddie.

Edward Fishman: It’s a wrinkle in the story. Then Mark Kirk, who’s his Republican counterpart, who also wants to do a naval quarantine of Iran — the two of them basically say, “We don’t care, Obama, we’re going to sanction Iran’s central bank.” That amendment passes 100 to 0 in the Senate.

Obama is left with figuring out how to make this work. They come to a compromise with the Hill in which they agree to sanction the Central Bank of Iran, but they create two exceptions. One is an exception for countries who every six months significantly reduce their purchases of Iranian oil. For instance, if you’re a Chinese bank, you’re exempt from this — you can pay the Central Bank of Iran so long as China as a whole every six months reduces its overall purchases of oil from Iran. This gives a glide path for Iranian oil sales to decline over time and winds up working marvelously, luckily with the ramping up of shale production in the U.S.

The other exception put in place in 2012 says you can pay the Central Bank of Iran if you’re a Chinese refinery or bank, but those payments have to go into an escrow account that stays inside China and can only be used for bilateral trade between China and Iran.

This actually gives Chinese entities an incentive to comply, because keeping this money in China is going to boost Chinese exports to Iran — there’s nowhere else that the Iranians can use the money.

The one-two punch of these gradual oil reduction sanctions and the escrow accounts leads to a situation where Iran’s oil sales collapse by 60% by volume and it effectively has zero access to its petrodollars. Within 18 months, about $100 billion of Iran’s oil money gets trapped in these overseas escrow accounts. This is the context in which Iran’s economy really goes into free fall. Hassan Rouhani, a dark horse presidential candidate in 2013, won the Iranian presidency on an explicit platform of trying to get the sanctions lifted.

The remarkable thing about this oil sanctions regime is it’s probably the most effective oil embargo we’ve seen in modern history. It’s done unilaterally by the U.S. — no other countries are fully bought into this. It doesn’t involve any sort of naval strategy at all. There’s no quarantining of oil ships or anything. It is just using these threats of being cut off from the dollar to coax banks in places like China and India to comply with American dictates.

Jordan Schneider: This is going to be the poster child for decades of history books in that it actually created political change. It both drove home economically, causing hyperinflation and really hitting growth, and then got you a new slate of politicians who some would argue really wanted to make a deal. Looking back 15 years later, what’s your take on JCPOA and how we should think about the lessons from how the Obama administration used the leverage that they created with this oil embargo?

Edward Fishman: The JCPOA is the high point of American economic warfare in the 21st century in that you actually see sanctions leading to the outcome that the United States had set out, which was to get a peaceful resolution to Iran’s nuclear program. You can quibble about whether the terms of the JCPOA were stringent enough. However, there’s pretty good consensus that sanctions were the critical unlock to that deal.

Democrats say that sanctions were the key to getting the deal. Republicans say that sanctions were working so well that if we had only kept them in place longer, we would have gotten an even better deal. Within really a 10-year period, we flip that consensus from sanctions don’t work to sanctions are this magic bullet that just ended Iran’s nuclear program without firing a shot.

The key lesson here is that you need both economic leverage to make sanctions work and a clear political strategy. Having a clear political strategy, which was to get a nuclear deal with Iran, wound up being very important because you wind up having the international community grudgingly go along with the sanctions. They don’t voluntarily go along — they kind of have to be dragged along, including even the Europeans. But it would have been much harder to bring them along if there hadn’t been a political strategy, if it had just been bludgeoning Iran with economic pain without any sort of political end game in mind.

Responding to Russia (2014 vs. 2022)

Jordan Schneider: Let’s transition from the success of Iran sanctions to the failed response to the annexation of Crimea. What was different about how Obama and the world responded to Russia’s invasion in 2014?

Edward Fishman: Too often we tell our histories in silos — U.S. policy toward Iran vs. U.S. policy toward Russia. One thing I wanted to show in my book is that all of these sanctions campaigns are intertwined because ultimately these are the same decision makers at the table in the Situation Room across multiple issues.

The timeline is interesting here — the U.S. signed the original Iran nuclear deal, which froze Iran’s nuclear program, on November 24th, 2013. On the same exact day, hundreds of thousands of protesters descended upon the Maidan in Ukraine to protest Viktor Yanukovych’s deal with Putin.

The Ukraine crisis really does wind up taking the Obama administration by surprise. It’s not like the Iran nuclear program, which played out over the years as a slow-burning crisis. The Ukraine crisis and the Crimea annexation happened very quickly, with the U.S. constantly playing catch up. This parallel is important because right when Obama officials are scrambling to figure out what to do about Putin’s annexation of Crimea, they’re fresh off this giant victory where they just froze Iran’s nuclear program basically just by using sanctions.

It became natural for Obama officials in February-March of 2014 to say maybe sanctions could work against Russia. It’s a harder problem with Russia for several reasons. Russia has a much larger economy than Iran — in 2014 it was the 8th largest economy in the world and the world’s largest exporter of fossil fuels. Europe is completely dependent on Russian energy to heat their homes. Natural gas pipelines crisscross the continent between Russia and Europe.

