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# 									Economic Impact of Sanctions on Russia							

FPC Briefing

 Professor Jeffrey Sonnenfeld, Yale Chief Executive Leadership Institute

Steven Tian, Yale Chief Executive Leadership Institute

Wednesday, August 10, 2022, at 11:00 am

Washington, D.C.

August 10, 2022

## 								Summary							

        -  During this on-the-record, hybrid briefing, Jeffrey Sonnenfeld and Steven Tian, from the Yale Chief Executive Leadership Institute, address thedevastatingimpact that economic sanctions and voluntary business retreats have had on Russia’s economy.  Their research, cited below, has received extensive coverage in recent weeks.  They will share data and insights from theircomprehensive economic analyses measuring Russian economic data and willoffer their assessment of Russia’s economic outlook.  Most of the one-hour program will be devoted to question and answer.  Journalists may choose to participate in person or via Zoom. 

**THE WASHINGTON FOREIGN PRESS CENTER, WASHINGTON, D.C.**

**MODERATOR:**  Welcome to the Washington Foreign Press Center.  Apologies in advance for the delays; we were putting together some of our technical requirements needed to make sure that we have a great briefing today.

My name is Ryan Roberts, director of the Foreign Press Centers, and I will be the moderator for today’s briefing on the impact of sanctions on Russia’s economy.

I’m pleased to welcome our distinguished briefers, Professor Jeffrey Sonnenfeld and Steven Tian.  Professor Sonnenfeld is the senior associate dean of leadership programs as well as the Lester Crown Professor in the Practice of Management for the Yale School of Management, as well as founder and president of the Chief Executive Leadership Institute, a nonprofit educational and research institute focused on CEO leadership and corporate governance.

Steven Tian is the Director of Research for the Yale Chief Executive Leadership Institute, where he leads a team of 42 research assistants across sectors and backgrounds working together with Professor Sonnenfeld.

And now for the ground rules for today’s briefing.  This briefing is on the record.  The briefers are independent experts, and the views expressed by briefers not affiliated with the Department of State are their own, and do not necessarily reflect those of the Department of State or the U.S. Government.  Participation in Foreign Press Center programming does not imply endorsement, approval, or recommendation of their views.  Our briefers will first provide a brief overview of their research into the impact of sanctions on the Russian economy.  After we hear from them, I will open the floor for questions – first from the journalists who have joined us in the briefing room, and then from those who are joining us online.  

This briefing will end promptly at 12 o’clock.  We will post a video and transcript of this briefing afterwards on our website at fpc.state.gov.

And with that, I’m going to turn the time over to Professor Sonnenfeld.

**MR SONNENFELD:**  Oh, thank you very much, Ryan.  A little bit of an echo here; I’ll maybe slide back a little, if that’s okay.  

I – honored to be with you today.  Thank you so much for the invitation and for that wonderful introduction.  I want to thank Tom Bossert, former national advisor at Homeland Security to the last administration; Evan Seltzer, who’s here representing the under secretary of Treasury; Brian Nelson, who of course oversees terrorism financial sanctions and other parts of – relevant parts of Treasury; Stapleton Roy, who’ll be joining us, who was the ambassador across several administration to China, Indonesia, and about a third of the rest of the globe through his career; Carla Hills, former U.S. trade representative and a member, actually, of the Ford administration, Carla Hills; but Ryan, especially to you, Ryan Roberts, for the invitation and your fantastic team to be here in your beautiful center.  I said “especially,” but of course I should say “especially” to the members of the media who are here, because we are thrilled you come out to talk with us, and those who are online, that you have stayed, and those that you saw stumbling around with our technology that you didn’t get frightened, that somehow we were going to have this technology suddenly go up in a puff of smoke and you didn’t get too worried.  But when we’re back in classroom at Yale, if we run a couple of minutes late as we just did, the students take flight after about five minutes, so we really appreciate your patience.  And you’re entitled to ask as tough a set of questions – or friendly, if you happen to have any – as you care to ask.  Nothing will offend us.  

We got into this work – I’ve been looking at corporate social impact as a field of inquiry since I was a professor at the Harvard Business School.  I was there for – I was up at Harvard for about 20 years.  I’ve been at Yale now about three years, so you can see my loyalty has shifted.  And I’ve been looking at everything from how companies respond to a whole host of issues, from climate change – when I got into it back in the late 1970s and 1980s on price fixing, anti-trust issues, it was called sustainability; it was called – much more having to do with environmental pollution compliance and conservation issues back then – gun safety, of course abortion, looking at issues having to do with trade and having to do with immigration reform, a whole host of issues.  

And this spring – well, actually this February 24th, when the Russian attack on Ukraine took place, we took note of the 12 companies that were the first movers that exited.  I’d like to say we sparked it; we didn’t.  They did this all on their own.  And I know we’re on the record, but just between us anyway – seriously, on the record – I – these were not the first movers on social change and social justice causes that I’ve studied in the last 45 years.  Big tech, big oil, and professional services – it usually – almost jump off a cliff rather than get involved in global controversy.  

You see why Ryan offered those disclaimers upfront as a – welcome, Tom; thanks so much for joining us.  We’ve already introduced you and saluted you, by the way, so thanks; glad you could join us.  Tom Bossert, former advisor – senior advisor to the president on homeland security, as I mentioned.  

