[Senate Hearing 115-376]
[From the U.S. Government Publishing Office]
S. Hrg. 115-376
OUTSIDE PERSPECTIVES ON RUSSIA SANCTIONS: CURRENT EFFECTIVENESS AND
POTENTIAL FOR NEXT STEPS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE IMPLEMENTATION AND EFFECTIVENESS OF THE SANCTIONS PROGRAM
CURRENTLY IN PLACE AGAINST RUSSIA AND THE EFFECTS OF THOSE SANCTIONS
__________
SEPTEMBER 6, 2018
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
32-635 PDF WASHINGTON : 2019
--------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
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
JERRY MORAN, Kansas DOUG JONES, Alabama
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
John O'Hara, Chief Counsel for National Security Policy
Kristine Johnson, Economist
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Colin McGinnis, Democratic Policy Director
Dawn Ratliff, Chief Clerk
Cameron Ricker, Deputy Clerk
James Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
THURSDAY, SEPTEMBER 6, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 38
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 38
WITNESSES
Michael A. McFaul, the Peter and Helen Bing Senior Fellow at the
Hoover Institution, and Professor of Political Science,
Director and Senior Fellow at the Freeman Spogli Institute for
International Studies at Stanford University, and Former U.S.
Ambassador to the Russian Federation (2012-14)................. 5
Prepared statement........................................... 40
Responses to written questions of:
Chairman Crapo........................................... 65
Senator Cotton........................................... 65
Senator Tester........................................... 66
Daniel Fried, Former Coordinator for Sanctions Policy, Department
of State (2013-17), and former Assistant Secretary of State for
European and Asian Affairs (2005-09)........................... 7
Prepared statement........................................... 48
Responses to written questions of:
Chairman Crapo........................................... 67
Senator Cotton........................................... 69
Senator Tester........................................... 70
Rachel Ziemba, Adjunct Senior Fellow, Energy, Economics, and
Security Program, Center for a New American Security........... 8
Prepared statement........................................... 53
Responses to written questions of:
Chairman Crapo........................................... 72
Heather A. Conley, Senior Vice President for Europe, Eurasia, and
the Arctic, Center for Strategic and International Studies, and
former Deputy Assistant Secretary of State for Eurasian Affairs
(2001-05)...................................................... 10
Prepared statement........................................... 60
Responses to written questions of:
Chairman Crapo........................................... 73
Senator Cotton........................................... 76
(iii)
OUTSIDE PERSPECTIVES ON RUSSIA SANCTIONS: CURRENT EFFECTIVENESS AND
POTENTIAL FOR NEXT STEPS
----------
THURSDAY, SEPTEMBER 6, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
We welcome all of our witnesses today and appreciate your
being willing to share your expertise with us and take your
time to be here. Thank you.
The Committee meets today for its second of three hearings
on sanctions against the Russian Federation for its malign
activities directed against the United States, its allies, and
spheres of influence.
I thank our panel of outside expert witnesses today, most
of whom are former Administration officials, who will help the
Committee better understand the current U.S. posture toward
Russia.
Testifying today will be Ambassador Dan Fried, now at the
Atlantic Council, but who capped off a 40-year State Department
career as the Obama administration's overall sanctions
coordinator; Stanford Professor Michael McFaul, also at the
Hoover Institution, who was U.S. Ambassador to the Russian
Federation for the 2 years leading up to Putin's illegal
annexation of Crimea; and Heather Conley, now with CSIS, but
who was also a Deputy Assistant Secretary for the Russia desk
in the Bush administration's State Department.
Rachel Ziemba, our sole Government outsider, now with the
Center for New American Security, will share her particular
expertise on the interlinkages between economics, finance, and
security issues with regard to Russia's economic resilience and
the role of sovereign wealth in all of this.
Two weeks ago, current Administration witnesses informed
the Committee of efforts to implement the Countering America's
Adversaries Through Sanctions Act, or ``CAATSA,'' which was
enacted in August 2017 and largely crafted by this Committee,
and what political and economic effects that implementation
have had.
Basically, the Administration reported that over the last
year it had sanctioned some 230 individuals and entities
through its use of CAATSA and its own administrative
authorities.
Those targeted include the heads of major State-owned banks
and energy companies, as well as some of Putin's closest
associates or oligarchs.
On the issue of electoral interference, a Homeland Security
official reported that malicious cyberoperations are not just
State-run, not just run by a single actor, and remain one of
the most significant strategic threats to the United States.
Beyond any use of sanctions, which Treasury imposed against
several Russian actors for interference in the 2016 elections,
Homeland Security further testified that it is working
aggressively to support State and local efforts to secure the
2018 elections.
They also made clear that this work must not only
continually evolve, but never become complacent because those
seeking to interfere and disrupt are on the cutting edge of
technology.
A number of the Members on this Committee, on both sides of
the dais, encouraged the Administration to do more and soon.
Whatever the economic effects of these sanctions have had
over the last year, it has escaped no one's attention that
Russia is still in Crimea and the Kremlin still exercises
violently destabilizing activities in Ukraine and Syria.
Moreover, since CAATSA implementation began, Putin has
ordered the use of chemical weapons to attack citizens of the
United States' allies at home and continues his efforts to
subvert the democracies of the United States and its European
allies through complex disinformation campaigns and outright
cyberattacks.
Getting sanctions ``right'' is a difficult exercise for
Congress and the Administration alike.
It took decades for sanctions to take real effect in Iran.
And Putin's Russia is not like Iran--or North Korea, for that
matter--at least not in any way other than its penchant for
engaging in malicious behaviors at home and abroad.
In the case of Russia, any constructive use of sanctions is
complicated further by the level of Russia's integration into
the global economy and all the attendant unintended
consequences, contagions, and spillovers that come with it and
which threaten to destroy the potential for needed multilateral
application of sanctions against an economy like Russia's.
There is no question that Putin must pay for his actions
and that the United States has the ability to impose real costs
against Moscow, even as it increases its own defenses against
future attacks.
The only question is how the United States will go about
imposing those costs.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman.
Today we gather to further assess Russia's persistent
efforts to attack the U.S. and our allies via cyber, influence,
and other campaigns directed at our most critical
infrastructure and to develop ways to strengthen U.S. responses
to those attacks.
In our first hearing, senior Administration officials
testified on sanctions and the protection of critical
infrastructure. Directly following that hearing, all Senators
had an opportunity to be briefed at a classified level on
preparations by our Federal Government, working in cooperation
with State and local authorities, to secure our electoral
process for the upcoming midterms.
Today we will hear outside perspectives on the
effectiveness of U.S. sanctions and on new tools, including new
sanctions authorities that might usefully be deployed against
Russian attackers. Bolstering that sanctions toolbox--and
ensuring that the tools are actually used by the
Administration, an important consideration, to get the job
done--is critical.
We will hear from those outside the Administration, as the
Chairman said, including witnesses with extensive and
distinguished diplomatic experience in dealing with Russia
under Republican and Democratic Administrations over decades,
what they think will most likely dissuade the Russians from
continuing these attacks.
While sanctions have had some effect on Russia's economy,
as they have been applied it is not clear they are doing much
to, most importantly, actually change Russia's behavior. And
that is the goal. Sanctions are a means to an end, not an end
in themselves. We seek real and immediate changes in Russian
behavior; we are not yet seeing it. Checking the box, as the
Administration seems to be doing, saying they have caused pain
in Russia, is not nearly enough.
There is little dispute sanctions are not yet having their
intended effect: Russia remains in Crimea, its proxies are
still in Eastern Ukraine, it continues to support Assad in
Syria, and to attack our elections and other critical
infrastructure using sophisticated cyberweapons. It has
attempted to assassinate British citizens; it has killed an
innocent bystander in the process. It has fostered sanctions
evasion and other illicit activity around the world.
Some of today's witnesses--including those with bipartisan
experience in Russia-U.S. relations--have been critical of the
administration's efforts to date, arguing they have been
inadequate and arguing they have been undercut by President
Trump's reluctance to criticize Putin and his Government.
President Trump's efforts to try to undermine what are
established conclusions of fact by the U.S. intelligence
community about Russia's involvement are well documented.
Russian attacks on our elections and critical infrastructure
like energy plants, utility systems, aviation, manufacturing,
and private sector business systems are continuing.
As our next elections approach, it is long past time for
Congress and the President to send a much more powerful and
direct message to Vladimir Putin and those within his circles:
If you continue cyberattacks against us, you and your
Government will pay a heavy economic, diplomatic, and political
price.
As Ambassador McFaul notes in his testimony, there is,
shall we say, a tension between what sanctions professionals at
Treasury and State are saying and doing and what the President
is doing.
Our Government needs to speak with one voice. The President
should clearly state how he will use CAATSA to forcefully
respond to Russian attacks, issue an Executive order that
clearly outlines the sanctions consequences for continuing
attacks, and implement that order if attacks continue.
In addition to urging the Administration to use CAATSA more
effectively, I think most of us agree Congress needs to do
more. Congress crafted these tough Russia sanctions, enacted
last August with only two dissenting votes in the Senate. We
should build on that bipartisan consensus.
Today we focus with these experts on the broader strategic
questions: What active cyberattacks are the Russians directing
against our elections and against our infrastructure? What
range of powerful economic, trade, financial, diplomatic, and
political tools can we deploy now to deter these attacks, these
threats?
What will it take to actually deter Putin, by sharply
increasing the price he must pay for them? I know those are the
questions my constituents ask. Our large Ukrainian community in
Ohio knows firsthand the dangers of Russian aggression.
This hearing should be an opportunity to get answers from
those long involved in U.S.-Russia policy. I welcome former
Ambassador to Russia Michael McFaul--thank you for joining us--
who has had his own recent political and legal struggles with
Mr. Putin, but has acquitted himself gracefully throughout.
Thank you. I welcome Ambassador Fried, former sanctions
coordinator at State, with a distinguished record of decades of
bipartisan service in U.S.-Russia policy. Thank you, sir.
Ms. Rachel Ziemba has done extensive economic research on
sanctions policies and their effects. Thank you for that. And
Heather Conley, for her work at CSIS and her work before that
in the Bush administration, thank you. I look forward to
hearing what effects you think current sanctions are having on
Russia's economy and behavior, and especially your ideas on how
we should more forcefully confront the threats posed by Russia.
Thank you all.
Chairman Crapo. Thank you, Senator Brown.
Ambassador McFaul, we will start with your testimony, then
turn to Ambassador Fried. Then we will follow with Ms. Ziemba
and Ms. Conley.
I want to thank all of you again for your written
testimony. It is very helpful to us, and it will be made a part
of the record. I ask you to remember to honor our 5-minute rule
and pay attention to that clock in front of you, as well as our
Senators to remember to honor the 5-minute rule. And to our
witnesses, if you have a Senator who just does not seem to be
able to do that, I ask you to wrap your answers to their
questions up quickly after the time runs out.
With that, Ambassador McFaul, please proceed.
STATEMENT OF MICHAEL A. MCFAUL, THE PETER AND HELEN BING SENIOR
FELLOW AT THE HOOVER INSTITUTION, AND PROFESSOR OF POLITICAL
SCIENCE, DIRECTOR AND SENIOR FELLOW AT THE FREEMAN SPOGLI
INSTITUTE FOR INTERNATIONAL STUDIES AT STANFORD UNIVERSITY, AND
FORMER U.S. AMBASSADOR TO THE RUSSIAN FEDERATION (2012-14)
Mr. McFaul. Well, thank you, Chairman Crapo, and thank you,
Ranking Member Brown, for inviting me here today. I do have a
long written testimony--I am an academic, after all--with even
footnotes, but I will just summarize it right now in 5 minutes.
First, the facts, just the facts, about Vladimir Putin's
belligerent, criminal behavior.
In 2008, he invaded Georgia, altered the borders there. In
2014, he invaded Ukraine, annexed Crimea. In 2015, he deployed
his military to support a brutal, ruthless dictator who has
committed crimes against humanity in Syria. In 2016, he
violated our sovereignty, as we all know well. In 2018, in
March, he violated British sovereignty as you already said, and
international law by trying to kill Sergei Skripal. And on a
much smaller but personal level, in July of 2018 Putin and his
Government violated diplomatic protocol and international norms
by calling for the interrogation and suggesting criminal
activities against former U.S. Government officials and one
member of the congressional staff, including me, based
completely on invented allegations.
You all know that list, and I could go on and on and on.
But you do not want me to, Chairman. But I think it is
important to remember what these issues are and that they are
not just violations or against the interests of the United
States of America. These are violations of international norms,
rules that are vital to the international system. And,
therefore, for crimes there must be punishment.
I applaud what the U.S. Congress has done, including this
Committee, regarding past sanctions. I urge you to do more.
In answer to the question ``Have sanctions worked? Have
they been effective?'' let me make three points.
First, sanctions sometimes, and most certainly in this
case, are the right moral punishment to take in response to
egregious illegal activity, even if they do not change Putin's
behavior. Sometimes you just have to do the right thing because
it is the right thing to do.
Second, as you alluded to in your comments, sanctions have
produced negative effects on the Russian economy, contributing
to its contraction beginning in 2014, scaring away foreign
investment, fueling capital outflows, and making it
increasingly difficult for Russian companies to borrow money. I
know many Russians who personally, and their companies, are
suffering because of the sanctions that have happened. And yet,
as you pointed out in your remarks earlier, they have not yet
compelled Putin to leave Syria or to leave Ukraine--that is
true--or to stop his propaganda efforts against us. But that is
not a reason to say we need to change course, in my view. That
is a reason to increase pressure through more sanctions, not
less.
The third point about our sanctions working. I think the
best evidence is the fact that Putin is annoyed by these
sanctions. Putin is trying to overturn them and has been
courting President Trump precisely to do that. If they did not
matter, why would he be putting so much energy into it? And if
it did not matter, if they were not afraid of your new
legislation that is pending, why have they been so belligerent
in their remarks about future sanctions? That to me is the
strongest evidence that sanctions are having an effect.
Now, there is one additional reason why I think there need
to be new sanctions, and that is to disabuse Putin of the idea,
which he still holds, that he can sweet-talk and court and
charm President Trump into lifting sanctions. This Congress, in
concert with like-minded officials in the Trump
administration--and make no mistake, there are many like-minded
officials in the Administration--must disabuse Putin of that
hope.
In my view, there should be several principles for future
sanctions. I will just go through them quickly and end.
First, ongoing illegal activity must be met with new
sanctions. I think that is a really important principle. I do
not know what it is like around here. If you park your car on
the Stanford University campus and you get a ticket one day and
you leave it there, you get a ticket the next day, until you
move your car. That is the principle I think we need to provide
when thinking about sanctions toward Russia when they are
parked in places like Eastern Ukraine.
Second, the U.S. Congress and President Trump must sign
into law sanctions that would trigger automatically in response
to future belligerent behavior.
Third, sanctions should be implemented in response to
concrete Russian actions so that a specific sanction can be
lifted when a specific Russian action is reversed.
Fourth, future sanctions should primarily be targeted at
Russian Government and its proxies, not the people of Russia or
the private sector.
Fifth, we need to deter money laundering in this country.
That needs to be part of what we do in the future, including
getting rid of anonymous ownership in the United States.
And, finally, as outlined in Section 707, the Defending
American Security from Kremlin Aggression Act of 2018 rightly
highlighted that the Kremlin abuses INTERPOL, red notices and
red diffusion mechanisms for political purposes, and that must
be stopped.
Finally, sanctions are only one instrument. We all
understand that it is just one in the toolbox. We need a
bipartisan grand strategy with strategic purpose with our
allies in order to deter and contain Putin's Russia, but new
sanctions is an integral part of that new strategy.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Ambassador.
Ambassador Fried.
STATEMENT OF DANIEL FRIED, FORMER COORDINATOR FOR SANCTIONS
POLICY, DEPARTMENT OF STATE (2013-17), AND FORMER ASSISTANT
SECRETARY OF STATE FOR EUROPEAN AND ASIAN AFFAIRS (2005-09)
Mr. Fried. Mr. Chairman, Ranking Member Brown, I am honored
to be here.
President Trump has noted that it would be nice if the
United States got along with Russia. Indeed, it would.
Presidents Bush and Obama both tried. Both failed, however,
because Russia's conditions for good relations with the United
States are those we cannot accept: American deference to
Russian domination of its neighbors, including through war; and
indifference to Russia's repression at home.
The 20th century taught us the hard way that a country's
malign behavior inside its borders is a reliable indicator of
malign behavior abroad, and that spheres of influence
established through force and repression--Russia's usual
methods--are neither stabilizing nor self-limiting.
Putin's system combines political authoritarianism and
economic kleptocracy. Russia's development would require the
rule of law, property rights, and freedom of speech and
assembly. But the Putin regime seems unable to accept this and,
thus, condemns Russia to stagnation. To maintain its rule, the
regime cannot count on democratic legitimacy but must rely on
repression, combined with chauvinistic campaigns.
A wise U.S. policy toward Russia, therefore, would combine
resistance to Russia's current aggression, including by working
with our allies; efforts to reduce the risks of destabilizing
clashes, without, however, unwarranted concessions or
apologies; cooperation with Russia where possible, without
expecting too much, too soon; and the anticipation of, and
planning for, potential better relations with a better Russia.
In the face of Russian aggression, the Obama administration
launched sanctions, and the Trump administration has continued
them. The Administration is reportedly preparing new measures,
and Congress is preparing new legislation.
So what lessons can we draw from the use of sanctions
against Russian targets? And what are our best next moves?
I suggest the following:
First, work with allies. The U.S.-imposed sanctions in
solidarity with its European and other allies, and our allies
generally did their part. This unity of purpose extended
sanctions power and may have frustrated Putin's expectations.
We should maintain it.
Second, we should prepare credible escalatory options. In
the short run, Putin is likely to continue his aggression, and
he may intensify it. Therefore, the U.S. should have and make
clear to the Russians that we have escalatory sanctions options
that are tough enough to hurt but restrained enough to use.
These can include two types: intensified sanctions targeting
finance, energy, defense, dual-use technology, and
cybersectors; and additional sanctions against individuals,
particularly those close to Putin.
Within sectoral sanctions, I see headroom in the finance
and cybersectors. Financial sanctions options could include
steps against new Russian sovereign debt and other steps. In
the cybersector, we should go after Russian bad actors and
their sources of funding and deny exports of relevant
technology.
There may also be some escalatory room in the energy
sector, but I think the U.S. should not target current energy
production. If we did, that could panic markets and drive up
prices, and that gives, perversely, the Putin regime a
windfall. Mandatory sanctions on all energy projects are
probably too broad, but we could go after future oil
production. We could ban the export to Russia of exotic
technology for fracking or all enhanced oil recovery
technologies for all new energy projects.