Putin is creating facts on the ground as the U.S. is trying to scramble to put together sanctions. The annexation of Crimea happens within weeks of the “little green men” showing up in Crimea — they appear at the end of February and the annexation is formalized in middle of March. Shortly thereafter, Putin starts sending little green men into the Donbas, Ukraine’s industrial heartland.

Jordan Schneider: Let’s focus on the multilateral dynamic of this because obviously the UN is thrown out when Russia’s doing the thing. I remember very vividly watching the transition of the European actors who were pretty close to shrugging off this whole thing — until all those Dutch people died in the commercial liner that the Russians shot down by accident with their anti-aircraft missile. Can you explain how that changed the dynamic?

Edward Fishman: When Putin annexed Crimea in March of 2014, the U.S. and Europe did go ahead with some sanctions, but by and large they’re individual sanctions on people very close to Putin — his judo partners from childhood who have been elevated to positions of power at companies like Rosneft. Igor Sechin, for instance, the CEO of Rosneft, is sanctioned, but there are no sectoral sanctions, no actual significant economic sanctions on the Russian oil industry or its banking sector.

Obama and European leaders very publicly threatened this in March of 2014, but they don’t do anything. The reason is partly because there isn’t political will, but it’s also because they don’t know what kind of sanctions are tolerable to their own economies. They wind up spending months negotiating and coming up with what they eventually term “scalpel-like sanctions,” which effectively cut off big Russian state-owned enterprises from Western capital markets. It’s using an even narrower chokepoint than the dollar — it’s really just Western financing.

Interestingly, something that doesn’t often get recognized enough, the Obama administration went ahead with these sectoral sanctions, cutting off some big Russian energy companies and banks from U.S. capital markets on July 16, 2014, the day before MH17 was shot down. Obama and his team were getting fed up with the European foot-dragging. They say we need to send a powerful signal to Putin if we’re going to have any chance of deterring a broader invasion of the Donbas.

At the time, the New York Times was publishing headlines like, “Obama goes ahead without the Europeans.” Banking CEOs in the U.S. are incredibly upset because they’re saying this is just going to lead to a flight from the dollar to the euro and all our competitors in Frankfurt and London are going to benefit at our expense.

The next day, Putin’s proxies in the Donbas shot down a commercial airliner using a Russian-made Buk missile. They killed almost 300 people, by and large Europeans, most of them Dutch. All of a sudden the political aperture just widens completely in Europe. The Europeans are suddenly not only ready to match the U.S. sectoral sanctions of July 16, but actually go beyond them — they wind up cutting off all of Russia’s state-owned banks from the European financial system. The real core sectoral Russia sanctions are put in place after MH17, really from late July 2014 through September 2014 when Russian and Ukrainian leaders agree to the first Minsk agreement, the first ceasefire in the conflict.

Jordan Schneider: There are two parts that made me get upset rereading and reliving this story. One is that the Obama administration had just learned the lesson which Democrats in general have a really hard time with — escalate to de-escalate. It’s such an Obama thing, the same with the debt ceiling, where he was just like, “I’m going to be a nice normal actor and lay out my five demands and okay, we’ll get to two or three.” The Tea Party — this is ancient history now — and the Republicans were like, “No, we want 100% of what we want.” Obama would get scared, then they’d do a debt ceiling fight and he would end up giving way more than he realized he had to.

By the time we got to 2014, he just said “screw you.” He had the playbook with Iran. All the Treasury forecasting about the catastrophic costs of sanctions is overblown. The U.S. had more agency than expected, the euro was not going to take over.

But Russia really got away without serious economic consequences. Why didn’t Obama put the money where his mouth was?

Edward Fishman: In retrospect, there are two things that led to Obama’s overly cautious approach. One was real, genuine concern about the U.S. economy and the European economy. Remember, we’re still in the wake of the financial crisis and the Eurozone crisis is very much a live situation. There are genuine fears from the Treasury Department that you could accelerate a financial crisis in Europe if Russia were to cut off their gas supplies, and that contagion would spread to the US.

The other thing — this is an interesting paradoxical lesson for the Trump people now and people who say Europe needs to pull more of its own weight — Obama was very deferential to the Europeans over the Ukraine crisis. He explicitly wants people like Angela Merkel and François Hollande to take the lead. The negotiating block that came up with the Minsk agreement, the Normandy format, is France, Germany, Russia, and Ukraine. The U.S. doesn’t even have a seat at the table in the negotiations. Obama was saying, “This is in Europe’s backyard. It’s really their problem.”

In retrospect, that caution does not look very wise. Obama should have hit Russia much harder than he did in 2014. One interesting thing though is even though the sanctions put in place that summer — these capital market restrictions, the “scalpel-like sanctions” — are much weaker than the Iran sanctions, in the second half of 2014, oil prices cratered from over $100 a barrel to around $50 a barrel.

While the sanctions were aimed at trying to constrain Russia’s economic horizons as opposed to creating an immediate financial crisis, the sanctions do push Russia to the brink of a complete meltdown. In the winter of 2014-2015, Russia’s economy looks like it’s about to collapse — honestly just as bad, if not worse than Russia’s economy winds up looking after the much more drastic sanctions from February-March 2022.