So you can see why Ryan offered those disclaimers.  These are not usually the first movers, but we went to talk to the CEOs why they were pulling out, and we saw a major concern they had were the pretenders that pretended that – had a very clever public relations smokescreen.  So we went public with that in the major business media as to who was genuine and who wasn’t, and that led to move this group jumping from 12 to, as we surfaced who was and wasn’t authentic in this front, the stocks crashed of the companies that were pretending to do something but weren’t; in fact, staying in there.  So we saw on a day where the stock markets were down 4 and 5 percent, the major indices, these companies, each one of them, went down anywhere from 12 to 35 percent.  I don’t know if this triggered it, if it was catalytic or it was coincidental, but the list jumped from that to the 12 to the 75 to 500, and now we’re tracking 1,300, which more than 1,100 have actually pulled out of some form or another.

More recently, research that we did, took a look with did it matter how they left.  Being a schoolhouse – I’m a schoolteacher, as you know – we’re good at grading from A to F on a five-point scale.  So we took a look at companies who had completely withdrawn, giving an A, permanently; those who had temporarily suspended, comprehensively, a B; those who had partially suspended, a C; those who had done something which was forestalling some kind of future investments, a little bit more vague, and those who were stubbornly digging in and saying we’re not doing any – those – and that was the F.  And what we have – and you can find it on the Social Science Research Network, all of our papers that are relevant here, SSRN, it’s absolutely free; type in SSRN.  Frustratingly, we don’t get a penny of royalties off this either.  I don’t think anybody makes any money off of it.  But it – you can see that the more aggressively people pulled out, the better the financial results were.  And this is not some weird correlation; this is actually time series data.  We can see when they pulled out and subsequently what happened to their stock value.  So those companies like Exxon that wrote off, I don’t know, 5, $6 billion, or BP wrote off $9 billion, or Shell that wrote off $4 or so billion, it actually was handsomely made up for in the stock market returns.

So the bottom line on all that is doing good was not antithetical to doing well, as you see that a lot of this hand-wringing angst over the woke CEOs and have somehow – is this a bad thing, to be doing something which is in the interests of society?  These were independent business leaders’ decisions.  These were no government arm-twisted, this was independent of the sanctions per se, is that these companies saw financial risk, they saw reputation risk, they saw operational risks, and frankly none of them are making – very few of them were making as much as 1 percent of their revenues from China to start with, and there was – they weren’t all that profitable in Russia to start with.  Another reason why I think Ryan would throw out disclaimers; I might say the wrong country now and then, which kind of matters in this line of work.

So doing good was not antithetical to doing well.  That’s what we thought the work was until we started to see that colleagues of ours in academia and colleagues of yours in the media were believing spin that was coming out of Russia from President Putin, and that was to suggest that, okay, maybe these sanctions are – and the business exits are noteworthy, but they have no consequence.  Look at the strength of the ruble, look at the strength of the stock market, which had only fallen about 55 percent or so.  

And we thought, wait, how could you buy that?  Where’s all the national income statistics that for the last 70 years the entire world has used through macroeconomists and journalists?  How could people have not realized – not to mention Russia alone the last 30 years, since Yeltsin especially, until this spring under President Putin – the standard statistics that you would want on imports and exports disappeared.  Where are the statistics on oil and gas, inflows and outflows?  Where are the commodities exchanged data?  Where is the capital market data on inflows and outflows?  Where’s the financial status of central banks, of financial – status of major Russian operating companies who have been required to probably report monthly, the foreign direct investment, the lending loan origination, the volume of flights?  By the way, data which we’ve all – many of these things captured.  Because even if Russia is a buyer, they’re not always a seller.  If they’re a seller, they’re not always a buyer. There are other – the other side of the equation we can go to to get the data.

And we can talk about this triangulation that macro-economists, when they’re working at their best, usually do, but sadly, some forgot to do in these last few weeks, and that’s basically what we did.  So I don’t know, we have a couple of myths we would go through, but that’s how we got into this all to see that, in fact, the Russian economy is in fact not as strong.  If any of you know the fable of Chicken Little that “the sky is falling,” and again, remember the State Department’s disclaimer – they’re not saying this; I am – is that unlike what President Putin says, the Russian economy is in far direr straits than has been advertised from official releases – official cherry-picked releases of statistics.  And we’ve put all of this out there in Social Science Research Network in a 118-page research monograph with all the sources – you can see where the data has come from.  Nobody else has done that.  And you can also find it in Foreign Policy, the last issue, the way – it’s actually on their current, too, the site, which goes through some of the myths that follow from this.  

Did I say too much?  

**MODERATOR:**No, you – perfect.  Why don’t we – I don’t know, Steven, if you want to add anything, or do you want to take two minutes to go through a couple of the points that you have?  Or we can open it to questions from our journalists.

**MR TIAN:**I’m happy just to go through a couple of slides showing some of the data we have.  We have a comprehensive 70-page slide deck which accompanies the 118-page SSRN publication, which can be found on our website.  For the sake of time, I’m only going to highlight just a few of them just to give you a sampling of what we’re doing and how we’ve been able to come to the conclusions that we have.  And hopefully for the thousands dialing in via Zoom, you all can see the slideshow as well, and I believe we’ll post this afterwards as well.