There is also room to target additional individual Russians
close to Putin. CAATSA Section 241, a smart provision, mandated
a study identifying these people--``The Kremlin Report''. It
has considerable potential for more use. It bothers Putin. We
should look at it hard.
We need to maintain operational flexibility. Licenses and
care in the use of mandatory sanctions is important.
A final thought. Sanctions have more power if they are
embedded in an overall policy that works, is credible, and is
consistently expressed. Russia policy has been a challenge for
this Administration, but the Administration has significant
tools, and through wise legislation the prospect of more, to
advance a strong policy resisting Russian aggression.
A final thought. A strong Russia policy should be embedded
in an American grand strategy which recognizes that a rules-
based world which favors democracy is in America's national
interest. For the past 100 years, American Presidents have
advanced such a grand strategy, and America and the world have
benefited thereby. Putin and like-minded nationalists and
despots stand for nothing more than power. America can do
better. At the end of our current national debate about
America's role in the world, I hope and believe that we will
recall the values and purposes that propelled American world
leadership.
Mr. Chairman, Ranking Member Brown, I appreciate the
opportunity to appear and look forward to your questions.
Chairman Crapo. Thank you, Ambassador.
Ms. Ziemba.
STATEMENT OF RACHEL ZIEMBA, ADJUNCT SENIOR FELLOW, ENERGY,
ECONOMICS, AND SECURITY PROGRAM, CENTER FOR A NEW AMERICAN
SECURITY
Ms. Ziemba. Thank you, Chairman and Ranking Member Brown,
for the chance to share my views on the economic impact of
sanctions and some perhaps surprising sources of resilience
that have been building up in Russia's economy. These are very
important as you consider potential measures.
Sanctions imposed starting in 2014 have had economic
impacts. They stressed Russia's economy. They amplified the
impact of a very severe energy price shock in the global
economy. U.S. and European measures restricted capital to many
Russian companies and reduced what was already low levels of
foreign direct investment. And they did contribute to a lengthy
if moderate recession, beginning in 2014.
But their impact has faded, and policy preferences do not
seem to have changed. Recent targeted measures and press
reports around legislation that this Committee is considering
have triggered pressure on currency and other financial
markets. But it is important to understand some of the ways in
which even that asset market weakness can provide some
resilience through the fiscal and external channels.
So what are these drivers of resilience? A major one has
been the improvement in global oil markets and the increase in
energy revenue; also, sound orthodox economic policies adopted
by Russia, particularly the flexible exchange rate and
relatively restrained fiscal policy. Another factor is the
deepening of domestic and foreign new sources of financing,
particularly from China and the Middle East.
Paradoxically, many of the factors that have sapped
Russia's long-term growth for a long time are contributing to
resilience. These include lack of competition, State
intervention, little labor force growth, and issues in the
business environment. These are reinforced by second-best
funding from countries like China and the Middle East that also
tend to have weaker governance.
Russia may not be thriving, but it is surviving, and these
are important factors to bear in mind when one thinks about
additional measures. This means that attempts to impose a
significant economic shock may require more increasingly blunt
measures.
I am arguing that the approach of retargeting and focusing
and differentiating within Russian actors should be a very
important part of sanctions measures going forward. At the end
of the day, the goal is not solely to impose economic stress on
Russia, but to prompt a policy change.
Broad sectoral measures might embolden those actors in
Russia who are already inward-looking and prefer non-Western
finance. Repatriating capital, encouraging import
substitution--none of these are great outcomes for Russia, but
they could end up contributing to a further consolidation of
power and wealth among the Putin Government. This, of course,
would continue to be counter to U.S. interests.
Let me briefly discuss some of the measures, some of the
sectors targeted in pending legislation: sovereign debt,
energy, and banking.
Russia's lower sovereign debt issuance already reflects
tight fiscal policy and has actually limited the degree of
contagion risk to the global economy. Already foreign holders
of local currency debt hold less than 20 percent of the
outstanding debt.
On the one hand, that limits the portfolio contagion risk
to other emerging markets. On the other hand, it already limits
some of the leverage of these measures.
Proposed measures would likely add to pressure on some of
those emerging markets I mentioned, of course, and could add to
some appreciation pressure on the U.S. dollar. But we need to
be clear about what the impacts might be.
Energy financing restrictions and access to resources would
likely dampen long-term production growth. I agree with other
speakers about the dangers of targeting current production,
particularly given the tightening of global energy markets and
concurrent U.S. policy to reduce Iranian output.
Banking sector measures should also be calibrated. State
banks such as Sberbank already have a strong liquidity
portfolio, and they have been gobbling up deposits from their
private banking counterparts. The central bank has been acting
in a very structured manner. Cutting off access to SWIFT, which
I am glad to see is not currently in many of the pieces of
legislation, would, I think, pose very significant risks of
ruptures with our European allies, making it harder to monitor
systemic risk and the payment system.
A credible sanctions regime establishes consequences for
malign behavior and clarifies behavior that would result in
those sanctions being lifted. I think it is very important to
continue to distinguish between some of the activity and to
have a sliding set of policies.
Finally, targeting the measures toward Government or those
actually involved in the policies rather than just Russia as a
whole seems to be a very important part of the sanctions regime
going forward.
Thank you very much.
Chairman Crapo. Thank you, Ms. Ziemba.
Ms. Conley.
STATEMENT OF HEATHER A. CONLEY, SENIOR VICE PRESIDENT FOR
EUROPE, EURASIA, AND THE ARCTIC, CENTER FOR STRATEGIC AND
INTERNATIONAL STUDIES, AND FORMER DEPUTY ASSISTANT SECRETARY OF
STATE FOR EURASIAN AFFAIRS (2001-05)
Ms. Conley. Mr. Chairman, Ranking Member Brown, and
distinguished Members of the Committee, thank you for this
opportunity to share my thoughts and hopefully I can provide a
bit of a summary of the witness testimonies.
If my count is accurate, the U.S. currently has 58 separate
sets of sanctions against Russia broadly across 8 lines of
effort that date back to 2011. So what have we achieved in
those 7 years?
Russia is economically stable. With the recent increase in
energy prices and depreciation of the Russian ruble, the
Kremlin has found an equilibrium of sorts. Its GDP is estimated
to grow this year by 1.5 percent. Moscow can blame any
hardships on Western sanctions and not its own long-term
economic mismanagement. And although Russia's economy will
remain vulnerable to volatility in emerging markets and
uncertainty in the commodities markets, our economic sanctions
have little effect on either the regime's economy or its
behavior.
But, perhaps more importantly, during this time President
Putin has effectively consolidated his leadership of a national
security State that is prepared for a prolonged period of
economic stagnation and decline. This is not a regime that is
tiring. It is a regime that is ready for the long haul.
Unfortunately, I cannot say the same for the United States
and our European allies. I think as Ambassador McFaul and
Ambassador Fried noted, we have sanctions policies that are in
desperate search of a more coherent policy which is fully
supported by our allies. I want to give you three words as you
think through this strategy: strength, clarity, and unity. We
must develop an enduring policy that addresses the global
nature of Russia's disruptive and malign behavior that
stretches from North Korea and Venezuela to Syria, but which
focuses its most destructive intent on the United States and
Europe. We must develop a prioritized policy that establishes a
clear road map for Russia to return to the international legal
norms--to which it is legally bound--as well as a clear and
consistent path of escalating punishments as Russia continues
to violate these legal norms.
Our first policy priority must be the defense of the
homeland and the need to protect the United States to the best
of our ability against Russia's cyberenabled attacks, against
U.S. voting systems, voter data, and other critical
infrastructure. This also entails thwarting Russia's ongoing
disinformation campaign and influence operations through
greater public awareness and proactive deletion of fake social
media accounts; and--and I will return to this--ending the
illicit use of the U.S. financial system, affiliated
institutions, and U.S. citizens to advance its malign influence
and subvert our democratic institutions.
Our second priority must be the Russian Government's return
to international legal norms, which include the respect for the
territorial integrity of neighboring sovereign countries
Ukraine, Georgia, and Moldova; to return to the U.N. Chemical
Weapons Convention and arms control treaties, including their
ongoing violations of the INF Treaty. We must modernize the
foundations of the Helsinki Final Act and, in particular, the
Vienna Document, to restore the transparency of Russian
military forces and exercises to make sure that we do not have
any accidents against U.S. vessels or aircraft.
And, finally, our third priority must be to restore our
focus on promoting and prioritizing the dignity of the
individual and the governed over the privileges of the State-
fed kleptocratic forces in Moscow. Ultimately, the success of
U.S. foreign and security policy rests on that third pillar.
But what has worked over the last 7 years? Of all the
sanctions that the U.S. has imposed or threatened to impose, it
seems to me what disturbs the Kremlin the most is the Global
Magnitsky Human Rights Accountability Act because this act
shines an international spotlight on the excesses and corrupt
nature of Russia's oligarchic capitalism and how it functions
within Russian society. And because the Kremlin has based its
economic model and its survival on kleptocracy, sanctions and
other policy instruments dedicated to preventing the
furtherance of corruption--or worse yet in the minds of the
Kremlin, providing accurate information to the Russian people
of the extent of this corruption--are a powerful countermeasure
to Russia's malign behavior.
I strongly urge this Committee to quickly craft and pass
legislation that enhances anti- money-laundering measures and
fosters greater transparency and ultimate beneficial ownership
with a very laser-like specific focus on Russia. I encourage
you to think about FinCEN's robust role of the Treasury's
Financial Crimes Enforcement Network to focus as much as they
do on terrorism financing as illicit financing. We can do this
with our allies. The EU is working on its fifth anti- money-
laundering directive. The U.K. is finally taking this more
seriously. But we are given daily reminders that we are not
doing enough. We just heard reports of a $30 billion Russian
and other post-Soviet Nations' funds that have coursed through
the Estonian branch of Danske Bank undetected for years.
It is time for the United States to close the Russian
laundromat and its affiliated enabling services that operates
within and outside the U.S. financial system and work closely
with our allies to drain this international response. And,
again, think those three words through: strength in our purpose
and our policy, clarity of that policy, and unity within our
allies.
Thank you.
Senator Brown [presiding]. Thank you, Ms. Conley.
Senator Corker.
Senator Corker. Thank you. Like today with this panel, we
had an outstanding panel yesterday in the Foreign Relations
Committee talking about some of these same things, and, of
course, every panelist, you know, man, we got to take it to
Russia.
Then you get into the details, and it gets a little murky.
Let us face it. We are dealing with a country that is willing
to assassinate people in other countries, use military power to
create a frozen conflict in Georgia, to take Crimea, to do the
same in Eastern Ukraine. And we are not willing to do that for
obvious reasons. They are using military power. We are using
sanctions. They are willing to get involved in our elections.
They are willing to use military power in a way that we will
not in Syria.
So our response always is sanctions. And, you know, what we
found in CAATSA, and thanks to outstanding staff work and
numbers of Senators working together, we ended up with a bill
that got it about right, but we made some mistakes. We did some
things that have unintended consequences as it relates to
Europe and in some ways cut our own nose off to spite our face.
So there is all this bravado, and I really appreciate the
effort that Senator Van Hollen has underway. He knows I
appreciate it, and many other Senators. But I think getting
this right matters, and I think anything we do to punish Russia
that also punishes Europe actually accrues to Russia's benefit,
right? I mean, we have got a President rhetorically who is
trying to alienate Russia, and what I find that we do here is
sometimes out of frustration, we pass legislation because our
Commander-in-Chief conducts himself in the manner that he does,
and we end up doing things that actually hurt the cause.
And so what I would ask each of you is: What specifically
should we do sanctions-wise, specifically, to punish Russia
that will not punish Europe in any way and will not blow back
on us? And I think that is a much harder question to ask. And I
know, Ms. Conley, you did some of that. But whether you can
answer that in the time we have here or whether you just want
to send that back to me, I would appreciate it.
So I will let some of you answer, and specifically. Do we
really want to cut Sberbank off from the U.S. financial system?
Tell me that. Is that specifically something we really want to
do, or do we want to think about some of these things? Yes,
sir.
Mr. Fried. I will take a stab at this. No, we should not
cut Sberbank off, but if you want to escalate in the financial
sector, I think going after new Russian sovereign debt fits
your criteria of hurting the Russians and not hurting us or our
allies.
Senator Corker. They have got like 12 percent debt to GDP.
OK? We have got 80 percent debt to GDP, really more than that.
So do we really want to cross that threshold of sovereign debt,
which will have no impact on them whatsoever, but it will be
crossing the Rubicon as it relates to potentially our debt down
the road. Is that something we really want to do?
Mr. Fried. Well, yeah, I would go for it. I think that the
impact on Russia is apt to be significant. The impact on us is
apt to be light. We hit Iranian sovereign debt, and some people
in Treasury predicted the end of the world if we did. But we
took that step, and the world did not end.
In the financial area, that is where I would--that is one
place I would go. There may be some other--I would not target
Sberbank. I would not target all of the big Russian State
banks. But I think going after new Russian sovereign debt or
going after one or two selected banks may be appropriate.
However, I want to go back to something----
Senator Corker. I tell you what, why don't you answer the
rest of it in writing, if you will, so I can get to the other
folks. But thank you so much for that input, and thank you for
your service.
Yes, Mr. Ambassador?
Mr. McFaul. A couple of thoughts. First of all, we are not
a patient society, usually. We want results quickly. And
putting on my academic hat now, I have studied the sanction
literature. It takes time for these things to have an effect.
It is a ricochet thing, especially when you are talking about
an economy with the resilience we already hard about, and
especially when you are talking about an autocracy, not a
democracy. So that is the first point.
Second point, concretely--because you asked concretely--
target individuals that are close to President Putin. That is
not my view of what has happened so far. I want to hear the
argument from somebody that Viktor Vekselberg--you asked for
specifics. I am going to get really specific. Why was he on the
list? I do not know. I can tell you he does not know. What was
the intention for him? I have got 12 names here--I am not going
to go through them all; I will provide them in writing so we do
not go through the Kovalchuks and everything--that are much
closer to Putin that were not there. That is number one. Go
after the people close to Putin.
Number two, I really like what is in the legislation in the
DETER Act about saying right now, if you do this in 2020--2018
is already gone. If you do this, then we will sanction
Sberbank. I know Mr. Gref well--I see him all the time--I know
Mr. Kostin, I know Mr. Shamalov, the heads of the three Russian
banks. They need to be part of the deliberative process before
the action is taken, not after, because once it is after, then,
you know, they cannot change Putin. It is the forward-looking
thing that this is specifically what will happen to you, German
Gref, you know, write a letter to him, make it very personal so
that then he says he does the lobbying before the action, not
after the fact, because after the fact it is very difficult to
get Mr. Putin to move off his mark.
Senator Corker. Thanks. I know I have run out of time, but
if you all could specifically write back.
Thank you for being here. We appreciate it.
I am sorry, Mr. Chairman.
Senator Brown. Thank you, Senator Corker.
Ambassador, I appreciate the last part of that answer. I
think we learned that from the briefings we have had and the
hearings we have had, to anticipate and threaten, for want of a
better term, those sanctions.
Let me drill down a little bit on Senator Corker's
question. You described in your testimony, Ambassador McFaul,
the tension between professionals on the one hand at Treasury,
State, and the intelligence community, what they have been
doing and saying to combat Russian aggression, and on the other
what the President is actually doing. You urged a unified
Administration plan and policy on Russia, noting the President
can engage Putin without embracing him, as he clearly has.
Would you be specific about what you think the President
should do right away, publicly and privately, to signal what
the consequences will be for continued Russian meddling in our
infrastructure and in our elections?
Mr. McFaul. I would like him to start reading the talking
points that his advisers provide for him. I am serious about
that. I think there is a lot of consensus in the Trump
administration about what should be done. This is going to
sound strange to Democrats and Republicans, but I actually see
a lot of continuity between the Obama administration and the
Trump administration on general policy toward Russia. And in
some places, like lethal assistance to Ukraine, I think the
Trump administration has rightfully gone farther than the Obama
administration did.
I just want to point out I left Russia the day before Putin
invaded Ukraine. He did not do it on my watch. I left that to--
Ambassador Fried had to deal with him after I left. The problem
is the President does not seem to agree with his own
Administration's policy, and every now and then, when he gets
behind closed doors, he lets you know that. I was in Helsinki
watching what happened, and that press conference was
extraordinary in terms of the disconnect between what the
President was saying and what I take to be as I read and talk
to people about what the policy is. So the simple thing is get
in alignment with the rest of your Government.
Senator Brown. Thank you.
Mr. McFaul. Easy thing to say, hard thing to do.
Senator Brown. Ambassador Fried, you talked about
escalating options tough enough to hurt, in your testimony,
restrained enough to use. What would be the top of your list of
sanctions to ratchet up pressure on the Kremlin in the short
term prior to the election for future attacks, going after
oligarchs in St. Petersburg, sanctioning State-owned entities,
Kremlin slush fund, Russian sovereign wealth fund? Talk in a
little more detail about that. In the short term, how would you
prioritize those in an escalatory approach?
Mr. Fried. I agree with my colleagues who have pointed out
that we should go after Putin's cronies. I think, as Heather
said, that that bothers the Kremlin no end. I think that the
consternation with which the Kremlin and Moscow elites greeted
Section 241 of CAATSA, The Kremlin Report, shows that that
bothered them. That is my personal favorite part of CAATSA,
that classified report. I think we should use it.
I like the DASKA provision which mandates a study of
Putin's wealth. I think if you have that study, probably
classified, and The Kremlin Report's CAATSA 241, there is good
material to draw from in going after people.
You know, Vekselberg--we do not have to talk about
individuals, but Mike McFaul is dead right. One escalatory
ladder that we ought to start now is going after these people.
Another one--and Heather Conley mentioned it--is start drawing
up the channels for dirty Russian money. Force disclosure of
beneficial ownership of high-end real estate. The Russians park
their money in Miami, New York, and London. We should not let
them do it. We should expose this.
Then the second category of sanctions are the sectoral
sanctions. Senator Corker mentioned his concerns about going
after Sberbank. You know, you can talk about the targets. We
should be selective. I continue to think that going after new
Russian sovereign debt is a good idea. We could also go after
new debt financing for a broader swath of Russian State-owned
companies. We also ought to go after the cybersector
aggressively. We ought to go after technology. We ought to go
after the cyber bad actors, and we ought to go after all of the
funders.
Senator Brown. Thank you.
Let me ask a question and any of you can answer, not all
four of you, but any--in mid-April, as you remember, U.N.
Ambassador Haley announced that Russian companies who help
Syria make and deploy chemical weapons would be sanctioned.
Then those sanctions were pulled back, reportedly on orders of
the President. Anybody have an opinion, a well-formed opinion,
on what might have happened?
You all have an opinion. You just do not want to state your
opinion, apparently.
Mr. Fried. The process, I think we have all become familiar
with the policymaking process at the top of the Trump
administration, and I do not think she made up--I do not think
Ambassador Haley made up that assertion. I think the policy
process was not as smooth as it should have been.
With respect to Syria-related sanctions, I am for it, but I
would keep my expectations under control. Sanctions work best
when they are embedded in a policy that makes sense. I think as
Mike McFaul said, this Administration's Russia policy, if you
take out--if you subtract what the President says--I know that
is hard, but if you do that, it could make a lot of sense. But
I do not think the same is true with respect to our Syria
policy, and I have never been a wild fan of Syria sanctions. We
ought to do them, but I would not expect too much.
Senator Brown. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chair.
Based upon the conversation that has been repeated several
times today with regard to where the focus should be and where
the emphasis should be, I am just curious, and I would ask
Ambassador McFaul and Ms. Conley to perhaps respond to this.
Mr. Putin recently backed down from a proposal to raise the age
eligibility for receiving a Government pension there in Russia.
Experts attribute this decision to be related to Mr. Putin's
popularity decreasing significantly due to this pension reform
proposal. This would suggest that Mr. Putin know that he is
subject to the consent of the governed and will take reasonable
action to maintain that consent and the favorability that comes
with it with regard to the public.
With respect to sanctions policy, what lessons can we learn
from this development? And how can we use sanctions and other
foreign policy instruments to perhaps nudge Mr. Putin to make
policy changes that are favorable to U.S. interests? I have
heard the discussion that we should focus on the oligarchs, but
clearly there is something else going on there as well with
regard to the popularity issues. Are we missing an opportunity
here simply because we think we are more direct on the
oligarchs as opposed to impacts for other portions of the
population within Russia?
Ms. Conley. Thank you, Senator. I think what we are
seeing--President Putin is well aware of the long-term negative
trajectory of the Russian economy. It is an energy-based
economy that has no innovation. It is a demographic collapse
that will happen beginning in 2050. He is acutely aware of
this. What he was trying to do was the most timid pension
reform to continue the viability of a social safety system that
they can no longer meaningfully maintain for the long term.
They have not reformed their pension service since the end of
the Second World War, since 1947. So what he is attempting to
do is make some adjustments to that, and they are not even that
big. And he was met with a surprising amount of unpopularity.
There is a restlessness in Russian society. We see that
with spontaneous demonstrations against corruption, the
demonstrations after President Putin announced he would be
returning to the Kremlin in 2012. But I think we cannot
misunderstand that to mean something more significant.
President Putin has a huge challenge to manage Russia's long-
term economic decline as China grows ever more powerful and
around it through Belton Road and through the Arctic, and so he
is doing what he can. And even that timid effort he had to step
back from. He does have to manage his popularity, but I do not
think we should question that he is concerned about his next 6
years in office.
Senator Rounds. OK.
Mr. McFaul. If I can say, I think, Senator, you raise a
very important----
Senator Rounds. Do you have your mic on?
Mr. McFaul. Now I do. I will hit that ``talk'' button. I am
slow on that. My apologies.
I think you raise a really important point about a lot of
analytic assumptions we make about decision making in Russia
and, therefore, the impact that sanctions have on it. That to
me underscores we need to be careful about how smart we think
we are about how Russia makes decisions and how Putin makes
decisions. Everybody talks about he is really popular and he is
going to be around forever. I agree with that. In my scenarios,
I do not see a situation in which Putin steps down or he is
voted out of office. I do not. However, that he does fall in
popularity--I mean, he most certainly did after he announced
the pension reforms, and he responded--suggests that there is
more pressure, societal pressure in that system than we give it
credit for.
Number two, something to remember about the popularity of
Putin--two things to remember. I used to coach basketball for
my sons, and I always think about Putin's popularity as taking
my sons' JV team and playing the Warriors. Guess what? The
Warriors are going to crush us. Is that real competition? Is he
really popular? Is he really so much better when he is running
against nobody? Oh, by the way, and he controls all the
television stations and all social media and the entire U.S.
Senate--the equivalent--and the Congress? It is not so hard to
be at 80 percent if you have all that on your side. So remember
that about that system.
Number two, remember this about that system, because all
Russians know this. You need to understand it, too. Russia is a
highly policed State. They have incredible capabilities to
monitor everything you do. When I was Ambassador, I assumed
that every email I sent, every phone call I made, and every
movement I made in my house, a beautiful house, Spaso House--
thank you for your support for helping to pay--well, not you.
Thank you to the American citizens for helping to pay the rent
on that--was monitored and recorded.
So think about this. If you are sitting out in Vladivostok
and Ivan Ivanovich calls you from Moscow from a polling agency
and says, ``How do you think the President is doing?'' There is
only one rational answer to that response, right? Oh, by the
way, all the polling firms are also controlled by the Kremlin
except for one. So I think we inflate what is going on in terms
of Putin's popularity by not taking those things into account.
The last thing about the oligarchs. They are not all the
same. We use that phrase as if they are some group that we just
would put in this room and they all have the same preferences.
That is not true. Many of them acquired their wealth--I did not
say ``made their wealth''--in the 1990s. Many of those are
those that are now externally oriented and their business
models depend on being in the international system. But as was
pointed out earlier by my colleagues, there is another group of
oligarchs--or, you know, I would just call them ``Putin's
cronies''--that acquired their property rights when Putin came
to power. And those two groups do not have the same set of
preferences.
I think there is a lot of tension between those groups
around sanctions. I know a lot of major Russian oligarchs that
think this Russia policy, Putin's policy is bad for their
business. They are not going to come and testify and tell you
about it, but make no mistake, there is tension among elites,
too, about this aggressive, belligerent policy that is
isolating Russia today.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo [presiding]. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Thank you all
for your testimony.
You know, I have been doing foreign policy between the
House and the Senate for 26 years, and I have learned one
thing: that if you are attacked and you do not respond, an
aggressor will attack again. Does anybody disagree with that
proposition?
[No response.]
Senator Menendez. So we have been attacked by Russia, and
we have not significantly responded to that attack. And we see
the consequences of the international community not really
responding. We see it--Putin made a calculated decision in
Crimea, Eastern Ukraine. He made a calculated decision in
Syria. It is all paying off for him at this point. So he going
to continue to make calculated decisions based upon whether we,
the United States, the leader of the free world, and get others
to join us in responding.
So I am a big supporter of my colleagues' efforts on the
DETER Act, but that is prospective. It does not deal with all
of the other malign, nefarious activities that Putin and Russia
is engaged in, in violating the international order that we
helped create after World War II and that has brought peace and
stability for the better part of three-quarters of a century.
So the question is--and I heard in my office my
distinguished colleague and friend, the Chairman of the Foreign
Relations Committee, on which I am the ranking Democrat. I know
he has a certain degree of reticence toward sanctions. We have
had some conversations about that. But it is the only tool of
peaceful diplomacy that we have outside of aid and trade and
international opinion that we can use.
So my point is that at this point we have been attacked
through those cyberattacks. There is no question about it. We
are in the midst of that even as we speak. We have seen the
violation of the international order that inures to our
detriment in terms of our own national interest and security.
Certainly I would argue that in Syria, at least. And so we need
to respond, and there is a reticence, I guess, about
responding. Now, I am all for understanding how do we refine
our response, but responding in and of itself, we have already
taken too long from my perspective to respond.
So I look at this, and I appreciate, Ambassador Fried, some
of the comments you made about DASKA, which I have joined with
Senator Graham and others in pursuing. You mentioned good ideas
from that legislation: targeting corrupt officials and their
family members, restricting U.S. persons from dealing in new
Russian sovereign debt, allowing the U.S. to designate persons
operating in the cybersector generally, and identifying
beneficial owners in high-end real estate deals as some of the
elements. I agree. And on the energy questions, you know, we
can refine some of those things. But I think what we need to do
is to act.
So let me ask you, Ambassador Fried, I understand that you
led the State Department's Sanctions Coordination Office in the
last Administration before it was disbanded in 2017 under the
Administration. What is the value of such an office at State?
And what are we missing now that it does not exist?
Mr. Fried. Well, I do not want to be self-serving, but the
office principally extends the power of sanctions by bringing
together the peoples, the Japanese, and the other major
democracies in common cause. That is what I did. I was in the
best possible negotiating position because when I traveled to
Europe, I could do handshake deals at the table and deliver
because I had the backing of the interagency, worked very
closely with Treasury and all the parts of the State
Department. And so we could work with the Europeans and
actually come to common--develop a common language on parallel
sanctions. That is helpful.
I would bet dollars to rubles that Putin told his people
that we would never be able to bring the Europeans along in
common cause on sanctions. He was wrong, and he was shown to be
wrong, which gets to Mike McFaul's point about not all the
Russians are comfortable with where Putin taking them.
That office was disbanded. The people doing sanctions at
the State Department are capable individuals. They are good
people. But they do not have the bureaucratic clout to be able
to bring together the interagency and work with the Europeans,
the Japanese, the Canadians, the Australians to develop common
positions on sanctions, whether it is Russia sanctions or DRPK
sanctions.
Senator Menendez. Thank you.
My time is up, but, Ambassador, I am going to submit for
the record questions as it relates to INTERPOL. I believe that
the Russians are abusing access to INTERPOL to suppress
efforts, and I would love to hear your answer on that.
Mr. McFaul. Happy to do it. Thank you.
Chairman Crapo. Thank you, Senator Menendez.
Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman. Thank you all for
appearing, and, Ambassador Fried and Ambassador McFaul, thank
you for your service. Ambassador McFaul, thank you in
particular for serving in Russia. You gave a small snapshot of
what it was like to be the Ambassador there, or really anyone
who works in the embassy, and I think few Americans realize
what a hostile and adverse environment it is.
Ambassador McFaul, you said, if I heard you correctly, that
you do not see much hope for a change in Russian behavior as
long Vladimir Putin remains President. That seems to have
escaped most recent Presidents. The stories of Bill Clinton's
late-night interactions with Boris Yeltsin are legion and
legendary. They tried to get off on the right foot with
Vladimir Putin in the late 1990s. Of course, George Bush looked
into President Putin's soul and got a sense of--looked in his
eyes and got a sense of his soul. Barack Obama had the Russian
reset, and President Trump has tried to repeatedly have a
better relationship with Vladimir Putin.
Why does that always come a cropper no matter what the best
intentions of Presidents of both parties?
Mr. McFaul. That is to me?
Senator Cotton. Yes, it is.
Mr. McFaul. Well, I would say two things. One is it is not
continuity over that 30-year history. I want to emphasize that.
There have been times in the U.S.-Russia relationship where it
has been genuinely cooperative. No one should mix up what we
did with the Russians in the 1990s, cooperative things we did
with them, versus where we are at today. It has to do, as
Ambassador Fried said, with the nature of the regime changing,
becoming much more autocratic, and it is not a spurious
correlation that when countries become more autocratic they
become more belligerent toward liberal democracies like
ourselves. That is true.
Under Putin, it is more autocratic than ever before. It is
more repressive than ever before. And as said in my opening
remarks, these are criminal activities. I just want to
associate myself with the way Senator Menendez described it.
And, by the way, a lot of these things never happened even
during the cold war. Annexation did not happen during the cold
war. Assassinating people in foreign countries using chemical
weapons, maybe that--I do not think that happened in the cold
war. A lot of this stuff goes well beyond--violating American
sovereignty during a Presidential election, that did not happen
during the cold war.
So I want to underscore I think we are in a fundamentally
new place. I recently wrote a book about this history, and the
last chapter is ``No More Resets''. I am intimately familiar
with the resets, as Ambassador Fried knows. No more resets
while Putin is in power, and we need to not think that we can
go back to that.
So my strategy is--I think there is a lot of agreement
here--we need to contain belligerent behavior through some of
the legislation that is here, and when we can, in very narrow
sets of interests, cooperate where it is in America's national
interest, just like we did during the cold war, by the way.
So, for instance, most of Helsinki I think was a complete
disaster. And, by the way, when people say the President's
words do not matter, those words mattered to me because it was
about me and my personal safety. So that notion that he can
just say things and the policy chugs along, I disagree with
that. I think his words have consequences for our Russia
policy, and I dare say Syria and other things. But----
Senator Cotton. Mr. McFaul, if I could reclaim my time.
Mr. McFaul. Sure, please.
Senator Cotton. The only thing I have in response to what
you said, with which I largely agree, is that they have taken
some steps beyond what happened under the Soviet regimes, but
most of the techniques remain the same: assassination,
disinformation, subterfuge, so on and so forth.
Mr. McFaul. I disagree, Senator. I do not----
Senator Cotton. So they had not targeted a Presidential
election perhaps, but they----
Mr. McFaul. Yes, that is new.
Senator Cotton. ----did target, though, for instance, the
deployment of mid-range nuclear missiles to Europe in 1983, we
now know.
Mr. McFaul. That is true.
Senator Cotton. I want to read something into the record. I
think it is very important. It goes back a little bit earlier
than most reports. It is ``Democracy in America.'' So the last
page of the first book of ``Democracy in America,'' which was
written 100 years before the cold war started, concludes like
this: ``There are two great peoples on the Earth today who,
starting from different points, seem to advance toward the same
goal. These are the Russians and the Anglo-Americans. Both have
grown larger in obscurity, and while men's regards were
occupied elsewhere, they have suddenly taken their place in the
first rank of Nations, and the world has learned of their birth
and of their greatness at the same time. All other peoples
appear to have nearly reached the limits that nature has drawn
and to have nothing more to do than to preserve themselves. But
these two are growing. All the others have halted or advanced
only with a thousand efforts. These alone march ahead in an
easy and rapid pace on a course whose bounds the eyes cannot
yet perceive. The American struggles against the obstacles that
nature opposes to him. The Russian grapples with men. The one
combats the wilderness and barbarism; the other, civilization
vested with all its arms. Thus, the conquest of the American
are made with the plowshare of the laborer; those of the
Russian, with the sword of a soldier.''
``To attain his goal, the first relies on personal interest
and allows the force and the reason of individuals to act
without directing them; the second in a way concentrates all
the power of society in one man. The one has freedom for his
principal means of action; the other, servitude. Their point of
departure is different. Their ways are diverse. Nonetheless,
each of them seems called by a secret design of providence to
hold the destinies of half the world in its hands one day.''
That suggests that the tension and conflict we have with
Russia go a lot deeper than any one American or Russian
administration, and the sanctions response and policy responses
we have discussed here are all meritorious and should be
pursued to the greatest extent. I do not anticipate much change
in Russian behavior either, Mr. McFaul, but we can draw a set
of boundaries to increase the cost for that behavior and
hopefully deter it.
Thank you.
Chairman Crapo. Thank you, Senator Cotton.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. And I agree with a
lot of the comments made by my colleague from Arkansas. It is
great to see the whole panel, but particularly you, Ambassador
McFaul. Thank you for your great service.
One of the things, I do want to go back a little bit to the
Helsinki episode. What I have seen from Congress is one of the
few times we have truly been unified in terms of sanctions
against Russia. What I have actually even seen from most of Mr.
Trump's appointees in the intel community and the defense
arena, uniform agreement that Russia attacked us, that they
will be back to attack us again, and this is an ongoing threat.
Through pure happenstance, Senator Rubio and I had engaged
with the Atlantic Council to bring together parliamentarians
from European countries to talk about Russian interference in
their elections, through both cyber and misinformation/
disinformation. And through pure happenstance, the day we
gathered was the day that Donald Trump and Vladimir Putin were
meeting in Helsinki. So we had Ukrainians, Estonians,
Lithuanians, Swedes, Brits, Canadians, Italians, Czechs,
Poles--I am going to leave off some, but 15 to 18 countries,
all who were recounting episodes similar, in some cases in
Eastern Europe even more sophisticated than techniques used
against our country. These fellow parliamentarians were aghast
when they saw in a sense the de facto leader of the West kowtow
to a Russian President.
So to your point, Ambassador McFaul, as somebody who served
in Russia, what kind of message do we send, even when we have
unity in Congress, even when we have most of Mr. Trump's
appointees recognizing this is a threat, even when we have
clearly, as Dan Coats has indicated, all 29 Nations of NATO
have been interfered with by the Russians, when we have a
President of the United States that seems to ignore this
threat, not acknowledge it, and, frankly, I would argue,
embarrass our country on the world stage by kowtowing to a
Russian despot?
Mr. McFaul. You want me to answer that?
Senator Warner. Yeah.
Mr. McFaul. And I want my colleagues to--I will try to be
briefer than I have been, which is to say it is not in
America's national interest. It is just that simple. I looked
at that performance, and I wanted--you know, I asked myself the
question. I was in Helsinki. I work for NBC, so I was there
covering it. What American national security interest was
advanced by that summit?
I am not against engagement, by the way. That is what I
wanted to say to Senator Cotton. When we engage with Soviets
and we engage with autocratic regimes and enemies when it is in
our national interest, sometimes to push back on them, and
occasionally to cooperate. The one thing that Putin said at the
summit, by the way, that I agree with him--and Putin and I do
not agree on much--is that we should extent the new START
Treaty. I think that is in America's national interest, and you
can only do that when talking to the Russians. But nothing else
was advanced. And that should be the criteria that all meetings
are judged by. What American national interest was advanced? I
did see very many in that Helsinki----
Senator Warner. Well, let me try to get a question in for
Ms. Conley. I think in your testimony you also indicated if we
ramp up--and I support, for example, Senator Van Hollen's and
others' efforts on the DETER Act. If we ramp up, though, one of
the things we have learned is that the Russian ability to
interfere in our elections, to use misinformation and
disinformation, is both effective and cheap. We did kind of
from the intel side a back-of-the-envelope evaluation and said
if you add up all the costs that Russia spent interfering in
our elections, in the French Presidential elections, and as
increasingly clear, in the Brexit vote, you add that all
together, it is less than the cost of one new F-35 airplane. So
this challenge is not going to go away.
I think you made a comment about heightening and making
sure that we continue to upgrade our election security. In a
normal White House with this kind of happening, there would be
someone designated on election security coming out of the White
House, because that is the only place where you can convene our
local, State, and Federal officials. And instead we have people
kind of running off half-baked, well-intentioned but without
that leadership.