So if we can go to slide number two, one of the topics we want to talk about right now because it’s so timely is this myth that sanctions are somehow creating a global famine.  This is a myth that’s been propagated relentlessly by the Kremlin.  And there is this myth, particularly in developing countries, that the United States has somehow created a global famine, that United States sanctions are leading to a collapse in agricultural products, soaring agricultural costs.  And this simply is just not true.  And we’ll take just a few slides to really unravel what’s going on with this specific topic, just as a sampler of the many different myths we deal with. 

As you can see from the slide behind me here, actually, contrary to Russian propaganda, wheat supplies this year – thanks to bumper crops from the United States, from Brazil, from Argentina, from several major wheat-producing countries, thanks to great weather – it’s actually record crop yields this year.  And what that means is even assuming that no wheat gets out of Ukraine, we are actually seeing a rise in global wheat supply this year compared to last year.  It’s not just a demand story; it’s a supply story.  And you can see on the slide behind me this is not at all the myth that’s been propagated by the Kremlin.  If you believe their myths, you think that we’re in a global famine with a supply contraction, but that is simply not true.  

And obviously, thanks to the efforts of our leadership at the State Department and elsewhere, if those safe maritime lanes are able to get some more wheat out of Ukraine, that supply would rise even more.  And you see that reflected in wheat market pricing.  On slide number three, we can just show the price levels over time.  As you can see, wheat prices have fallen back to where they were before the invasion began.  They’re now at pre-war levels.  So that goes to show that a lot of the initial spike in wheat prices in March and April, where it nearly doubled, it was driven more by financial markets pricing in a sense of Armageddon which never came to pass.  It’s not reflecting actual fundamentals of supply and demand, because we have increasing supply.  At the same time, we actually have decreasing demand for some reasons there, which it’s a complicated story.  But the key component is the supply side of that equation.  

On slide number four, this is a bit of a technical slide, but for the financial journalists on Zoom, you all appreciate the importance of futures markets, and wheat futures are currently in what they call contango, meaning that future wheat prices are reflected to be higher than what they are today.  That actually shows we’re not in a structural deficit.  There are no imminent supply challenges right now.  If there were, the futures market would be in backwardation, not contango, meaning that prices today would be higher than what they will be one or two years down the line as the markets are pricing them in.

So that goes to show that the supply side of the equation is very different from the prevalent narrative that’s being spread by Putin.  Contrary to this myth about a supply deficit, we’re actually operating with a supply surplus.  So that gives you some sense of the research we’re doing.

I’ll just fly through just a couple of additional slides to give you a sense of what’s in the 70-page slide deck.  On slide number five, as you can see, as Jeff mentioned, there’s a whole host of statistics which used to be released by the Kremlin pre-invasion which are no longer being released.  On slide number six, as you can see from a map of Russia’s pipelines, natural gas for Russia is a non-fungible good because it’s mostly piped gas.  It’s not liquefied natural gas; they don’t have liquefaction capabilities to the most – to the greatest extent.  So if you take a look at the actual map of pipelines, most of Russia’s pipelines lead towards Europe.  Only one single pipeline connects Russia to Asia.  That’s the Power of Siberia pipeline, which, as you can see here, is still very much under construction.  Most of the key legs have not even been built yet and won’t be built until 2025.  

On slide number seven, as you can see, yes, Russia has been able to sell more oil to Asia, specifically China and India, but they’re having to take a unprecedented $35 price discount, and it takes 35 days for that oil to get transported to East Asia, contrary to just two to five days in Europe.

The last couple of slides.  As you can see on slide eight, Russian domestic industrial production has fallen off across basically every single sector across society, in some cases by 60 or 50 percent, very dramatic levels.  

And one last myth we’re going to unravel here before we hand it over for questions, on slide number nine, as Jeff mentioned, Putin loves to talk about the Russian ruble and how strong it is.  That’s simply not true; it’s an artificial exchange rate.  It’s a reflection of capital controls.  Simply put, if you live in Russia right now, there is no legal way for you to obtain dollars.  You can’t access dollar deposit accounts; you can’t buy dollars from the bank.  You see that listed here.  And you can see the trading volume has plummeted across the ruble, showing that there’s a heavy premium being paid on the black market. 

So with that, I’ll hand it back to Jeff and to Ryan.  

**MR SONNENFELD:**And we can give you a link to these materials, but it’s optional reading.  None of it will be on the final exam, so don’t feel that you have to follow up, but we’re happy to follow up with any statistics on any of this and open it for questions.  And sorry we went on longer.  He – Ryan told us we had 10 minutes.  We studiously avoided looking at the clock since we were late to start with.  

**MODERATOR:**You did.  Thank you so much for those remarks and those insights.  A lot of information, hard to put it into a few minutes, so really appreciate that work.  We’ll now open for questions and answers from our journalists.  For journalists in the briefing room, please raise your hand if you have a question.  If called upon, we ask you to please wait for the microphone before posing your question.  Kindly identify yourself and the outlet that you represent.  For journalists who are joining us online, please raise your hand using the raised hand icon at the bottom of the Zoom meeting, and turn your cameras on so that our briefers can see your face and we can see you as you ask your question.  So let’s turn to questions.  Oh, right here.  