What should we do? And if you can also comment on a more
specific area I think you raised as well, and that is--and I
appreciate the Chairman and the Ranking Member on this. If we
are going to take on AML reform, one of the areas where we can
find those oligarchs' funds is the question around beneficial
ownership. So election security and beneficial ownership,
please.
Ms. Conley. Yes, absolutely. Thank you. This is where I was
speaking about prioritize. Nothing can be more important than
defending our democracy, and that is exactly what the Russian
Government would like to erode confidence and credibility in.
It has to be first principle.
If the White House and the President will not lead, what we
are going to have to do is a substitute, which is, as best we
can stitch together, a whole-of-Government effort. I do not
think we are organized or fit for purpose for this. If this
were a normal situation and our country was attacked the way it
was in November of 2016 and before that, we would have created
a 9/11 Commission. We would have looked at the structural
impact, and to bring fusion centers or whatever it is, we did
none of that. And we are structurally not organized to combat
this. What the Russians are doing is going through our
strategic seams, domestic through international, State and
Federal. Whatever that division line is, they are finding it
cheaply, and they are pulsing it.
This is on us. This is less about Russia, and it is more
about the United States getting its act together, strengthening
its institutions, and prioritizing this. We just do not have
the perfect situation, unfortunately. But that is not an
excuse.
Senator Warner. My time is up, but I just want to mention
that there is bipartisan legislation that is not going to solve
everything, but an Election Security Act. And I sure wish that
this Senate, that the Majority Leader would move that
legislation, because I believe it would get 75 votes.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Warner.
I will take my question time now. I want to follow up on
what you just said, Ms. Conley. It seems to me, first of all,
that there is sort of a consensus in the room that there is an
opportunity here to increase sanctions on oligarchs and have
some effect. But before I get to that question, you just seemed
to talk about some kind of a structural change of our approach.
Could you describe that a little better?
Ms. Conley. Yes, sir. Thank you. What strikes me--and this
appears in legislation, whether we return the Sanctions Office
to the State Department or put something--we are doing things
on the margins. This takes a whole-of-Government effort. Where
my argument is, our research is focused on Russia's economic
influence and then its political influence. So you can tell
from my focus on that.
In some ways our tools lie in different places, which is
why we have had the Senate Banking Committee, the Senate
Judiciary Committee, the Senate Foreign Relations Committee,
the Armed Services Committee--everyone has a piece of this.
This is a full spectrum that goes from military operations to
social media and disinformation. It is hard to get your arms
around, and we are not organized to do this.
After 9/11, we started reorganizing ourselves because we
found we were not fit for organization. We have to do the same
thing on malign influence. It is Russia today. It will be China
and other adversaries tomorrow. They are watching this
playbook, and they are taking notes. This is about getting
ourselves organized for a sustained campaign of malign
influence by our adversaries, because we are most--as
democracies, we are most vulnerable when our institutions do
not work, we are partisan, and we do not have a unified whole-
of-Government effort. I encourage perhaps in the next Congress,
if possible, to think about the structural differences and to
put forward a new thought process of oversight as well as
Administration organization to combat effectively adversarial
malign influence.
Chairman Crapo. So have you got a suggested plan?
Ms. Conley. I can come up with one, Mr. Chairman. I think
think tanks should be part of that conversation, just like the
9/11 Commission. Create a high-level bipartisan panel to think
through those structural impediments.
Chairman Crapo. I would appreciate your further input on
that. I think that is a very insightful comment.
One last question that will probably use up the rest of my
time, and I put this question out to whoever on the panel would
like to respond. But it seems to me from what I have heard so
far that sovereign debt and increased focus on oligarchs are
two areas which seem to have some broad support for us to look
at further ratcheting up our responses.
With regard to oligarchs, are there oligarchs closer to
Putin whom we have not targeted? Has anyone considered or
suggested whether sanctions should be imposed against Putin
himself? Could you, any of you who wish, respond to the general
question of what does it mean when we say we should have an
increased focus on oligarchs?
Mr. Fried. First, I would differentiate, as Ambassador
McFaul said, between oligarchs. They are not all equal. Some
are closer to Putin; some are independent of Putin.
The CAATSA study produced a classified report of those
oligarchs who are particularly close to Putin. It is
classified. I have not seen it. But by all accounts, it is a
first-rate study. It was done by the pros. The Administration
mishandled the public rollout, but no matter. That is a good,
that is a solid document.
Second, one of my favorite provisions in the draft DASKA
bill is the mandated study of the sources of Putin's wealth. So
if you put those--if that passes and we have a study of Putin's
wealth, then we can cross--then the Administration can cross-
reference that with the Putin-connected oligarchs, and you have
a pretty good target set of people. They are there. There is no
question that we could escalate the sanctions and put pressure
on Putin. And the fact that it bothers him is demonstrated by
the lengths he went to to get the Magnitsky Act repealed. The
Magnitsky Act, as it turned out, targeted people close to
Putin. We did not know it at the time, but it bothered him. His
anxiety suggests opportunity and leverage for us to push back.
Chairman Crapo. All right. Thank you very much.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman.
First, a question for the panel. We know that Russia has
interfered in elections among our NATO allies, and to both
Senator Corker and Senator Warner's point, it is working, it is
cheap, and it is asymmetrical in the sense that we cannot
exactly invoke Article V over cyberinterference. Interfering
with vote counts would be another matter. Interfering with
critical infrastructure would be another matter. But just
messing with an election process, we are in a position right
now where we do not know really know how to respond except
kinetically, which is a vast overreaction. And so I am
wondering whether there is a space here short of invoking
Article V to work on, in a sanctions package, some kind of
response to interfering with electoral processes, especially
among our allies. And I will start with Ambassador McFaul and
try to go down the line.
Mr. McFaul. First, again, I just want to underscore I like
the conceptual idea of prospectively saying if you do this,
this is what will happen to you. I think that is the first
thing I would start with.
But, number two--and I said it at the end of my remarks,
and I write about it in the testimony--there has got to be more
instruments of power, right? So high on my list is resilience,
like with all due respect, we have done next to nothing as a
country to increase the cost and to defend our election
infrastructure. I actually do not think we are going to see big
violations of it in 2018. If we have time, I will go into why.
But the capacity is still there. That should be number two.
And, number three, we are wrestling with it--and I know you
wrestled with it, some of you wrestled with it yesterday with
some folks from where I lived, but what is the balance between
our national security interests and our First Amendment? What
do we do with--let me just make it really concrete. When
Sputnik International, a company 100 percent controlled by the
Kremlin--it was actually started by a friend of mine. I know it
well. When they tweet out ``Crooked Hillary''--that is what
they did in 2016--is that the press expressing themselves or is
that a violation of American sovereignty? And I do not think we
have wrestled appropriately with that question. I like the
progress we have made, and I think some of the things that both
Google, Facebook, and to a lesser extent Twitter have done--
well, actually Twitter, too. They have all done some things
that are moving in the right direction in terms of at least
information about where this comes from. So RT is incredibly
popular on YouTube. They know how to do that well. There is a
little information thing. But that balance I think needs to be
the third component of how to get it right before 2020.
Senator Schatz. OK. Ambassador Fried, let us focus on NATO
and what we can do sort of inbetween kinetic and nothing.
Mr. Fried. I agree with Ambassador McFaul, prospective
sanctions, putting your escalation in the window and letting
them see what you are prepared to do is a good idea. That is
what I like particularly about the DETER Act, its focus.
Second, there is plenty of room to use sanctions against
bad cyberactors. If you talk to European Governments, a lot of
them are angry about the Russian electoral interference. I am
convinced that there is a constituency out there for common
action with us.
I was in Madrid recently. They are not happy about the fact
that the Russians were messing around in the Catalonia
referendum. That is another particular for us to make common
cause instead of bashing the Europeans.
Senator Schatz. Thank you.
Mr. Fried. Second, in the disinformation space, it is a
false choice to say we have to go after--weaken the First
Amendment to go after disinformation. That is nonsense. The
Honest Ads Act and other forms of transparency requirements
would actually help expose Russian disinformation. The
Administration--this is what Heather Conley said, and I agree
completely--ought to organize itself and probably have--just as
we developed after 9/11 an interagency counterterrorism center,
we ought to have a counterdisinformation center. That center
should also be working with the Europeans, who are moving
forward in this space while we are doing whatever it is we are
doing.
Senator Schatz. I am going to run out of time. I will take
the next two answers for the record because I wanted to say to
Ambassador McFaul, first of all, we stand with you, and we did
that with our bipartisan resolution. I know there are
continuing concerns for you and your safety and the misuse of
the INTERPOL process with Russia-friendly regimes. If there is
anything that the U.S. Senate or the U.S. Government could be
doing that it is not doing, I want you not to hesitate to
contact any or all of us instantly, because your safety is
absolutely essential in terms of respecting your public
service, but also in terms of our geopolitical position. So
thank you for your service. We are sorry for this difficulty,
but we certainly stand with you.
Chairman Crapo. Senator Reed.
Senator Reed. Thank you, Mr. Chairman.
First, let me thank the panel not only for your comments
today but for your extraordinary service to the Nation in so
many ways.
Ms. Conley, I agree with you, we are not organized, et
cetera, but let me focus on the upcoming 2018 election. We are
looking at it in terms of preparing our electoral system,
avoiding disinformation, making sure of the integrity of the
vote. There is another effect, though. I think the Russian
approach is to constantly keep us upset, confused, et cetera.
Whatever happens in the election, my sense is they have a plan
to exploit that. So there could, in fact, be a situation where
they would question through disinformation the integrity of the
vote, whether people voted, whether illegal people were voting,
et cetera, et cetera, et cetera.
One, and I will start with the Ambassador, how credible is
that? And, two, it goes back to the point that Ambassador Fried
made, that we would need someone with authority and facts to
stand up almost immediately on election day or the next day and
say, ``No, we verify the accuracy of the vote.'' The worst
thing for us would be to have that message trumpeted by figures
in the United States.
So with that prelude, your comments, Mr. Ambassador.
Mr. McFaul. Let me be brief so I can get everybody else in.
I think those are very appropriate concerns, and I think it is
a good reminder that the Russian strategy is a very
sophisticated strategy. It is not just about helping one
candidate or the other. It is about exacerbating polarization
already in our society. To me, the research on that is as clear
as day, and that we are divided and fighting amongst ourselves
and talking already about whether the elections are legitimate
or illegitimate. Those are all wins for Vladimir Putin.
I also think, at least as a hypothesis, that he may sit the
next electoral cycle out so that we all are complacent and we
all say, ``Oh, sanctions solved it. They are afraid of our
sanctions. We do not have to do any of these other things that
we were just talking about.'' That is one of my greatest
concerns, and then we just all forget about the things we are
talking about and we do not do anything. And then 2020 comes
along, and in 2020 my greatest fear is not about Crooked
Anybody, that that will happen. My greatest fear is exactly to
your point about them questioning the integrity of the election
and somehow being an actor in the integrity of the election.
And all it takes is a few thousand votes where people say,
``Hey, this did not work the way it was supposed to,'' and we
have got a big crisis on our hand in terms of the integrity of
our democracy. And it is very, very easy to do, and we have not
done--we have done next to nothing to prevent it from
happening.
Senator Reed. Ambassador Fried, other comments?
Mr. Fried. I agree with what was said. I think that we face
a challenge, but we have the tools to combat it if we focus.
Senator Reed. Thank you.
Ms. Ziemba.
Ms. Ziemba. Yeah, I think the important thing to stress has
been the broader damage to the institutions and the question
that I would be less concerned--I think echoing what Ambassador
McFaul was saying, in some ways I might be less concerned about
direct Russia standing up and statements around the results and
more about what we might see at home. And I think taking that
sort of dynamic and continuing to build back up respect for the
institutions that are protecting our democracy is very
important. So there is the work that we can do to make sure we
are targeting Russian resilience, but I do think what is coming
out here is what we need to do at home.
The other challenge, I think, more generally--and just to
echo what has been talked about--we can look at examples
throughout Europe of the ways in which Russia took advantage,
and China to some extent, but especially Russia took advantage
of divides within countries. And that is where I think one of
the things I liked in the DETER Act was the emphasis on working
with European allies.
Now, the details of that obviously we do not have time to
go into at this point, but I think that is very important.
Thank you.
Senator Reed. Ms. Conley, there are a few seconds left.
Ms. Conley. Yes. Russia is constantly adapting its tools.
They will look less Russian and more American and to be more
divisive, and we have to be very vigilant on that.
The second question, I think, on the cyberimpact, the
Russians follow our political system very closely. They know it
is a handful of swing States and a handful of swing counties
that sometimes can determine. If there is, I think, a focused
penetration of cyber, it will be in those swing areas, and I
think that we have to prioritize those critical areas for
cyberprotection of our election infrastructure.
Senator Reed. Let me thank you, but just a final point. I
think even though in 2018 they might take, as the Ambassador
suggested, a timeout so they can get really ready for 2020, I
think we have to be ready--and we are not--to have someone when
the polls close everywhere be in a position to verify the
accuracy of the vote from a standpoint of a credible source,
because I think they will not miss the opportunity and it will
be echoed by some people in the United States, maybe they will
echo people in the United States, that this was not fair, that
the votes were not counted right, et cetera, and we could have
a huge problem in 2018 if we do not today identify that person
in the Administration who will stand up and said, ``I have
validated these. Every Secretary of State has reported in. We
had no problems.''
Chairman Crapo. Senator Warren.
Senator Warren. Thank you. Thank you, Mr. Chairman, and
thank you to all of our witnesses.
Ambassador McFaul, I am very sorry about the threats that
you have had to endure. I assure you Congress has your back.
You were our Ambassador in Moscow, and it was your job to deal
with an increasingly aggressive Russia. We do not permit other
countries to punish our diplomats for doing their job.
You know, President Trump seems to love photo ops with
dictators and summits that do not produce real results. In a
recent article, you wrote that the Trump administration
``should not pursue engagement as an end in itself. Good
relations with Russia or a friendly summit with Putin should
not be the goal of U.S. diplomacy, but the means to achieve
concrete national security ends.''
So, Ambassador McFaul, briefly--because we are limited for
time--when it comes to our relations with Russia, is the Trump
administration making enough progress on the most urgent
national security goals?
Mr. McFaul. First of all, thank you for your initial
remarks, and I just want to remind everybody that I was not the
only one on that list. I was there with a dozen other U.S.
Government officials and one staffer up here, Kyle Parker, and
they were Democrats and Republicans. So, remember, this is
about us all. But I really appreciate the support. I did in
July, and it made a difference most certainly. More work to do
on INTERPOL if we have time on that, but I will come back to
that in a minute.
My general answer is the Administration I think is doing a
pretty good job. Just the President of the United States does
not seem like he supports their policy. And that has
consequences for the policy. It is not just they can do
everything on their own and then the President will not mess it
up, and we saw that in Helsinki. When Putin came out and set
him up to create this false moral equivalency between the
people that Mr. Mueller indicted and the 11 or 12 of us that
Putin put on, and he said it was a great idea, that is not
advancing America's national interest. And so I think
generally, you know, if I were advising the President, I would
say just focus on one thing to get done, and, you know, new
START Treaty, extend it. And then do not do all the other
stuff, because I honestly--thank you for quoting my article. I
learned that from George Shultz, by the way. I do not want to
take credit for that idea. He is a colleague of mine at
Stanford. But I think he just does not understand that. I think
he defines so many bilateral relationships, not just Russia, as
getting along with the leader. Mostly they are autocratic
leaders he is concerned with, and that in my view does not
serve America's national interest.
If there was a deliverable out of Helsinki and, you know,
if he actually was friendly to Putin and he said, yeah, OK, I
am going to get out of Eastern Ukraine, then I would celebrate
it. But I see no evidence of that strategy succeeding.
Senator Warren. Well, you know, Congress wants to push
harder against Russia. Last summer, we overwhelmingly passed
tougher sanctions on Russia, and over a year later, the Trump
administration has not implemented seven mandatory sections of
this Russia sanctions law.
Ambassador McFaul, do you believe there is any legitimate
excuse for the Trump administration's failure to follow the law
and to implement mandatory Russia sanctions that were passed by
this Congress?
Mr. McFaul. No.
Senator Warren. You know, I think you are right on this,
and you rightly point out that President Trump's own National
Director of Intelligence said publicly that Russia keeps trying
to undermine our electoral process, our energy grid, and other
critical infrastructure. On the same day that President Trump
signed the Russia sanctions law last year, he said, ``It
disadvantages American companies and hurts the interests of our
European allies to enforce these sanctions.''
So let me pose that as a hypothetical here. Ambassador
McFaul, in the long run, which hurts American companies and our
European allies more--the Russia sanctions law passed
overwhelmingly by Congress or Russia's cyberattacks,
disinformation, and other destabilizing activities?
Mr. McFaul. I think that is a great way to think about it,
because we never do--we do not think about the nonevents from
our successful activities.
For instance, back in 2014, Putin had other ideas. He
wanted to take all of a place called Novorossiya, and first and
foremost, Ukrainian soldiers stopped that idea. But maybe
Ambassador Fried's work had something to do with that as well.
If we did not take those actions, things would be a lot worse,
and I think that is a really important concept to think about
the negative--including economic consequences. You know, I got
lots of phone calls from lots of people who do business in
Russia in anticipation of this hearing, as you can well
imagine, and I like this argument that in the long run this
could be more costly to us all if we are in a confrontation. So
remember the nonevents that we do not know that maybe we are
deterring that are beneficial to us and Europeans.
The last thing I would say, I am sorry, you cannot have
effective sanctions with zero cost for the ones that are
implementing sanctions. I do not know of a case in history that
there were effective sanctions that did not somehow affect
those that are doing the targeting. That is part of doing it,
and you have to do that in the national interest, not just the
individual interest of one company or one individual.
Senator Warren. Thank you. You know, Congress can only do
so much to confront Putin. We need a strong leader in the White
House who clearly understands this threat and is willing to
confront it. And right now we do not have one.
Thank you.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you and
the Ranking Member for having these hearings. I know he is not
here anymore, but I want to thank Senator Corker, Chairman of
the Foreign Relations Committee, and Senator Menendez. They had
hearings, as Senator Corker mentioned, yesterday with some
witnesses, including Ambassador Nick Burns, who worked on a lot
of these issues, and the President of the Council on Foreign
Relations, Richard Haass. So I think it is really important
that both the committees, all committees be working together,
along with the Intelligence Committee, Senator Warner and
others.
I want to thank all of you for your testimony, and, Ms.
Conley, you pointed out that we have a lot of things we want to
focus on when it comes to U.S.-Russia relations, but we do have
to prioritize. And I do agree that priority number one needs to
be defending the integrity of our democracy and our election
system as we continue to pursue those other issues. And that is
exactly why Senator Rubio and I introduced the DETER Act,
because we heard testimony from Secretary Pompeo in the Senate
Foreign Relations Committee that we have clearly not deterred
Russian efforts to interfere in our elections. The Trump
administration national security team, everybody other than
President Trump himself, has been very clear that the Russians
continue to try to interfere. And the idea behind the DETER Act
is simply to say up front and in advance to Vladimir Putin,
``If you cross this threshold, you will face these penalties.''
Deterrence has been part of our strategy when it comes to, you
know, our military strategy against the Russians, and that is
why we introduced this.
Ambassador McFaul, thank you for your service and for your
testimony today in support of the DETER Act. Could you just
elaborate a little bit more on your experience with Putin and
why you believe that if you say up front here is the price you
will pay if you engage in that conduct, that it probably has a
better chance of success than if you after the fact take action
where for him there is no way he can necessarily change his
behavior to get out of it?
Mr. McFaul. Well, again, I do not want to exaggerate my
interactions with him. I have been in summits with him a half-
a-dozen times. I met him first in the spring of 1991, so we go
way back. I would not say we are exactly Facebook friends right
now.
I think it is very hard for him to move back from a
position. I mean, you just alluded to it. He is a very stubborn
guy that way. He is going to lose face, and he will dig in. And
I am very struck by even in the moment of euphoria--at least in
Russia there was euphoria about a new beginning with President
Trump--he has not done one thing for U.S.-Russia relations to
help out President Trump. To my mind, not one single positive
thing in U.S.-Russia relations. I could give you half-a-dozen
he could have done to help that. He has not done that. So that
is not the way he behaves. He expects us to lose interest, us
to fade away, our European allies--I just want to associate
with what everybody else said. Nothing we do is any good if it
is not with them.
Whereas, the other way around, the prospective this is what
will happen if he does this, that creates tension within his
inner circle, within his Government. It creates an opportunity
for deliberation about cost-benefit analysis behind closed
doors that I think gives more prospect of a positive, in terms
of our interest, deterring him. And I think ``deter'' is
exactly the right word.
Senator Van Hollen. Ambassador Fried, you and I have
talked. We are in the process of having discussions on Capitol
Hill between Republicans, Democrats, and others about changes
that we can make obviously to the DETER Act. No bill is perfect
as introduced, and Senator Rubio and I are very open to making
those changes. But could you also comment on the overall sort
of structure of the DETER Act, laying out these clear, bright
lines? As you pointed out, President Putin needs to know that
we believe what Trump's national security advisers have been
saying, and that we should not let President Putin think he
can--I think you said ``sweet talk''--sweet talk President
Trump. And the way to do that, as Ambassador McFaul says in his
written testimony, is for the Congress and President Trump to
``sign into law preemptive sanctions that would trigger
automatically in response to future malign behavior,''
including election interference. Do you support that overall
structure?
Mr. Fried. Just as Mike McFaul said, I like the notion of
hanging out the prospective sanctions. I think that works as a
deterrent. Senator Menendez had a point when he said, look, the
Russians have already done bad things. So then the challenge is
to sort out the different tools we have to put pressure on the
Russians because of their various tracks of malign behavior.
So where do we want to increase the sanctions now? Where do
we want to hold sanctions back for future, you know,
prospective malign behavior? That needs to be sorted out, and
we have to think it through in a disciplined way so that there
is clarity. Easier said than done. But I like the DETER Act's
focus. I like a lot of the individual sanctions provisions in
DASKA. And I am cognizant of the fact that for Ukraine you both
want to deter future bad Russian actions, but you also want to
increase the pressure on Russia so that they fulfill the terms
of Minsk, because that is a decent framework for a solution.
Now, that is complicated stuff, and it is made more
complicated by the fact that we do not--that the Administration
cannot hold to a consistent line on Russia policy mainly
because of, frankly, the President, not because of the people
in the Administration. But that undercuts the value of what the
Congress is trying to do. So hard but not insolvable.
I am also heartened by the fact that so many of the actors
in Congress, in the Administration, and outside are basically
moving in the same direction trying to do the right thing.
Senator Van Hollen. Thank you. And it is complicated, but
here is what is simple and straightforward: As you all have
said, if we do not take action and we do not make it clear what
the consequences of action are, they are going to run all over
us. And so we better do that sooner rather than later.
Mr. Fried. Yes, sir. I agree.
Chairman Crapo. Senator Jones.
Senator Jones. Thank you, Mr. Chairman.
Ambassador McFaul, let me add my appreciation for
everything, and I was glad to be at least part of your--I did
not join the Senate until January, but I was glad to be part of
the Senate resolution with your support and the others. And I
appreciate everybody for being here today.
Ambassador McFaul, I want to go back a little bit because I
wanted to go where Senator Reed and you went earlier, and that
is about whether or not we are really going to see a lot of
interference in these elections.
We have got two sets of sanctions. Crimea and Ukraine are
one set. But everybody is concerned about 2018, and my real
concern is that they are just going to lay low and declare
victory by laying low and we do not do anything.
What is it that we can do right now in which we start
preparing for the possibility that there is only a small amount
of interference that we do not see a whole lot and that this
Administration can then say, ``See what we have done,'' and
that we let our guard down for 2020? Which I think is the more
important election that the Russians will focus on. What can we
start doing now in this Congress to try to make sure that we
inoculate ourselves from that possibility as well as a 2018 in
which we have got all manner of interference as obvious as it
was in 2016? And anybody can answer that, by the way.
Mr. McFaul. I will go first, but I will try to be quick.
Number one, I want to underscore it is a hypothesis I have
about Putin. I do not know it to be true, but I am worried
about it because of complacency. And so to me there are four
elements, but let me just focus on three.
One, I think the DETER Act is a great way to get ready for
2020 so that they can have a deliberative idea about whether it
is worth it or not to get involved to the same extent they did
in 2016. And I think that will be a bigger, more healthy
debate, because I know of people around Putin--not in his inner
circle--that do not think that that intervention was such a
great thing for Russia's long-term national security interest
and economic interest.
Number two, resilience, we have talked about it. I
completely agree with what my colleague said. We missed an
opportunity to have a 9/11-like Commission and to have a whole-
of-Government, and all the things we did after September 11th
we should have done after 2016. That boat has left. But focus
on resilience for 2020. Basic things, really basic things like
paper ballots, dual authentication for anybody that works on a
computer that counts votes. I do not need to go through the
list, you know them, but they are really, really basic.
We have people working on these things at Stanford to test
them, and they are frightened by how little has been done.
Senator Jones. So we do not let up.
Mr. McFaul. We do not let up, no. We have got a lot of work
to do on the resilience.
Senator Jones. And I completely agree, it is a total
hypothesis. But everything that I have heard from everyone here
and in my time in the Senate is that Putin is very
opportunistic, and if he sees an opportunity to lay low for a
little bit in order to get sanctions relieved or not have
anything down the road, I think he will do it.
But let me go real quick, because we have alluded to it a
couple times. As an old prosecutor, I would like to just go
ahead and get it on the record. Let us talk a little bit about
the abuses at INTERPOL and are there things that we could do in
this Senate right now that we could strengthen that up? But I
would like to just go ahead--we have talked about it, and we
have talked around it. What is going on and what can we do?
Anybody.
Mr. McFaul. Well, I have become a big expert on INTERPOL
lately, not by choice, and what I would just say is there are
many countries in the world, not just Russia--they tend to be
autocratic countries--that abuse the INTERPOL system, and they
do not do red notices, by the way. This is what I have learned.
They use this diffusion system, which is a lot--it is easier to
do. It is bilateral, and, therefore, it is much harder for--it
does not go through Lyon. And using that for political
purposes--usually, it is against, you know, opposition leaders.
You know, it is usually against Ukrainians, by the way, and not
many Americans. But more attention to that, and just say, you
know, Russia needs to be kicked out of INTERPOL. That is one
thing one could say if they continue to abuse the INTERPOL
system. I like the language that is in Section 707 to say that
there will be sanctions about it.
But, third, it really has to be the Administration, a very
strong message to Vladimir Putin that says, ``If you ever stop
any of our people in any third country, just even for a couple
hours, there will be consequences.'' And then say to those
third countries that participate in this schema that there will
be detrimental relations in our bilateral relationship, right?
Both of those need to be targets of our diplomacy to stop this
abuse. And it is not just Russia, but Russia is a major abuser
of that system right now.
Senator Jones. All right. I think my time is up. I
appreciate it. I may have some more, Mr. Chairman, for the
record.
Let me say given Russia's ability to produce misinformation
in this country, you might want to go ahead and check your
Facebook page. You may very well be friends with Putin today.
[Laughter.]
Mr. McFaul. Good point.
Senator Jones. Thank you, Mr. Chairman.
Chairman Crapo. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. I would like to
thank all the witnesses for your service to the country.
Ambassador, thank you for everything you have done for our
country and for all of those people that you talked about.
Please know--and I know that it has been mentioned before--we
are on the same team, and we have your back.
Mr. McFaul. Thank you.
Senator Donnelly. And we will continue to do so. For
anybody who is listening, please know we have his back.
The first tranche of mandatory sanctions for Russia's use
of chemical weapons in the U.K. has recently been imposed. A
stronger round of sanctions that potentially includes further
export and import restrictions, a downgrading or a suspension
of diplomatic relations, and a termination of landing right is
supposed to take place in just under 3 months.
This goes for all of you. Are any of you aware of any
efforts within the Administration to discuss this issue with
Russia?
Mr. Fried. I cannot speak from direct knowledge, but I
suspect that the Administration has tried to have a dialogue
with the Russians. I think that the Russians would have blocked
it and it will go nowhere. That is a pretty safe prediction. So
I think we will end up with the Administration grappling with
the second tranche of sanctions under the CBW Act.
Senator Donnelly. What is your opinion on how the Russians
are going to react to these sanctions, including the second
round?
Mr. Fried. Well, their instant reaction will be to scoff at
them in public, dismiss them and belittle them. But this is a
general point worth making. We should look past the initial
tranche of Russian bluster and denial that sanctions have any
impact. I remember the 1980s and the dynamics. The Soviets then
went from denying that any of the pressure the Reagan
administration would have the slightest effect on them to
acknowledging that they could not go on like that.
When I was a young diplomat in the Soviet Union in the
early 1980s----
Senator Donnelly. You still look like a young diplomat to
me, sir.
Mr. Fried. Well, I had hair then.
[Laughter.]
Mr. Fried. What you heard were Russians looking around and,
when they thought nobody was listening, saying, ``We cannot go
on like this.'' It was the early 1980s. I am starting to hear
the same thing, and I think Mike McFaul may have heard it more.
Russians quietly are beginning to have greater doubts about
where Putin is leading them.
Pressure tactics can have a cumulative impact, and they can
bring results when you do not expect it. We did not know that
the Berlin Wall was going to fall, you know, before it fell. I
do not want to be extravagant, but because there has been so
much emphasis in these hearings about Russian strength and the
weakness of our response for various reasons--which I get. I am
not arguing with that. There is a larger strategic point----
Senator Donnelly. Well, I apologize. I only have so much
time. What do you think--this is for all of you--is the number
one action Congress and the White House can take in the next 6
months to change Putin's calculus?
Mr. Fried. I think strong, carefully crafted sanctions
legislation, combining DASKA and DETER, would be a good, strong
signal.
Senator Donnelly. Ambassador.
Mr. McFaul. I agree. I actually agree. And I base that
assessment on the very strong reaction that you got from the
Prime Minister and many other actors about this pending
legislation. They are watching very closely what you are doing.
Senator Donnelly. Ms. Ziemba.
Ms. Ziemba. I agree as well. The broader importance,
though, I think becomes making sure that in those sanctions and
in the implementation, the enforcement, which is obviously the
Administration level, that there is a focus on actors who--that
it is not necessarily just all Russians, and differentiating
and linking it to the behaviors. I recognize there is a whole
part of the sanctions literature that can argue for targeting
an entire country. My worry is if all of Russia was targeted,
then that would increase the power of some of those who have
been benefiting from sanctions.
Ambassador Fried is definitely correct that there can be
vulnerabilities built up over time. We do not know. I just fear
we are not at that tipping point yet.
Senator Donnelly. Ms. Conley.
Ms. Conley. President Putin is under the mistaken belief
that democracy is for sale. We have to make sure that Russian
illicit financing has no safe home in Europe or the United
States or any enabling services that that money provides. That
we can do right now.
Senator Donnelly. Mr. Fried, one last question, and that is
in regard to North Korea. What do you think Putin's goal is
there? Is it to make it as difficult for the United States in
relations with North Korea as he possibly can?
Mr. Fried. Yes.
Senator Donnelly. Well, that is a succinct answer.
[Laughter.]
Senator Donnelly. And I appreciate it. Thank you, Mr.
Chairman.
Chairman Crapo. You might get the record, Ambassador Fried,
and you, Senator Donnelly, for the most succinct questioning of
the Committee.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman, and thanks to
all of our guests today. You guys are presenting really
thought-provoking and important testimony and questioning.
You know, I wonder where he got the idea democracy is for
sale. Huh, I wonder. That is a rhetorical question.
You know, when we look at Putin--and I had someone school
me early on as we looked at kind of long-term Russian politics,
and he reminded me, this young man, that Putin's position, you
have to kind of look at him like the czar. You know, we kind of
think about our democracies and political leadership, but he
really holds the cards to all the financial ability for people
to be successful, and that puts him in a very powerful
position.
The ability to interfere with that kind of power seems to
me to be the pressure point that we want to exert when we look
at sanctions, the things that threaten the internal stability
of Putin to continue to wield the kind of czar-like authority
that he has.
So if we were going to be very strategic and very surgical
about focusing our attention, where would we put it? And I want
to start with you, Ms. Conley. What do you think? You seem to
have a pretty good idea of what happens within the Russian
economy.
Ms. Conley. Well, thank you, Senator. I think, again, it
is--President Putin has really consolidated his inner circle
and his strength. In fact, the last 4 years of these sanctions
have proved a bit of a loyalty test, which is why I find it
striking that many of his inner circle have their funds not in
Russian banks but to be protected overseas so they cannot be
used for higher purposes in this State.
I think if we can apply pressure to the inner circle that
he relies on very closely to stabilize the security services,
his national guard led by his former bodyguard, we can get very
specific to those individuals that allow Mr. Putin to continue.
That is not harming the Russian people. That is minimizing the
sacrifice that our companies and our allies have to take for
higher principles. If we can focus like a laser beam on those
individuals that sustain his own personal power structure, that
could make an important difference. But these are very
targeted, they are very specific.
So, for instance, with Mr. Deripaska, it is not going after
Rusal. It is going after Mr. Deripaska very specifically and
where his financings are.
Senator Heitkamp. If I can just comment on that, I found it
very interesting that we gave him enough advance notice so he
could divest his interest. You know, it just did not seem to me
to be a very strategic response.
I would like everyone to answer that question, if you
could, but I wanted to make sure that we understood maybe the
economic implications. Ms. Ziemba.
Ms. Ziemba. I think, again, back to targeting some of those
in the inner circle and who end possibly some smaller--you
know, not State banks necessarily, but some banks that are
actually involved in the transfers of illicit finance and the
like. I remain somewhat concerned about the effectiveness of
targeting sovereign debt just because of the limits and because
it could be another example of that sort of loyalty test that
Ms. Conley just mentioned. And I think we have seen some of the
bluster in the Russian press, even this morning has suggested
that there is cash available in that context. So I think
focusing where it hurts and enforcing some of the divides
within Russia, just as Putin has been trying to do within our
society.
Senator Heitkamp. Ambassador Fried.
Mr. Fried. I think you have heard echoes of a debate in the
Russia and sanctions community about what works best. I think
everybody agrees--and you have heard it on this panel--that we
ought to be going after the bad actors, the cronies close to
Putin. There is a difference about how much we should go after
the sectors like cyber and finance. So far we have done both. I
think that we ought to be pushing harder on the individual
sanctions for the reasons that you have heard, and I agree with
my colleagues. I am not willing to give up on sectoral
sanctions because I think if we finally craft it, that can also
be useful.
I think that there will be a rallying around the flag
effect, but I do not think that will last. And in the end I
think that there are advantages to pressure. But the advice you
have heard from other members of the panel strikes me as sound,
so I think being discrete about sectoral sanctions and
aggressive about going after bad actors is the way I would move
the sanctions policy.
Senator Heitkamp. Ambassador McFaul.
Mr. McFaul. Well, the first point, I just want to
underscore a very important analytic point you made, Senator,
and I think some people get confused about the nature of
Putin's rule. We think that there are these capitalists, these
owners, and these sanctions hurt them, and then they go lobby
Putin to change the policy.
What is wrong about that analytic framework is they are all
rich because of Putin. They are dependent on Putin. So they
cannot go to him and say, ``Hey, make me richer, you know, you
have got to change your policy in Ukraine.'' And he is, like,
``What do you mean, man? You are a billionaire because of me.''
That is number one.
Number two----
Senator Heitkamp. He is Santa Claus.
Mr. McFaul. And he has got leverage on them. They cannot go
to a court to protect their property rights. They protect their
property rights by being in good standing with Putin. That is
the inner circle.
The paradox of sanctions is that the outer circle, the
people that are actually doing business in the international
world, including Mr. Deripaska, including Mr. Vekselberg, are
the ones that are more susceptible to our sanctions--right?--
and also are the ones that are least connected to Putin. And so
we have got to get our head around the fact that we are not
going to have this causal effect as quickly as we want, and
that then leads me to the last thing I want to say about this.
Even if you are not going to change his behavior, you do the
sanctions on the people that are responsible for all this
egregious behavior because it is the right thing to do. And do
not forget that Ukrainians are watching that, that Estonians
are watching that, and that Russians, who are against this
regime, are also watching that.
So when it has the causal effect--I think Ambassador Fried
made a good point. We are not very good--by the way, the
Government is not very good at predicting when these things
happen. Neither is academia, I can tell you that. But we should
not underestimate the kind of churning that happens there. So
sometimes just doing the right thing, you do it because it is
the right thing to do, not because you think you are going to
change the behavior.
Senator Heitkamp. I am completely out of time, but,
otherwise, I would ask the effect of belittling or in some way
diminishing the effect of Article V, what that has done in
terms of internal politics. We cannot take that off the table,
and that goes to speaking with one voice.