**QUESTION:**Thank you so much.  My name is Iaroslav Dovgopol.  I am Ukrainian journalist, represent UkrInform agency.  Thank you for your presentation and for this information about sanctions.  I have two questions, actually to Professor Sonnenfeld.  The first one is about impact of Russian sanctions.  Despite all the sanctions, Russia is continuing its aggressive behavior in Europe.  It’s not about Ukraine – it’s also about European Union, gas supply, and et cetera, et cetera, including food security.  Do you see any additional sanctions or other leverage that could be used to effectively block any possibility of Russia continuing its aggression?  This is the first question.

And the second one:  The Ukrainian Government is calling to recognize Russia as a state sponsor of terrorism.  Could you please explain what this status means in the context of the additional sanctions?  And in your opinion, what is preventing the U.S. State Department from taking this step?  Thank you.

**MR SONNENFELD:**Thank you very much for those questions, and best wishes to you, your family, and your countrymen.  I think the role of sanctions has been very powerful.  Since we sat down here this morning, a piece I just saw – it just came out in Foreign Policy Magazine – that talks about how you take down a tyrant.  I won’t take you on a summary through that.  I haven’t read it myself to see what the editors did to our writing.  Hopefully, it’s similar to what we sent them.  And it takes a look at the historic role of sanctions.  

Unlike what you hear with some journalists and some foreign policy experts that will talk about how sanctions have sometimes been disappointing, say, in Iran, North Korea, and Cuba, they fail to take a look at the large number of examples, some of them from your part of the world in Central and Eastern Europe, where Jaruzelski in Poland or Ceauşescu in Romania, Erich Honecker in East Germany – we could go on and on – even back in Ukraine before – we could talk about the role of economic sanctions as well as Chile or Argentina Libya, unlike the rest of Arab Spring, there’s something different happened with Libya.  And what you see there, which is unusual, is that has happened at a few times in history.  

Those examples I gave – as well as perhaps South Africa and the days of the Raj with India – is you had private sector voluntary efforts that were massive – 200 companies that pulled out of South Africa were the gold standard, the high water mark.  I shouldn’t use gold standard when you’re talking about South Africa.  But it still was quite noteworthy historically.  Until this, there’s nothing like this in world history to have 1,100 plus companies – multinational companies voluntarily pull out.  

Working in conjunction is what makes this happen.  A lot of foreign policy experts still don’t understand this.  They think selective use of sanctions – let’s punish them with their automobile tires.  No, that doesn’t work.  It has to be cross sector.  It has to be comprehensive.  The examples that we talk about is when that’s happened, and you can see that in Central Europe that has mattered. 

Now, when you see that Russia, President Putin – we don’t like to say that he’s Russia – but President Putin on his own is saber-rattling and talking about cutting back on 20 percent into the gas pipelines, for example, right now.  I don’t know –  you shouldn’t have heard this here first –  we’re already in Europe, in Western Europe, that’s been buying that – those – that gas is more than 70 percent filled already, far ahead of where they were last year in this time.  

And there’s alternative supplies are coming along.  Germany has ramped up six massive conversion plants that have gotten surprisingly little publicity.  Maybe it’s a good thing.  Maybe we don’t want to put too much focus on them.  It’s remarkable.  None of them were on the books six months ago.  They’re all due to be completed by the end of this calendar year.  Maybe there’ll be a little slippage, but for the cold of winter, they’re not going to be dependent on Russian gas.  

As a matter of fact, Russia needs to sell that gas.  85 percent of that gas goes to Western Europe, and as you just saw, there is no pivot east.  They can’t sell very much of that to India or China.  No matter what President Putin said, that’s a myth – or some journalist said.  It’s a myth.  They can’t do it.  It’s vapor.  It has to go through pipes that carry vapor.  It’s not liquid.  But what’s Germany doing?  They’re creating capacity for Europe to – with these conversion plants to receive liquid gas from Algeria, more from Norway, from the United States – they’ve already received more from the U.S. now in Europe than they did from Russia. 

So it’s – in terms of the gas issue, it’s not as threatening as those headlines were.  And in fact, Europe has shown a remarkable model of unity and resolve that hearkens us back to the Second World War, where it’s incredible.  Despite a lot of the misgivings we saw in – nobody here on this call, but other friends of ours in the media suggested that there be this divisiveness in Europe.  Sure, there are some people questioning.  Every policy should be questioned.  But we saw a week ago today that there are these 15 percent rationings agreed to by the EU.  That’s remarkable. 

So I think that on the energy front, it’s nowhere near as threatening as the headlines were, which is why we led on the grain and food insecurity issues because we hopefully have changed the narrative – the false narrative that was out there, seeing Vladimir Putin as the world’s savvy energy czar.  It’s just not true. 

**MR TIAN:**  And just to jump in, if we can get slide number 10 behind me.  When slide number 10 is up, I’ll pause just a second – but I think it’s now up.  You can see the piece that Jeff referenced just now.  This is a new publication which just came out literally minutes ago.  It’s a new foreign policy expert argument, and it amplifies many of the themes that we were just discussing right here, right now, expanding on our previous piece. 

**MODERATOR:**  Thank you.  Let’s go to Alex for a question.  

**QUESTION:**(Off-mike.)    

**MR SONNENFELD:**Oh, Alex, you get extra credit.  You get the A for the class for sure.  Good question with the first question, but you definitely get the A.   

**QUESTION:**  (Off-mike.) 

**MR SONNENFELD:**Stephen, do you want to start?

**MR TIAN:**  I will start with the second question and Jeff can tackle the first.  On the issue of – there’s three, essentially, pivot areas where Russia has traditionally retained significant influence.  But we’re seeing from economic data that that’s changing very rapidly.  It’s the Caucasus, it’s Central Asia, and it’s Eastern Europe, all of which have been traditionally in the Soviet sphere of influence, all of which retain very close economic ties to Russia. 

But we’re already seeing in trade data – even though Russia’s not releasing its trade data – in every transaction there’s a buyer and there’s a seller.  So if one side’s not releasing data, you can find it from the other side.  And what we’re seeing when we triangulate the trade data is that all of these bordering nations are not only doing less trade with Russia, but they’re actually the beneficiaries of net capital inflows as well as talent inflow into these border countries.  You have this to different degrees, not so much particularly in Azerbaijan, but if you look at countries such as, for example, Estonia or Uzbekistan, there are hundreds of thousands of highly trained Russian tech workers flocking to those countries.  You have new financial centers being developed, for example in Tashkent, where the Tashkent IT park has tripled in size thanks to the influx of Russian migrants.

So in these traditional areas where Russia has wielded a lot of influence – and this pertains to Azerbaijan as well – these regions are having to cultivate much closer ties to other regions, including, of course, Europe and pivot away from Russia.  This is the case with Azerbaijan with the new gas deal that was just signed.  Of course, lots of complications.  There are very idiosyncratic factors on the ground.  But the macro narrative, the macro story, is that these traditional – these regions that have traditionally been in the Soviet sphere of influence are pivoting away from Russia and towards Europe, towards the United States, towards other countries that can now take Russia’s place. 

**MR SONNENFELD:**  I should also mention, as we refer to Azerbaijan, and – the flight of professional talent to nearby states is pretty significant from Russia, seeing IT talent that we know that TASS, who is represented here, has already published back in April the 5 to 700,000 – this is Russian data – have already fled and are not returning.  So we expect that the number is quite a bit higher than that.  

But in particular, Azerbaijan – but we have – should mention that you have two people before you answering your questions, and hopefully in more detail than even you wanted – is that we are representing 42 researchers that are from almost every country – I think every country represented in this call that are native speakers as well as many of them citizens of those places, and many of them operating there, including – I probably shouldn’t mention this even in Russia; we don’t copy our Russian sources on our emails, hopefully – but we have people giving us photographs, data.  They’re fluent in at least 10 or 12 languages, from Mandarin to Russian to Polish to German, Ukrainian, and things.  But we have – the people in Uzbekistan were just telling us this morning some data we have to verify in terms of the magnitude of Russian IT folks who have fled there, too, professionals.  So that’s sort of interesting from that standpoint. 

But you still ask about the average Russian – there’s another point where I wanted to hearken back to Ryan’s reminder that this is not the official voice of the State Department.  I should also say this is not the official voice of Yale University, this is our own little team – that the State Department has been clear in January.  I haven’t heard them echo this since, but I’m sure this is probably their position still, that this is not about the Russian people, this is about targeted leadership – Vladimir Putin.

But your question’s about the Russian people.  We know from the Second World War – we have the book, Jacob Goldhamer’s provocative book – 1995 – Hitler’s Willing Executioners – where he condemned not just der fuhrer for his evil schemes, but the enablers, the important role – if anybody was looking it up, I think Knopf was the publisher, but I have no stake in that either – that the role that the average German had through their complacency, they were complicit.  So how does this tie in here?  

We don’t see on the streets of Moscow the courage that we see on the streets of Kyiv and elsewhere.  Now, similar ethnicity, common – why would this be?  Well, I don’t know.  But even recent data still tells us that roughly 4 percent of tech-savvy Russians are downloading the VPN to receive this information.  So while there’s – they know there’s no alternative press, they know the opposition candidates are jailed or killed or both.  Well, then, what does this mean?

Well, there’s – a hopeful angle on this is even if relatives, immediate kin are discarded by Russians, is we just saw this article – as you may have seen yourself – in the Washington Post from – well, we have many Russian sources.  The importance of courageous symbols, as we saw with Stephen Biko and, of course – in South Africa – and the people who were killed and martyred such as him is that we had – Vladimir Kara-Murza has gone into prison, as Aleksey Navalny is, of course.  

But is he – is writing articles out of prison in The Washington Post, six or seven of them already.  The one that just came out two days ago, he said that – he refers to the roughly 17,000 people from human rights groups in Russia that have defied official bans and threats and said – chided the U.S. Russian experts as being naive, saying: publicly released polls invariably showing overwhelming support for both Putin and the war, the reliability is about as high as the 99 percent official results for the Communist Party Soviet-style elections.  “I continue to be amazed by Western analysts who take these polls seriously.  A recent media expose of the Russian polling industry revealed, among other things, that people simply refuse to respond to pollsters’ questions for fear of repercussions.”s

So there’s a tipping point at some point where we see that there’s enough suffering, there’s enough hardship that the Russian people come to recognize that the architect of their suffering is not the West.  They’re not being vilified by others, just as South Afrikaners learned because of the sanctions and boycotts together that they were in fact being reviled by the world – not by some diplomatic force, by some country that had some retribution, but the world saw them as rogue nation.  As that comes clear, they start to recognize the number one enemy of the Russian people is Vladimir Putin.  That’s when we see people out on the streets.