Thank you, Mr. Chairman, for your indulgence.
Chairman Crapo. Thank you, Senator Heitkamp, and thank you
to all of our witnesses. That concludes the testimony. We have
had a very helpful discussion here today, and I also think that
the written testimony provided has been very helpful as well.
We appreciate, again, the help that all of our witnesses have
brought to us as we deal with this issue.
For Senators, questions for the record are due Thursday,
September 13th, and you probably will get some questions
following the hearing. We ask that you respond to those
questions as quickly as you possibly can.
With that, the hearing is adjourned.
[Whereupon, at 12 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
The Committee meets today for its second of three hearings on
sanctions against the Russian Federation for its malign activities
directed against the United States, its allies and spheres of
influence.
I thank our panel of outside expert witnesses today, most of whom
are former Administration officials, who will help the Committee better
understand the current U.S. posture toward Russia.
Testifying today will be Ambassador Dan Fried, now at the Atlantic
Council, but who capped off a 40-year State Department career as the
Obama administration's sanctions coordinator; Stanford Professor
Michael McFaul, also at the Hoover Institution, who was U.S. ambassador
to the Russian Federation for the 2 years leading up to Putin's
invasion of Crimea, and Heather Conley, now with CSIS, but who was also
on the Russia desk in the Bush administration's State Department.
Rachel Ziemba, our sole Government outsider, now with the Center
for New American Security, will share her particular expertise on the
interlinkages between economics, finance, and security issues, with
regard to sanctions, Russia's economic resilience and the role of
sovereign wealth in all of this.
Two weeks ago, current Administration witnesses informed the
Committee of efforts to implement the Countering America's Adversaries
Through Sanctions Act, or ``CAATSA'', which was enacted in August 2017
and largely crafted by this Committee, and what political and economic
effects of that implementation have had.
Basically, the Administration reported that over the last year it
had sanctioned some 230 individuals and entities through its use of
CAATSA and its own administrative authorities.
Those targeted include the heads of major State-owned banks and
energy companies, as well as some of Putin's closest associates or
oligarchs.
On the issue of electoral interference, the Homeland Security
official reported that malicious cyberoperations are not just State-
run, not just run by a single actor and remain one of the most
significant strategic threats to the United States.
Beyond any use of sanctions, which Treasury imposed against several
Russian actors for interference in the 2016 elections, Homeland
Security further testified that it is working aggressively to support
State and local efforts to secure the 2018 elections.
They also made clear that this work must not only continually
evolve, but never become complacent because those seeking to interfere
and disrupt are on the cutting edge of technology.
A number of the Members on this Committee, on both sides of the
dais, encouraged the Administration to do more, and soon.
Whatever the economic effects of these sanctions have had over the
last year, it has escaped no one's attention that Russia is still in
Crimea, and the Kremlin still exercises violently destabilizing
activities in Ukraine and Syria.
Moreover, since CAATSA implementation began, Putin has ordered the
use of chemical weapons to attack citizens of U.S. allies at home, and
continues his efforts to subvert the democracies of the United States
and its European allies through complex disinformation campaigns and
outright cyberattacks.
Getting sanctions `right' is a difficult exercise for Congress and
the Administration alike.
It took decades for sanctions to take real effect in Iran. And,
Putin's Russia is not like Iran or North Korea, for that matter, at
least, not in any way other than its penchant for engaging in malicious
behaviors at home and abroad.
In the case of Russia, any constructive use of sanctions is
complicated further by the level of Russia's integration into the
global economy and all the attendant unintended consequences,
contagions and spill-overs that come with it and which threaten to
destroy the potential for needed multilateral application of sanctions
against an economy like Russia's.
There is no question that Putin must pay for his actions and that
the United States has the ability to impose real costs against Moscow,
even as it increases its own defenses against future attacks.
The only question is how the United States will go about imposing
those costs.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Today we gather to further assess Russia's persistent efforts to
attack the U.S. and our allies via cyber, influence and other campaigns
directed at our most critical infrastructure; and to develop ways to
strengthen U.S. responses to those attacks.
In our first hearing, senior Administration officials testified on
sanctions and the protection of critical infrastructure. Directly
following that hearing, all Senators had an opportunity to be briefed
at a classified level on preparations by the Federal Government,
working in cooperation with State and local authorities, to secure our
electoral process for the upcoming midterm elections.
Today we'll hear outside perspectives on the effectiveness of U.S.
sanctions, and on new tools, including new sanctions authorities that
might usefully be deployed against Russian attackers. Bolstering that
sanctions toolbox--and then ensuring the tools are actually used to get
the job done--is critical.
We'll hear from those outside the Administration--including
witnesses with extensive and distinguished diplomatic experience in
dealing with Russia under Republican and Democratic Administrations
over decades--what they think will most likely dissuade the Russians
from continuing these attacks.
While sanctions have had some effect on Russia's economy, as they
have been applied it's not clear they are doing much to actually change
Russian behavior. And that, after all, is the goal. Sanctions are a
means to an end, not an end in themselves. We seek real and immediate
changes in Russian behavior, and we are not yet seeing it.
There is little dispute sanctions are not yet having their intended
effect: Russia remains in Crimea, its proxies are still in eastern
Ukraine, it continues to support Assad in Syria, and to attack our
elections and other critical infrastructure using sophisticated
cyberweapons. It has attempted to assassinate British citizens with a
chemical weapon, and killed an innocent bystander in the process. It
has fostered sanctions evasion and other illicit activity around the
world.
Some of today's witnesses--including those with deep bipartisan
experience in U.S.-Russia relations--have been critical of the
Administration's efforts to date, arguing they have been inadequate and
are undercut by President Trump's reluctance to criticize Putin and his
Government.
President Trump's efforts to try to undermine what are established
conclusions of fact by the U.S. intelligence community about Russia's
involvement are well documented. And Russian attacks on our elections
and critical infrastructure like energy plants, utility systems,
aviation, manufacturing and private sector business systems are
continuing.
As our next elections approach, it is long past time for the
President and Congress together to send a much more powerful and direct
message to Putin and those within his circles: If you continue
cyberattacks against us, you and your Government will pay a heavy
economic, diplomatic, and political price.
As Ambassador McFaul notes in his testimony today, there's a
tension between what sanctions professionals at Treasury and State are
doing and saying, and what the President is doing on Russia.
Our Government needs to speak with one voice. The President should
clearly state how he will use CAATSA to forcefully respond to Russian
attacks, issue an executive order that clearly outlines the sanctions
consequences for continuing attacks, and implement that order if
attacks continue.
In addition to urging the Administration to use CAATSA more
effectively, I think most of us agree Congress should also do more.
Congress crafted these tough Russia sanctions, enacted last August by
overwhelming majorities in both chambers. We should build on that
bipartisan consensus.
Today we should focus with these experts on the broader strategic
questions: What active cyberattacks are the Russians directing against
our elections and critical infrastructure? And what range of powerful
economic, trade, financial, diplomatic, and political tools can we
deploy now to deter those threats?
What will it take to actually deter Putin, by sharply increasing
the price he must pay for them? I know those are the questions my
constituents are asking. Our large Ukrainian community in Ohio knows
firsthand the dangers of Russian aggression.
This hearing should be an opportunity to get answers from those
long involved in U.S.-Russia policy. I especially welcome our
distinguished former Ambassador to Russia Michael McFaul, who has had
his own recent political and legal struggles with Mr. Putin, but has
acquitted himself gracefully throughout.
I welcome Ambassador Fried, former sanctions coordinator at State
with a distinguished record of decades of bipartisan service in U.S.-
Russia policy. Ms. Rachel Ziemba has done extensive economic research
on sanctions policies and their effects, as has Ms. Heather Conley of
CSIS. I look forward to hearing what effects you think current
sanctions are having on Russia's economy and behavior, and your ideas
on how we should more forcefully confront the threats posed by Russia.
Thank you Mr. Chairman.
______
PREPARED STATEMENT OF MICHAEL A. MCFAUL
Peter and Helen Bing Senior Fellow at the Hoover Institution, and
Professor of Political Science, Director and Senior Fellow at the
Freeman Spogli Institute for International Studies at Stanford
University, and Former U.S. Ambassador to the Russian Federation (2012-
14)
September 6, 2018
In the last several years, the Russian Government has taken
increasingly belligerent actions abroad, threatening not only American
national interests but also violating international laws, norms, and
values. Russia has not always behaved as a rogue or outlaw State. Under
Soviet leader Mikhail Gorbachev and Russian President Boris Yeltsin,
the Kremlin adopted a different, more cooperative approach towards the
United States and the West and adhered more closely to the rules of the
game of the international system. Under the leadership of President
Vladimir Putin, however, especially after his return to the Kremlin in
2012, Russia has moved in the opposite direction, defying the West,
challenging international rules, and aggressively undermining American
national interests. In parallel, Putin has consolidated autocratic rule
inside Russia, a lamentable trend that correlates with Russia's growing
belligerency abroad.
While Putin remains in power, Russian foreign policy is unlikely to
change. But that fact should not lead to the erroneous conclusion that
the United States--together with our allies--cannot constrain, contain,
or deter Putin's bad behavior. By developing a sustained, multipronged
strategy of containment regarding most issues, combined with engagement
on a limited agenda, the United States and the West can begin to reduce
Russia's disruptive, dangerous, and damaging actions in the world. Part
of that strategy must include a new and improved sanctions regime.
The Facts on Putin's Belligerent, Criminal Behavior
Tragically, Russian foreign policy has become increasingly
belligerent and rogue during the almost 20 years of Putin's rule.
In August 2008, Russia invaded Georgia. \1\ In the wake of that
war, Moscow recognized Abkhazia and South Ossetia as independent
countries, changing de facto by force the borders of the sovereign
country of Georgia. This Russian action violated international laws and
norms and adversely affected American national interests.
---------------------------------------------------------------------------
\1\ Dmitry Medvedev had been inaugurated as Russian president
months before this war, but Prime Minister Putin assumed operational
control of this military intervention.
---------------------------------------------------------------------------
In February 2014, Russia invaded Ukraine. Russia first seized
control and then annexed Crimea. Annexation is illegal and taboo in the
international system. \2\ After annexation proved easy and cheap, Putin
fomented separatist movements in eastern Ukraine, sparking a civil and
interstate war, since Russian soldiers and intelligence officers have
been directly involved in the fighting. Putin also provided the rocket
that shot down MH17 over Ukraine, killing all 283 passengers and 15
crewmembers on board, another criminal act. \3\ Since the fighting
began in eastern Ukraine, over 10,000 people have died and roughly two
million Ukrainian citizens have been displaced. During World War II and
before, dictators annexed territory in Europe. But during the Cold War
and after, annexation ceased to be a practice in European politics,
until 2014.
---------------------------------------------------------------------------
\2\ Turkey invaded and seized control of part of Cyprus in 1974,
but never annexed this territory, instead, recognized the Turkish
Republic of Northern Cyprus (TRNC) in 1983, similar to Russia's
recognition of independence of Georgian regions, Abkhazia, and South
Ossetia.
\3\ After a joint investigation was completed, the Dutch
Government announced that they will seek to prosecute those responsible
in Dutch courts after an effort to set up an international tribunal had
failed. ``Statement by the Minister of Foreign Affairs on MH17, 5 July
2017'', Government of the Netherlands, July 5, 2017, https://
www.government.nl/latest/news/2017/07/05/statement-by-the-minister-of-
foreign-affairs-on-mh17-5-july-2017.
---------------------------------------------------------------------------
In September 2015, Putin deployed the Russian military to Syria
with the mission to prop up a ruthless dictator, Mr. Assad. Russia's
ally in Syria used illegal chemical weapons to kill innocent civilians
in a violent campaign of suppression that started against peaceful
protestors and then metastasized into a civil war. Many external
observers have labeled Assad use of chemical weapons and other military
actions against civilians as crimes against humanity, \4\ yet Putin
continues to back him. Some of Russia's own military operations in the
Syrian war, including the carpet-bombing of Aleppo, also have been
portrayed as crimes against humanity. \5\
---------------------------------------------------------------------------
\4\ ``Amnesty Slams Syrian Regime for Crimes Against Humanity'',
DW, November 13, 2017, https://www.dw.com/en/amnesty-slams-syrian-
regime-for-crimes-against-humanity/a-41352848; and Lizzie Dearden,
``Syria Conflict: U.N. Report Accuses Assad Regime of Massacres and
Crimes Against Humanity'', Independent, August 27, 2014, https://
www.independent.co.uk/news/world/middle-east/syria-conflict-un-report-
accuses-assad-regime-of-massacres-and-crimes-against-humanity-
9694116.html.
\5\ Human Rights Watch, Syria 2017, https://www.hrw.org/world-
report/2018/country-chapters/syria; and ``Russia/Syria: War Crimes in
Month of Bombing Aleppo'', Human Rights Watch, December 1, 2016,
https://www.hrw.org/news/2016/12/01/russia/syria-war-crimes-month-
bombing-aleppo.
---------------------------------------------------------------------------
In 2016, Putin violated American sovereignty. The Russian president
used several instruments--including theft and then publication of
private data, deployment of Russian State-owned and State-controlled
conventional media, social media, bots, trolls, and fake accounts, as
well direct engagement with the Trump campaign--to try to help Donald
Trump win the 2016 presidential election. Russian State-sponsored
actors also sought to exacerbate American political polarization more
generally. Putin and his proxies also may have used other means,
including money and ``kompromat,'' to sway the outcome of the election
and influence subsequent actions by President Trump. We must wait for
the outcome of the Mueller investigation to understand the full extent
of the Russian operation to influence our vote and subsequent politics
and policies. But we know already that Putin's actions in 2016
adversely affected American interests and violated international norms.
During the Cold War, the Kremlin never violated American sovereignty so
illegally, aggressively, and audaciously.
Since the 2016 presidential election, the Russian State and its
proxies continue to use traditional and social media to spread
disinformation and sow division in American society. Russian Government
officials and their allies also continue to seek partnerships and
cooperation with like-minded Americans. \6\ This Russian campaign
inside the United States is part of a global effort by Putin to win
over ideological allies within democracies as a means to change their
policies towards Russia. Putin has anointed himself as the global
leader of nationalist, nativist, conservative (as defined by him)
movement fighting against the decadent, liberal West. Putin also
cultivates an image of a strong, virile ruler--bare chested fishing,
hunting, horseback riding and all that--in contrast to weak democratic
leaders in chaotic democratic societies. Putinism has attracted
ideological allies sometimes in the Government and sometimes in the
opposition in Hungary, Italy, Czech Republic, Turkey, the Philippines,
Austria, the Netherlands, Germany, France, the United Kingdom, and the
United States. \7\
---------------------------------------------------------------------------
\6\ Casey Michel, ``The Kremlin's California Dream'', Slate, May
4, 2017, http://www.slate.com/articles/news--and--politics/foreigners/
2017/05/why-russia-cultivates-fringe-groups-on-the-far-right-and-far-
left.html; and Sharon LaFraniere, Adam Goldman, ``Maria Butina,
Suspected Secret Agent, Used Sex in Covert Plan, Prosecutors Say'', The
New York Times, July 18, 2018, https://www.nytimes.com/2018/07/18/us/
politics/maria-butina-russia-espionage.html.
\7\ Bob Dreyfuss, ``Is Steve Bannon Trump's Link to Putin and the
European Far Right?'' The Nation, March 19, 2018, https://
www.thenation.com/article/is-steve-bannon-trumps-link-to-putin-and-the-
european-far-right/; Timothy Snyder, The Road to Unfreedom. Russia,
Europe, America. Penguin Random House, 2018; Fabrizio Tassinari and
Miguel Poiares Maduro, ``Why European Populists Idolize Putin and
Trump'', The Washington Post, July 16, 2018, https://
www.washingtonpost.com/news/theworldpost/wp/2018/07/16/trump-putin/
?utm_term=.f4daad0f11fc; Ronald Brownstein, ``Putin and the Populists,
The Roots of Russia's Political Appeal in Europe and the United
States'', The Atlantic, January 6, 2017, https://www.theatlantic.com/
international/archive/2017/01/putin-trump-le-pen-hungary-france-
populist-bannon/512303/; Jon Stone, ``Italy Breaks With European Allies
and Voices Support for Russia After Populist Party Takes Power'',
Independent, June 6, 2018, https://www.independent.co.uk/news/world/
europe/italy-prime-minister-giuseppe-conte-russia-sanctions-end-
populist-five-star-vladimir-putin-crimea-a8385626.html; and William
Galston, ``The Rise of European Populism and the Collapse of the
Center-Left'', Brookings Institution, March 8, 2018, https://
www.brookings.edu/blog/order-from-chaos/2018/03/08/the-rise-of-
european-populism-and-the-collapse-of-the-center-left/.
---------------------------------------------------------------------------
In March 2018, the U.S. State Department assessed that the Russian
Government attempted to assassinate Sergei Skripal, a former Russian
intelligence officer living in the United Kingdom. Russian operatives
used illegal chemical weapons, violated British sovereignty, injured
innocents, and served notice to everyone around the world that the
Kremlin can come after you anywhere.
Skripal is not the only Kremlin foe attacked overseas. The tragic
assassination of Kremlin critic, Pavel Sheremet, in Kyiv, Ukraine on
July 20, 2016, remains officially unsolved. Others Putin considers foes
of his regime, like Boris Berezovsky (found dead in 2013 in London in
suspicious circumstances) and Alexander Litvinenko (killed in 2006),
which, a British inquiry concluded nearly 10 years later, was ordered
by the Kremlin, were similarly violations of British sovereignty. Even
in the United States, former Russian press minister Mikhail Lesin died
mysteriously in 2015 in Washington, DC. On occasion, Soviet leaders did
assassinate dissidents abroad, including most famously Leon Trotsky in
Mexico in 1940. But for many decades of the Cold War and post-Cold War
era, these practices were considered taboo, until recently.
In addition, the true perpetrators of several assassinations inside
Russia remain unresolved, including most recently the murder of former
first deputy prime minister Boris Nemtsov, in February 2015. Those
responsible for the wrongful death of Sergei Magnitsky in November 2009
have never faced justice. Nor has anyone gone to jail for the
assassination attempts against opposition activist Vladimir Kara-Murza.
Especially troubling are the number of Russian journalists who have
been murdered mysteriously, including most famously Anna Politkovskaya
in 2006, and most recently, Nikolai Andrushchenko and Dmitry Popkov in
2017. \8\ American journalist Paul Klebnikov also was killed in 2004;
those behind his tragic murder have never ben arrested.