**MODERATOR:**  Great.  Let – I’m going to take one more question from the room here and then we’re going to go online (inaudible).  I promised (inaudible) get to them.

**QUESTION:**  Yeah, good morning.  My name is Can Merey.  I’m with the German Press Agency.  Thank you very much for doing this.  I’ve got two questions.  Did I understand you correct, Professor Sonnenfeld, that you are saying that Germany is not heading into an energy crisis this winter?  Because the Germans very much fear this.

And the second question is: how do you – is there any estimate how long the Russian economy can sustain this?

**MR SONNENFELD:**  The second question is the hard one.  And were I a public official, I would talk about other things and duck it completely, because we’re pushed to say how much running time do they have left.  They have foreign currency reserves of less than is advertised – 600 billion – but 300 billion of that is frozen by the West and perhaps, between us, will be reallocated maybe to Ukraine for their rebuilding.  We don’t know, but it’s certainly not accessible.  They’re drawing down on that.  Roughly, I don’t know, 80 billion of that has already been used up just since the outbreak of war.  

So we don’t put a specific date on it because there’s so many uncertainties to how much of the war effort is ramped up.  We see this morning’s reports is that the prisons are already being emptied to try to draft new soldiers, and we’re looking at 75-80,000 number – estimates coming in of fatalities and injuries in Russian soldiers that – maybe if this war effort loosens up, then the staying power would be a lot longer.  If it continues to try to ramp it up, then these reserves will disappear.

They’re already running deficits, 2 percent deficit – think, oh, that doesn’t sound so bad for the – if you can’t finance it, it’s bad.  Nobody – nobody in this room, nobody you know, nobody remotely – would invest in Russian debt right now.  They’re not repaying it; they’re defaulting on it.  Nobody – it’s not investable.  So those deficits matter, so that’s why we don’t know, but it certainly – not a long period of time.  So – but very good question.

And the first question, which you’d think was the easier one – I wouldn’t say it’s going to be easy.  A 15 percent rationing is a hardship.  What does it mean won’t be done?  I don’t know how it’s going to be balanced between industrial and residential and other commercial uses, and I think it’s remarkable unity and resolve and Europe should be celebrated, the EU should be celebrated for that.  But I don’t say that’s going to be easy for people, and I hope the production – there are no production delays, construction delays on these plants in your country.  But it’s just incredible.  They were not on the books and they’re racing ahead, and the estimates that we see is that it will be done by the year’s end.  December gets kind of cold in New Haven.  I don’t know how it is in Munich and Berlin.  Hopefully it’s still quite warm by then, but I don’t know.  Steven, any thoughts on this?

**MR TIAN:**  No, absolutely.  Just to amplify one of Jeff’s earlier points, as it pertains to gas in Europe, there’s no illusions that this will be easy.  It’s not that this won’t be a crisis.  That’s the wrong way to frame it.  Every policy maker in Europe, especially Robert Habeck in Germany, understands the magnitude of different scenarios moving forward.  And policy makers are being proactive.  Policy makers are being proactive in taking steps, and they’re – again, as Jeff said, with remarkable unity across the EU to actively bring on new supply in gas.  That is an extraordinarily important story in addition to everything that’s being done with the renewable transition.

And at the end of the day, it’s much easier for a consuming nation to be able to onboard new supply than it is for a producing nation to be able to find new markets when they’re an international pariah.  The way the commodity cycle works, you have a transitory increase in prices right now due to the short-term supply disruption, but higher prices incentivizes producers and nations that might not have been previously profitable to onboard new supplies.  And, of course, there’s a time lag there.  It takes new – takes time to build new regasification terminals and to bring on new gas supplies, but over time, as prices continue to rise, new supply will be brought on board and that will increasingly balance supply and demand.  

And as long as the EU stays united through Putin’s divide-and-conquer tactics – which, remarkably, right now on the gas crisis it is – this is a solvable, transitory crisis, whereas for Russia, it is not a solvable – it is a permanent loss of market share.  It is not replaceable and not solvable.

**MR SONNENFELD:**  As a brief aside, if I had any academic colleagues on the line that are wondering why I mentioned Stephen Biko and not Nelson Mandela – I already imagine faces grimacing back home on Yale campus – the reason I was talking about the martyr – he was murdered.  And, of course, Nelson Mandela was an incredible, inspiring figure, but as – who I never got to know, but I did know Bishop Desmond Tutu, who talked quite directly at this as a great human rights activist who said – and anti-apartheid leader – that the marriage of private sector exits with the government sanctions was critical for the inextricable, intertwined nature of the symbolism and the substance of what these economic pressures say to a domestic population – in that case South Africa.

**MODERATOR:**  Let’s go now to our journalists who are on Zoom.  We have a question from Martin Burcharth.  Would you turn on your camera and pose your question?

**QUESTION:**  Yes.  Hi.  Thank you very much for doing this.  I’ve always been confused about what the purpose of these sanctions on Russia are.  Was it to bring about the fall of Putin primarily, or was that primarily to limit or even stop his ability to wage war on Ukraine?  And so I wondered whether the authors of this report had found any evidence that sanction have at least had a limited impact on Russia’s ability to wage war and whether sanctions only could be successful if there’s a total ban on energy imports to Europe.

And last thing I’ve been thinking about is this:  Even if there were a total ban on energy imports, could Russia not just finance its war by larger budget deficits, basically? 

**MR SONNENFELD:**Finance it by what?  I’m sorry.  

**MODERATOR:**Larger budget deficits.

**MR SONNENFELD:**Oh.  I don’t see – Steve, you — 

**MR TIAN:**Sure.  I can jump in on the budget deficits.  There’s two ways to essentially finance a budget deficit for a government: you’re either selling debt and raising new capital or you’re drawing down your rainy day funds.  In the case of Russia, they’ve been locked out of international capital markets.  Ever since the start of the invasion, there’s been zero debt issuances across any Russian entity, whether sovereign or corporate; zero equity issuances for any Russian entity.  They’ve been frozen out of Western capital markets, which of course are the deepest, richest sources of capital.  

You can say that they still have access to domestic capital markets, but the entire capital in that market is a fraction of what Western capital markets represents.  It is not the same deep, rich, liquid pool of capital that Western financial markets are.  Now, in terms of drawing down rainy day funds, nobody is saying that Russia will go broke overnight.  Russia does not have high external debts, and it does have – even beyond the frozen portion – 300 billion approximately in foreign exchange reserves primarily denominated in gold and renminbi.

What this is is it’s the structural erosion of Russia’s economy at every single level over the intermediate to long term. It’s not an overnight financial crisis or an overnight depletion of rainy day funds.  Budget deficits can be sustained in the short term, but they’re unsustainable in the intermediate to long term when you’re facing the crises that Russia is facing.  

And I would also jump in on your question about military capabilities.  The Ukrainians are finding weapons with semiconductors that they’re recovering from the battlefield, Russian weapons with semiconductors that are salvaged and cannibalized from refrigerators.  That is not the sign of a healthy producing economy.  This is degrading Russia’s actually ability to make war in the sense that they cannot obtain the imports and the technology that they need in order to remain innovative and productive over the intermediate to long term.  It is that lack of access to Western technology and the global market that erodes Russia’s economy in the intermediate term, but it also erodes Russia’s ability to wage war – its warmaking capabilities.  

**MR SONNENFELD:**And getting some of those parts – you’ll always see articles that some of your colleagues will write about some IT components or some airplane – some parts get in.  Something will always leak in through a black market.  There’s always going to be opportunities for smuggling.  You can’t run an economy based on the smuggling, and the smuggling itself – we’re looking at these replacement parts – nothing is at 20 percent.  We’re looking at 60, 70 percent inflation across these sectors that we had up on the board before – 60, 70 percent inflation makes things here look pretty darn good back home here.  But you also have this surging unemployment, and our data has – suggests of the companies that have exited is that that’s about 40 percent of the Russia’s GDP.  That can be a big chunk of the workforce.  

If you take Russia’s own numbers that they – only represents 12 percent of the Russian workforce that’s exit – that’s 5 million people right there.  That’s direct employment of 5 million people.  I don’t know that there’s an economist that we – you would ever talk to that won’t say that’s the direct, so the multiple of jobs dependent on those companies would be conservatively three times that so you get back up to the 40 percent number.  Again, that’s a lot of unemployment.  

We’ve heard some companies that stayed in Russia say, well, the Duma has issued this decree that if they don’t keep working, they might get imprisoned.  There aren’t enough football stadiums in all of Europe to hold 40 percent of the workforce.  All that would do would be to trigger the next Russian Revolution.  I can’t imagine any leader, sane or insane, trying to round up 40 percent of their workforce.  That’s crazy.  

So what is the objective of all this is, as you opened with, as Stephen talked through the fact they can’t finance this war – that’s, again, where I want to, again, scream from the mountaintop that this is speaking not for Yale University, not for the United States Government, not for the State Department, just for myself and hopefully Stephen will stand by me here and our little team – is when you a person that military officials around the world have labeled as the most dangerous human being who ever walked the planet, more than Genghis Khan, more than Attila Hun, more than Adolf Hitler – why?  Because of the cash that you’ve talked about – inflammatory language (inaudible) hear in this room – because of that and the cash he has and the access to thermonuclear warheads is right now the – of the – I guess it’s around 12, almost 13,000 nuclear warheads in the world, that the U.S. and Russia have about 90 percent of them.  

So we’re talking about somebody who is an imperialist, a bloody dictator, a tyrant that – taking on innocent sovereign nations.  Crimea, what did they do?  Interfered in the elections of Georgia or Moldova or France or the U.S. — I mean, this is not something where Neville Chamberlain-like appeasement is, like, going to lead to some ceasefire and everybody can go away happily ever after is – and I, certainly speaking only for myself here on the 77th anniversary this week of the bombing of Hiroshima and Nagasaki – I’m not talking about taking on this tyrant through warfare.  