---------------------------------------------------------------------------
\8\ The Committee to Protect Journalists count 38 Russian
journalist who have been murdered between 1992-2018 in Russia. See
Committee to Protect Journalists website, https://cpj.org/data/killed/
europe/russia/?status=Killed&motiveConfirmed%5B%5D=Confirmed&type%5B%5D
=Journalist&typeOfDeath%5B%5D=Murder&cc-fips%5B%5D=RS&start-
year=1992&end-year=2018&group-by=location.
---------------------------------------------------------------------------
In July 2018, at his Helsinki summit with President Trump, Putin
called for the interrogation and arrest of several former U.S.
Government officials (including me) and one currently serving staffer
here at the U.S. Congress, Kyle Parker. For performing our jobs in the
U.S. Government, we are accused falsely of violating Russian law.
Again, in a now familiar pattern, by calling for the interrogation and
hinting as his Government plans to indict American officials without
any evidence about illegal activities, Putin's action violated
international norms. \9\ Unfortunately, Russia has a long track record
of violating INTERPOL procedures and practices in seeking to detain
innocent people in third countries. Putin's ``incredible offer''
proffered in Helsinki obviously served no American national interest
but also violated basic diplomatic protocol. During the height of the
Cold War, no Soviet leader sought to interrogate or arrest American
Government officials.
---------------------------------------------------------------------------
\9\ Alexander Kurennoi, the spokesperson for the Prosecutor
General, gave more details about the alleged crimes these Americans had
committed, in a conspiracy with Bill Browder, in his press conference
the day after the Helsinki summit. You can watch the press conference
here: https://www.youtube.com/watch?v=he4RInnq44w&feature=youtu.be; See
also, ``Russian Officials Want To Question Former Ambassador Michael
McFaul and Other U.S. Officials in Their Investigation of Bill
Browder'', Meduza, July 17, 2018, https://meduza.io/en/news/2018/07/17/
russian-officials-want-to-question-former-ambassador-michael-mcfaul-
and-other-u-s-officials-in-their-investigation-of-bill-browder.
---------------------------------------------------------------------------
I could go on. But the point of this long but impartial list is to
remind this Committee that Putin is not only acting against American
national interest across several issue domains, but is also audaciously
violating international laws and norms. Many of these actions are
criminal. He should not be embraced; he must be deterred.
The Necessity of Sustaining and Expanding Economic Sanctions
For crimes, there must be punishments. Economic sanctions are a
blunt, but necessary tool for punishing illegal, belligerent Russian
Government behavior.
In 2012, the U.S. Congress rightly passed and President Obama
rightly signed the Russia and Moldova Jackson-Vanik Repeal and Sergei
Magnitsky Rule of Law Accountability Act, followed by the Global
Magnitsky Act in 2016. In 2014, the Obama administration rightly
sanctioned Russian individuals and companies in response to the
annexation of Crimea and Russian military intervention in eastern
Ukraine, and then 2 years later added additional sanctions in reaction
to Russia's interference in our 2016 presidential elections. In July
2017, the U.S. Congress rightly passed (and President Trump reluctantly
signed the following month) the Countering America's Adversaries
Through Sanctions Act in response to Russia's interference in the 2016
U.S. election, violation of human rights, annexation of Crimea and
military operations in eastern Ukraine. \10\ In April 2018, the Trump
administration implemented additional sanctions against seven Russian
oligarchs and twelve companies they own or control, 17 senior Russian
Government officials, and a State-owned Russian weapons trading company
and its subsidiary, a Russian bank. In August 2018, the Trump
administration rightly implemented additional sanctions in accordance
with the Chemical and Biological Weapons Control and Warfare
Elimination Act of 1991 (CBW Act), after issuing a finding that the
Russian Government used illegal chemical weapons to try to assassinate
Sergei Skripal and his daughter Yulia in the United Kingdom. The United
States Government has now sanctioned several hundred Russian
individuals and entities. \11\ Never in the history of U.S.-Russian
relations, including the most charged moments of the Cold War, have so
many Russians (and Americans, including me) been on sanctions lists.
---------------------------------------------------------------------------
\10\ H.R. 3364--Countering America's Adversaries Through Sanctions
Act, U.S. Congress website, https://www.congress.gov/bill/115th-
congress/house-bill/3364/text.
\11\ As Assistant Secretary of State for European and Eurasian
Affairs A. Wess Mitchell testified last month that Trump administration
actions include ``217 individuals and entities sanctioned, 6 diplomatic
and consular facilities closed or kept closed, and 60 spies removed
from U.S. soil.'' See Statement of A. Wess Mitchell, Assistant
Secretary of State for European and Eurasian Affairs, Senate Foreign
Relations Committee, U.S. Strategy Towards the Russian Federation,
August 21, 2018, https://www.foreign.senate.gov/imo/media/doc/
082118_Mitchell
_Testimony.pdf.
---------------------------------------------------------------------------
And yet, superficially, sanctions do not appear to have changed
Putin's behavior at home or abroad. Some, therefore, argue that
sanctions don't work, and should be abandoned in favor of other more
cooperative strategies of influence. I disagree.
First and foremost, sanctions are the right, moral punishment to
take in response to egregious, illegal actions even if they do not
change Putin's behavior. The United States must respond to annexation,
or violations of our sovereignty, or the use of chemical weapons. For
moral reasons, we believe as a Nation that crimes committed within the
United States must be met with punishment, even if the punishment does
not deter future crimes. The same principle must apply regarding
international behavior. Moreover, we must think of the counterfactual;
doing nothing would encourage even more belligerent behavior.
Demonstrating resolve to defend international laws, rules, and norms is
essential for the long-term preservation of international order.
In addition, sanctions implemented by the United States, Europe,
and other countries have produced negative effects on the Russian
economy.
Starting in the third quarter of 2014, the Russian economy
contracted for nine quarters; sanctions contributed to this decline.
\12\ By some estimates, sanctions were responsible for one-and-a-half
percent of GDP contraction in 2014. \13\ Others estimate that the
impact of sanctions, independent of falling oil prices, was as much as
2-2.5 percent for the first few years after Russia's intervention in
Ukraine. \14\ Hardest hit were Russian companies and banks seeking to
raise capital on international markets. In turn, according to the
EBRD's chief economist, Sergey Guriev, ``Russia's inability to borrow
has led to a dramatic depreciation of the ruble and a fall in real
incomes and wages.'' \15\ Capital outflows had also been steady for
years and then accelerated after sanctions, jumping from $61 billion in
2013 to $151.5 billion in 2014. \16\ In the wake of sanctions, foreign
direct investment also slowed, though numbers are now moving slowly in
positive direction again. Some future investment planned, we know, has
been canceled, including most dramatically Exxon-Mobil's decision to
suspend its joint investment projects with Rosneft, at one time
estimated to total $500 billion. Other potential foreign investments
that did not occur because of sanctions is harder to track--it's hard
to measure a nonevent--but anecdotally Western investors and companies
doing business in Russia have stated publicly and privately that
uncertainty about future sanctions has squelched interest in attracting
new investors to the Russian market. Most of those already in Russia
will fight to stay; those who may have thought about investing in
Russia market are now looking for less risky opportunities.
---------------------------------------------------------------------------
\12\ ``39 Russia Economic Report'', The World Bank, May 2018, p.
4, http://pubdocs.world
bank.org/en/162681527086868170/RER-39-Eng.pdf.
\13\ Isolating the independent causal impact of sanctions is
difficult to measure, especially when energy prices were also declining
at the same time. One-and-a-half percent is a conservative estimate
suggested by Russia's own prime minister, Dmitry Medvedev. ``Russian
Economy Shrinks 2 Percent as Sanctions Bite--Medvedev'', BBC News,
April 21, 2015, https://www.bbc.com/news/world-europe-32396792; The IMF
estimates ``sanctions and countersanctions could initially reduce real
GDP by 1 to 1\1/2\ percent. Prolonged sanctions, could lead to a
cumulative output loss over the medium term of up to 9 percent of
GDP'') Russia Country Report #15/211, International Monetary Fund,
August 2015, https://www.imf.org/external/pubs/ft/scr/2015/cr15211.pdf.
\14\ Evsey Gurvich, ``[How To Properly and Incorrectly Respond to
Sanctions]'', Vedomosti, May 16, 2018, https://www.vedomosti.ru/
opinion/articles/2018/05/16/769605-otvechat-sanktsii; For a
comprehensive assessment of the economic and political consequences of
sanctions against Russia, see Nigel Gould-Davies, ``Economic Effects
and Political Impacts: Assessing Western Sanctions on Russia'',
(Helsinki: Bank of Finland, BOFIT Policy Brief No. 8, 2018).
\15\ Sergei Guriev, ``Russia's Constrained Economy'', Foreign
Affairs, May/June 2016 issue, https://www.foreignaffairs.com/articles/
russia-fsu/2016-04-18/russias-constrained-economy.
\16\ ``UPDATE 1--Russia's Capital Outflows Reach Record $151.5 bln
in 2014 as Sanctions, Oil Slump Hit'', Reuters, January 16, 2015,
https://www.reuters.com/article/russia-capital-outflows-
idUSL6N0UV3S320150116.
---------------------------------------------------------------------------
The Russian economy did grow last year. \17\ But the IMF, World
Bank, and even some in the Russian Government predict a sluggish
recovery of 1.5-1.8 percent over the next several years, far below the
world average of 3 percent and well below other major emerging market
countries and even other countries to emerge from the collapse the of
Soviet Union. \18\ In his address to the Federation Assembly in 2018,
Putin stated explicitly, ``our economic growth rates should exceed
those of the world's. This is a difficult task but not instance case of
wishful thinking. This is a fundamental condition for a breakthrough in
resolving social, infrastructure, defence and other tasks.'' \19\
Western sanctions have frustrated Putin's ability to achieve this goal.
---------------------------------------------------------------------------
\17\ Henry Foy, ``Russian Economy Grows in 2017 for First Time in
Three Years'', Financial Times, February 1, 2018, https://www.ft.com/
content/707f64b8-0752-11e8-9650-9c0ad2d7c5b5.
\18\ Andrey Biryukov and Anna Andrianova, ``Russia To Lower
Forecast of Economic Growth'', Bloomberg, June 27, 2018, https://
www.bloomberg.com/news/articles/2018-06-27/russia-said-to-lower-view-
of-economic-growth-on-planned-tax-hike; and ``Russia Economic Report'',
The World Bank, issue 39, May 2018, http://www.worldbank.org/en/
country/russia/publication/rer.
\19\ Vladimir Putin, ``Presidential Address to the Federal
Assembly'', Official Kremlin website Kremlin.ru, March 1, 2018, http://
en.kremlin.ru/events/president/news/56957.
---------------------------------------------------------------------------
The negative effects on the Russian economy from sanctions have not
compelled Putin to quit his war in eastern Ukraine, leave Crimea,
abandon Assad, or stop sowing division in American society. Russia is
not a democracy, so societal pressure for policy change is difficult to
achieve at all and most certainly not very quickly. In all targeted
countries, the feedback loop from sanctions to economic downturn to
foreign policy change is a long and indirect one. In Iran, for
instance, it took several years (and a presidential election producing
a new leader) before sanctions deployed in 2010 helped to pressure the
theocratic regime to negotiate a nuclear deal. Similarly, sanctions
against apartheid South Africa took several years to yield changes in
Government policy, even though the South African economy was much more
dependent on the West than either Iran or Russia. Russia's economy is
much bigger than Iran's and arguably has more immunity to the highly
targeted Western sanctions imposed to date and that do not go nearly as
far as those implemented against Iran. \20\ Moreover, Putin and his
media outlets have portrayed Western sanctions as a policy to weaken
Russia and foment regime change. That alibi compels Russian patriots to
endure economic suffering in the defense of the Motherland.
---------------------------------------------------------------------------
\20\ On the effectiveness of economic sanctions more generally,
see Daniel Drezner, ``Targeted Sanctions in a World of Global
Finance'', International Interactions, 41-4, (2915), pp. 775-764; and
Rosenberg, Elizabeth, Zachary K. Goldman, Daniel Drezner, and Julia
Solomon-Strauss, The New Tools of Economic Warfare: Effects and
Effectiveness of Contemporary U.S. Financial Sanctions. (Washington:
Center for a New American Security, 2016); and Robert Blackwill and
Jennifer Harris, War by Other Means: Geoeconomics and Statecraft.
(Cambridge: Harvard University Press, 2016).
---------------------------------------------------------------------------
And yet, there are increasing signs of Russian societal
dissatisfaction. Putin's approval rating has fallen to its lowest level
in several years: in July 2018 Putin's approval rating was 67 percent,
a drop from 82 percent in April of this year or from 87 percent in July
2015. \21\ Putin's unpopular pension reform is the main driver of these
falling numbers, but economic sluggishness is also part of the
equation. Economic elites show incremental but growing signs of
division, especially between those who need access to the global
economy to prosper (that is, those who need access to international
markets, especially capitals markets, as well as trade, foreign
investment, and technology) and those more focused on Russia's domestic
economy. If Russia's economy continues to grow at anemic rates, we
should expect these anxieties about Putin's current foreign policy
course to grow.
---------------------------------------------------------------------------
\21\ [Odobrenie Institutov Vlasti, Levada-Center], July 31, 2018,
https://www.levada.ru/2018/07/31/odobrenie-institutov-vlasti-3/.
---------------------------------------------------------------------------
We also do not know about nondecisions or nonactions by the Kremlin
that may have been influenced by sanctions. For instance, in the spring
of 2014, Putin appeared ready to annex even more territory in eastern
Ukraine--a region called Novorossiya. But he stopped. Ukrainian
soldiers played the central role in stopping this more ambitious land
grab, but sanctions may also have helped to deter this bigger military
operation. In the run up to the American midterm elections in November
2018, Russian cyberactors and propagandists seem less active than in
2016. Have sanctions helped to diminish this activity? We do not know,
but we cannot assume that sanctions played no role in Putin's thinking
regarding disruption of these elections. (The real test will come in
2020.)
Finally, perhaps the best evidence that sanctions are working is
Putin's irritation with them and his efforts to lift them. The Russian
Government has continued to denounce American sanctions. Putin may even
have tried to help Trump to win the presidential election, in part
perhaps because candidate Trump said he would look into lifting
sanctions. \22\ On June 9, 2016, a Russian delegation met with Trump
campaign officials to discuss, among other topics allegedly, the
lifting of sanctions on Russian individuals and companies implicated by
the Magnitsky Act. At the Helsinki summit in July 2018, Putin made
clear his obsession with the Magnitsky Act, and its main champion, Bill
Browder, by devoting several minutes of the joint press conference to
spinning a crazy, fabricated tale about how U.S. Government officials
helped Browder launder money out of Russia to help finance the Clinton
campaign. This summer, on August 10, 2018, in response to press reports
about new sanctions legislation, Prime Minister Medvedev stated most
aggressively that new sanctions against Russian banks would be
``declaration of economic war'' and that Russia would retaliate
``economically, politically, or, if needed, by other means''. \23\ If
sanctions were so ineffective, why are all of these Russian Government
officials working so hard to lift them? Clearly, sanctions matter.
---------------------------------------------------------------------------
\22\ Aaron Blake, ``The Other Remarkable, Pro-Russia Thing That
Donald Trump Just Said'', The Washington Post, July 27, 2016, https://
www.washingtonpost.com/news/the-fix/wp/2016/07/27/the-other-remarkable-
pro-russia-thing-that-donald-trump-just-said/
?noredirect=on&utm_term=.97f9cf06bce2.
\23\ ``U.S. Curbs on Russian Banks Would Be Act of Economic War--
PM Medvedev'', Reuters, August 10, 2018, https://uk.reuters.com/
article/uk-usa-russia-sanctions-moscow-reaction/u-s-curbs-on-russian-
banks-would-be-act-of-economic-war-pm-idUKKBN1KV0FM.
---------------------------------------------------------------------------
Principles for Applying Future Sanctions
Because economic sanctions have produced a tangible impact on the
Russian economy and concrete reactions from the Russian Government but
have not yet changed fundamentally Russian foreign policy, new
sanctions are necessary. Economic pressure must be increased until
Putin changes course. Because President Trump continues to send mixed
signals to Putin about American resolve, the U.S. Congress must pass
new legislation to compel the Trump administration to increase pressure
on the Russian Government. Trump's lavish praise of Putin, including
most recently at the Helsinki summit, keeps alive in Moscow the hope
that President Trump can be cajoled into lifting sanctions without
insisting on any meaningful change in Russian policy. The U.S.
Congress--in concert with liked-minded officials in the Trump
administration--must disabuse Putin of that hope.
Several principles should guide the implementation of new sanctions
and the adoption of new laws mandating new sanctions.
First, ongoing Russian illegal activity must be met with new
sanctions. Sanctions must escalate if Putin does not change Russian
behavior. For instance, every day that Russia supports the separatist
war in eastern Ukraine should be understood as new illegal Russian
action. \24\ Instead of just maintaining the originally implemented
sanctions in response to Russia's intervention in eastern Ukraine, U.S.
lawmakers should lock into place by law a timetable for ratcheting up
sanctions if the Russian Government continues illegal, belligerent
activity.
---------------------------------------------------------------------------
\24\ The analogy here is parking illegally for many days. The
owner of an illegally parked car does not receive just one ticket on
the first day the car is violating law but accumulates a new ticket for
every day the car is parked illegally. Russia is parked illegally in
Ukraine.
---------------------------------------------------------------------------
Second, the U.S. Congress and President Trump must sign into law
preemptive sanctions that would trigger automatically in response to
future malign behavior by the Russian Government. By spelling out
explicitly future American sanctions in response to specific possible
Russian actions before they occur, the United States would help to
clarify for Putin his cost-benefit analysis. This deterrence strategy
should be applied to defend our sovereignty during elections as in the
``Defending Elections from Threats Establishing Redlines Act of 2108''
(the DETER Act), but also should be applied to other policy domains,
such as deterring the arrest of American Government officials, past and
former, in third countries through the abuse of the INTERPOL system, or
deterring cyberattacks on critical infrastructure in the United States.
Third, sanctions should be implemented in response to concrete
Russian actions or future actions, so that a specific sanction can be
lifted when a Russian specific action has been reversed. Implementing
sanctions in response to a general bundle of bad behavior makes it
difficult for Kremlin officials and their proxies to know what they
need to do in order to get those sanctions lifted. \25\ The tighter the
link between the American sanctions and the Russian actions, the more
effective new sanctions will be.