So what’s the other lever we have?  The other level – lever – is what we saw happen in all those other countries – relatively peaceful, relatively bloodless.  I don’t know.  I think Eric Honecker maybe cost 80 lives or so in East Germany – is these are relatively bloodless transfers of at least – you stop a bloody – a dictator by showing that they don’t have the control that they pretend to have to their population.  They need to be seen as a totalitarian.  That’s their only base.  

If you can show that they don’t have control of civil society – that’s what Gandhi did and that’s what we’re talking about here – is that as he gets stripped away, this emperor is denuded – did not have the control of civil society; that his economy is a wreck and he is the reason behind it, then his power is curtailed, right.  I’m not – I don’t know that he’s overthrown.  I don’t know what happens to him, but he certainly is distracted and can’t go – continue this bloody rampage.  Stephen, are you still with me on this? 

**MR TIAN:**I – it’s well said, and I could not agree any more, Jeff.  

**MR SONNENFELD:**Oh, good. 

**MR TIAN:**So at least you have person.  

**QUESTION:**Okay.  So – but what about a total ban —  

**MR SONNENFELD:**(Off-mike.) 

**QUESTION:**What about a total ban on energy imports – a total ban on energy imports?  Would that do it in terms of limiting his ability to wage war on Ukraine?  Can we wait for him to fall?  Is Ukraine going to wait for that? 

**MR TIAN:**Well, just to jump in – as you know, there’s many different degrees of energy import bans being considered.  One of them is the oil price cap that’s worked on by the United States Secretary of the Treasury, amongst many others.  And there’s obviously – the eighth package proposal from the EU, when it comes to the EU oil embargoes – well, I mean the gas embargo, excuse me – there’s different variations of the specific implementation, but on the question that you were asking, obviously that would go a long ways towards choking off the flow of revenues into Russia’s coffers.  That is the largest source of revenue for Russia, upwards of 50, even 60 percent of revenue in some years.  

There’s no understating the impact that that would have.  But even short of that, what we have to understand is at the current moment, regardless of what bans are put in place, the oil and gas market for Russia has already irrevocably deteriorated.  Russia’s production is projected to decline over the next ten years, even by the Russian energy ministry’s own estimates, because they not only don’t have the markets, they can’t get the oil and gas out of the ground.  A lot of Russia’s most promising energy developments are in the Arctic, and they aren’t – they lack the upstream technology to be able to continue to innovate there. 

So there’s – so I – so yes, on your question, it’s obviously a very important measure.  But even short of that, what we have to understand is that in terms of what’s actually going on, Russia’s status as a energy exporter is already under severe strain.  

**MR SONNENFELD:**And we saw some financial industry energy experts talking about $380-$400 a barrel oil, and of course they are not geologists.  They’re not geopolitical experts.  And they apparently are not very good economists.  I’m not sure what their backgrounds were, but they were ridiculous because they were predicting that’s where we would be approaching now.  It’s – and we’re looking at $90-$91 a barrel.  

And if we’re looking at a $35 discount on that because Russia has found that China – whose imports are down 50 percent, by the way – they’re not compensating for the import crashing from the West – that Russian imports from China are down 50 percent, as much as the rest of the world – is – but that Russia and India are thinking, well, great we’re going for this $35 barrel discount.  Take that off the 90, suddenly we’re getting perilously close to their break even because they may be the third largest oil producer in the world, but they are – they’re producing – one of the least efficient.  They’re $42-$43 a barrel.  It’s getting – going to be hard for them to make money even if everybody wanted to buy it, given where India and China – and by the way, India’s tanks are being filled.  Their demand is going to probably fall off, and I don’t – I can’t speak for what China’s demand will be, but they’re getting a very good price and not getting much money to Russia for that. 

**MODERATOR:**Thank you very much.  I think we have time maybe for one last question, either from our briefing room or from our participants on Zoom, if there was one more?  No.  Well, with perfect timing, we have exhausted all of the discussion.  I don’t know – Jeffrey and Stephen, do you have one last comment or one last takeaway you would like our journalists to take from today’s event? 

**MR SONNENFELD:**This sounds like it’s pandering, but actually the questions were fantastic.  We have – we don’t really do the kind of public (inaudible) that you’re used to with public officials for a living.  So we’ve gotten a little punch drunk and sometimes with the questions, but the questions we usually have are pretty repetitive.  So we don’t usually get this deep, and I – I want to congratulate you not just for your tolerance with us starting a little bit late, but in all seriousness your patience and thoroughness of the questions.  We’ve never had an hour-long discussion of this stuff, and I wish we could in the media.  And it’s nice of you to – taking time away from your busy days to invest in it and think that we had something to offer.  Even if you don’t agree with us, we really appreciate you listening to us.  

**MODERATOR:**Well, thank you very much.  This ends the Q&A session.  I’d like to express our special thanks to our briefers, Jeffrey Sonnenfeld and Stephen Tian, and to all of the Foreign Press Center journalists who participated today.  Thank you very much and this concludes our briefing. 

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District of ColumbiaEconomic Prosperity and Trade PolicyForeign Press CentersForeign Press CentersRussiaSanctionsUkraineWar Crimes

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