---------------------------------------------------------------------------
\25\ In April 2018, the Treasury Department issued new sanctions
on several Russian business people and their companies as well as
Russian Government officials. (``Treasury Designates Russian Oligarchs,
Officials, and Entities in Response to Worldwide Malign Activity'',
U.S. Department of the Treasury, April 6, 2018, https://
home.treasury.gov/news/press-releases/sm0338) The direct role of these
individuals in the Russian State's bad behavior, however, was not
spelled out. In announcing this new round of sanctions, the Treasury
Department listed ``a range of malign [Russian] activity around the
globe, including continuing to occupy Crimea and instigate violence in
eastern Ukraine, supplying the Assad regime with material and weaponry
as they bomb their own civilians, attempting to subvert Western
democracies, and malicious cyberactivities.'' Because this list is so
long, it is not obvious what the newly sanctioned individuals would
have to pressure the Russian Government to do differently to be removed
from these sanctions lists.
---------------------------------------------------------------------------
Fourth, although easy to state in theory and difficult to do in
practice, future sanctions should primarily target Russian Government
officials, State organizations, debt instruments issued by the Russian
Government, enterprises owned or controlled by the Russian State, and
traditional and social media entities owned or controlled by the State.
Since roughly 60 percent of the Russian economy is effectively State-
owned or State-controlled, the State sector is a rich target
environment for future sanctions and also the segment of the economy
closest to and valued by Putin. Genuine private-sector individuals and
companies should not be sanctioned unless their direct support of
egregious Russian foreign policy behavior can be documented. To the
extent possible, private Russian citizens not involved with Russian
foreign policy should not be the targets of sanctions. Collateral
damage to nongovernmental actors and organizations only reinforces
Putin's claim that the United States is out to weaken Russia and
impoverish the Russians.
Fifth, to the extent possible, private American interests--
individuals, companies, and shareholders--should not be adversely
affected by new sanctions. Our aim should be to deter and punish Putin,
his Government, and their proxies, not American traders and investors
engaging in the Russian private sector. The growth of the Russian
private sector--autonomous from the Russian State and cooperating with
the American private sector--still serves American national interests,
as actors in this sector of the Russian economy are most likely to
pressure Putin to stop isolating Russia through aggressive foreign
policy actions. In practice, this principle is difficult to navigate
since private American companies invest, trade, and cooperate with
Russian State-owned enterprises (i.e., Sberbank, Rosneft). In these
cases of overlap between the private and public sectors, experts
implementating new sanctions will have to determine if the Russian
entity in question is behaving more like an instrument of Russian
foreign policy or more like a profit-maximizing company. If the former,
then the Russian actors could be targeted even if American investors
also suffer. If the latter, then the United States Government should
not sanction them and explain this rational for nonaction.
Sixth, greater transparency about Russian investments and economic
activity abroad serves American national interests. Russian citizens
should know how and where their leaders hide their money abroad,
especially if laundered into the United States. Americans and our
allies also should know. In the United States, new legislation should
be adopted that eliminates anonymous ownership of corporations and real
estate, and the transfer of funds abroad through law firms. \26\
---------------------------------------------------------------------------
\26\ See for instance, S. 1717, The Corporate Transparency Act of
2017: https://www.congress.gov/bill/115th-congress/senate-bill/1717.
Anders Aslund details how these mechanisms are used to launder money
from Russia to the United States in ``How the United States Can Combat
Russia's Kleptocracy'' (Washington, DC: The Atlantic Council, July 31,
2018): http://www.atlanticcouncil.org/images/publications/How-the-
United-States-Can-Combat-Russia-s-Kleptocracy.pdf.
---------------------------------------------------------------------------
Seventh, the Kremlin's abuse of INTERPOL--through the inappropriate
use of both red notices and red diffusions--must be stopped. INTERPOL's
constitution forbids the use of the organization for political
purposes, yet the Russian Government has attempted to use red notice
and red diffusion mechanisms to silence and threaten critics. The U.S.
Congress and the Trump administration should codify in law the specific
sanctions that the U.S. Government will implement in response to future
abuses of INTERPOL's red notice and red diffusion mechanisms.
Beyond Sanctions: The Need for a Grand Strategy To Contain (and
Sometimes Engage) Russia
Sanctions--even a more robust sanctions regime--are only one
instrument of American foreign policy needed to be deployed to confront
Putin's Russia. To contain or deter Putin's belligerent behavior abroad
requires that the United States and our allies use our full arsenal--
multiple instruments of diplomacy, including coercive diplomacy--to
implement and sustain a bipartisan, grand strategy of containment.
The United States must lead in articulating and implementing such a
grand strategy, and then work with our allies and partners in the world
to execute it. Alone, we will not succeed.
For instance, to reduce the probability of Russian belligerent acts
against NATO members in Europe, the United States and our NATO allies
must threaten sanctions in response to new acts of aggression, but also
strengthen our defensive posture and cyber-resilience, especially in
frontline States. In June 2014, in response to Russia's invasion of
Ukraine, President Obama rightly announced the creation of European
Reassurance Initiative (ERI), a multibillion dollar project designed to
increase America's military presence in Europe. The Trump
administration has increased support for ERI. In subsequent NATO
summits in 2014, 2016, and 2018, the alliance has taken significant
steps to enhance deterrence, including the NATO Readiness Initiative, a
pledge in 2014 to spend two percent of the GDP on defense, and Forward
Presence, and the deployment of four new battalions, totaling roughly
4,500 soldiers, in Estonia, Latvia, Lithuania, and Poland. These
advances in capabilities must now be matched with credible commitments
in intention from the United States. Above all else, President Trump
must signal more credibly that the United States will respond to an
attack on any NATO ally (including Montenegro). \27\
---------------------------------------------------------------------------
\27\ Helena Smith, ``How Trump Destabilized Montenegro With a Few
Words'', The Guardian, July 19, 2018, https://www.theguardian.com/
world/2018/jul/19/how-trump-destabilised-montenegro-with-a-few-words.
---------------------------------------------------------------------------
In affirming our commitments to the alliance, President Trump and
his Administration should also remind Putin that NATO is a defensive
alliance that has never attacked Russia and would be insane to ever do
so. Enhanced NATO military capacity within allied countries bordering
Russia only threatens the Russian armed forces if they attack a NATO
ally. Making that Russian military option more costly preserves peace;
as President Ronald Reagan said, ``peace through strength.''
To increase the costs of Russia's military intervention in Ukraine,
the United States and our partners must maintain and expand economic
sanctions, but also increase economic, political, and military
assistance to the Government in Kyiv and the people of Ukraine. Sending
lethal weapons of a defensive nature to Ukraine has helped to increase
the costs of Russian military escalation in Ukraine, since these
weapons only threaten Russian armed forces who are or might be in the
future in Ukraine illegally. More important than lethal military
assistance, however, is continued American support for Ukrainian
economic and political reform. Ukraine faces a pivotal challenge during
presidential elections next year. A free and fair election will mark a
major milestone in the consolidation of Ukrainian democracy. An
election influenced by Russian disinformation or worse yet,
cybermanipulation of election results, will set back Ukraine's already
fragile democratization process. Providing loud public support and
increased financial assistance for free and fair elections (election
monitors, cybersecurity, NGOs exposing disinformation, international
election observers, etc.) is an immediate, tangible way to push back on
Putin. The Russian president fears nothing more that an independent,
democratic, market-oriented, and Western-leaning Ukraine.
To increase the costs of Russian intervention in our electoral
process, the U.S. Government must threaten new sanctions in response to
future Russian meddling, and at the same time increase the
cybersecurity resilience of the entire infrastructure used for
conducting elections and counting election results. In parallel, the
U.S. Government must develop clearer rules and regulations for
constraining foreign activities of influence--especially through
traditional and social media--during our elections and more generally.
Progress has been made. American social media companies independently
have taken a series of measures to reduce disinformation and increase
transparency. \28\ But the norms, rules, and laws for defending
American sovereignty are still poorly developed. Sanctions alone will
not deter Russia, or other hostile State actors, from seeking to
influence our domestic politics.
---------------------------------------------------------------------------
\28\ ``Defending Democracy Program'', Microsoft, https://
news.microsoft.com/on-the-issues/topic/defending-democracy-program/;
``Making Ads and Pages More Transparent'', Facebook Newsroom, April 6,
2018, https://newsroom.fb.com/news/2018/04/transparent-ads-and-pages/;
``We're Making Our Terms and Data Policy Clearer, Without New Rights To
Use Your Data on Facebook'', Facebook Terms Update, https://
www.facebook.com/about/terms-updates; ``Hard Questions: What Is
Facebook Doing To Protect Election Security?'' Facebook Newsroom, March
29, 2018, https://newsroom.fb.com/news/2018/03/hard-questions-election-
security/; Michee Smith, ``Introducing a New Transparency Report for
Political Ads'', Google Blog, August 15, 2018, https://www.blog.google/
technology/ads/introducing-new-transparency-report-political-ads/;
``Transparency Report, Political Advertising on Google'', Google,
https://transparencyreport.google.com/political-ads/overview; Vijaya
Gadde and Bruce Falck, ``Increasing Transparency for Political
Campaigning Ads on Twitter'', Twitter Blog, May 24, 2018, https://
blog.twitter.com/official/en_us/topics/company/2018/Increasing-
Transparency-for-Political-Campaigning-Ads-on-Twitter.html; Ads
Transparency Center, Twitter, https://ads.twitter.com/transparency;
Bruce Falck, ``Providing More Transparency Around Advertising on
Twitter'', Twitter Blog, June 28, 2018, https://blog.twitter.com/
official/en_us/topics/company/2018/Providing-More-Transparency-Around-
Advertising-on-Twitter.html.
---------------------------------------------------------------------------
To increase the difficulty of conducting Russian intelligence
operations in the United States, the Obama and Trump administrations
rightly have used other means, in addition to sanctions, including
expelling Russian intelligence officers and closing Russian consulates
in San Francisco and Seattle. Sanctions alone were not enough to deter
Russian intelligence operations inside our country. At the same time,
our Government must continue to deter and reduce Russian intelligence
operations without fueling anti-Russian hysteria within our society.
Russian diplomats must be able to meet with all kinds of Americans,
including Government officials, business leaders, civil society
organizations, and scholars. Similarly, Americans should be allowed,
even encouraged, to travel to Russia and meet with their counterparts
and not be accused automatically of malicious intent.
To deter the Russian Government from trying to detain American
officials, past and present, in third countries for invented crimes,
sanctions are an effective tool. However, the threat of sanctions must
be accompanied by diplomatic engagement--at the highest levels--warning
Putin and his Government of the deleterious consequences for our
overall bilateral relationship of any attempt to detain American
officials. Third countries also should be warned of the negative
consequences of responding favorably to red notice or red diffusions
mechanisms initiated by the Russian Government against American
officials.
While seeking to contain and deter Russian aggression along many
fronts, the United States generally, and the Trump administration in
particular should also engage the Russian Government and Russian
society to advance American national interests. For instance, the Trump
administration should work with the Putin administration to extend the
New Start Treaty, which expires in 2021. The preservation of that
treaty--especially the inspections regime--serves American national
security interests. As a country, we also should seek to maintain and
expand relations between American and Russian societies, especially
regarding educational and cultural exchanges. Genuine private sector
engagement between Russian and American businesses also should be
encouraged. The free flow of factual information between our two
countries also serves long-term American national interests. At the
same time, President Trump and his Administration must soberly realize
that the areas for possible cooperation with the Russian Government are
extremely limited as long as Putin continues to threaten American
national interests and undermine the international order.
To signal a credible commitment to this long-term strategy of
containing (and at times engaging) Putin's Russia, President Trump and
his Administration must commit to a single, unified policy. Such a
commitment would generate bipartisan support in Congress and throughout
American society. To date, the Trump administration appears to be
implementing one policy, while the President pursues another. President
Trump's adulation and support for Putin in Helsinki last July--
especially when he sided with Putin against the assessment of the U.S.
intelligence community--undermines American national interests. Trump
should use future meetings with Putin to push back and criticize
illegitimate, illegal, and threatening Russian actions, just as
American presidents did during summits with Soviet leaders during the
Cold War. Trump can engage Putin without embracing him. Likewise,
Trump's lukewarm reaction to sanctions only encourages Putin to seek to
overturn sanctions by engaging Trump, rather than changing Russian
behavior. A unified message will make all of the dimensions of a new
strategy towards Russia outlined in this testimony more effective.
______
PREPARED STATEMENT OF DANIEL FRIED
Former Coordinator for Sanctions Policy, Department of State (2013-17),
and former Assistant Secretary of State for European and Asian Affairs
(2005-09)
September 6, 2018
Mr. Chairman, Ranking Member Brown, I appreciate the opportunity to
appear before you today. The topic is relevant and timely.
The Russia Problem
In recent testimony before Congress, Assistant Secretary of State
Wess Mitchell, Under Secretary of Treasury Sigel Mandelker, and
Assistant Secretary of Treasury Marshall Billingslea summed up well the
behavior of Putin's regime: its aggression against Ukraine and Georgia;
interference in U.S. and European elections; its use of violence
against opponents at home and abroad, including assassination and
attempted assassination; and its autocracy and corruption.
President Trump has noted that it would be nice if the United
States got along with Russia. Indeed, it would. Both Presidents Bush
and Obama tried to establish constructive relations with Putin's
Russia. Both failed, however, and the reasons for those failures are
instructive. Russia's conditions for good relations with the U.S. are
those that no U.S. Administration can or should accept: namely, U.S.
deference to Russian domination of its neighbors, including through
intimidation and war, and U.S. indifference to Russia's repression at
home.
There are those in this country and in Europe who might accept
these Russian conditions. But hard experience in the 20th century--
through World Wars and Cold War--taught that a country's bad behavior
inside its borders is a reliable indicator of bad behavior abroad, and
that spheres of influence established through force and repression,
Russia's usual methods, are neither stabilizing nor self-limiting.
Putin's system of rule combines political authoritarianism and
economic kleptocracy; it is a regime dedicated to enriching its
members, not the Nation it supposedly serves. Economically, it depends
on control of raw materials which it can export. Russia's advance over
the longer term would require, among other things, respect for the rule
of law, property rights, and freedom of speech and assembly. These are
reforms that the Putin regime seems unable to accept, because these
would allow the development of economic and political power independent
of the regime-connected crony system. Thus, the Putin regime
essentially condemns Russia to structural stagnation, recalling the
more reactionary Tsars and the late-Soviet period. Under these
circumstances, Putinism cannot depend on democratic legitimacy, but
must rely on repression at home combined with chauvinistic campaigns
directed especially against the United States, which remains the ``main
enemy.''
The regime seeks to prevent its democratic rivals--what we used to
call the Free World--from challenging Putin's regime by the power of
their example. From this perspective, it is critical for the Kremlin
that Ukraine not succeed in its attempt to transform itself from a
Putin-dependent kleptocracy, as it was before 2014, to a free market
democracy drawing closer to Europe. Should Ukraine succeed, it might
demonstrate to the Russian people the viability of an alternative to
Putinism. In like fashion, Putin's policy, like that of the Soviets,
also aims to weaken the institutions of the Free World, including the
European Union and NATO, and to discredit the very idea of democracy as
a potentially appealing alternative for Russia.
To challenge the Free World's democratic, rule-of-law system, Putin
seeks to assemble a counteralliance of autocrats and nationalists. The
Trump administration's national security strategy argues that the world
has returned to a period of great power rivalry, with Russia and China
challenging the United States and its allies. The Administration has a
point, and I hope that it will seek, in a consistent way, to strengthen
our friends and resist the aggression of our adversaries.
Given this background, some believe that Russia will always be
America's strategic rival, that its history condemns it to perpetual
hostility to the United States and the values which our country has
championed for at least 100 years.
I do not share this view. While relations with Russia are currently
bad and may get worse, Russia's history suggests that if the West
resists Russia's aggression abroad, Russia may turn to reform at home,
accompanied by efforts to improve relations with the West to support
economic reforms and integration with the world.
A wise U.S. policy toward Russia would, therefore, combine
resistance to Russia's current aggression, including by working with
our Allies; efforts to reduce the risks of destabilizing clashes,
without, however, unwarranted concessions or apologies; cooperation
with Russia where possible, without expecting too much, too soon; and
the anticipation of, and planning for, potential better relations with
a better Russia. A strong, democratic, and peaceful Russia would be an
asset to the world and a country with which we should seek and could
sustain better relations.
Current Russia Sanctions
In the face of Russian aggression in many areas, the
Administration--and Congress--have turned to sanctions as a principal
tool of the U.S. response. Launched during the Obama administration,
these included extensive Ukraine-related sanctions, coordinated with
the EU and other key allied Governments; human rights sanctions through
the Magnitsky Act, a few Syria- and DPRK-related sanctions;
nonproliferation related sanctions; and sanctions related to
cyberelection interference, announced in late December 2016.
The Trump administration has continued these, adding new
designations. It has also used additional authorities, such as a
significant individual designation under the ``Global Magnitsky'' Act,
new sanctions under the 1991 Chemical and Biological Weapons Control
Act (in response to Russia's use of nerve gas in the U.K.), a strong
set of omnibus sanctions under the framework of the Countering
America's Adversaries Through Sanctions Act of 2017 (CAATSA), and a
broad tranche of designations of Russian oligarchs and their companies
on April 6, 2018. The Administration is reportedly preparing additional
sanctions, including, according to the Washington Post, a new Executive
order providing for more sanctions in case of Russian illegal
interference in the U.S. midterm elections.
The Office of Foreign Assets Control, part of the Treasury
Department, has the major responsibility for sanctions within the U.S.
Government and has done, and continues to do, capable work, supported
by professionals at the State Department and NSC, both career and
political appointees. CAATSA has given the State Department increased
sanctions authorities; given this and the importance of sanctions
generally, State might wish to strengthen its sanctions policy
capacity, including by reestablishing the Office of the Sanctions
Coordinator (which I headed from 2013-2017), led by a senior career
official.
Congress last summer passed a major piece of sanctions legislation,
CAATSA, and is considering additional legislation, including the
Defending Elections from Threats by Establishing Redlines Act (DETER)
and the Defending American Security from Kremlin Aggression Act
(DASKAA).
The scope of the sanctions programs against Russia, either existing
or planned, reflects the fact that there are a lot of areas of bad
Russian behavior.
Sanctions Lessons
What lessons can the U.S. draw from the use of sanctions against
Russian targets? What are our next best moves, by the Executive and
Congress?
Lesson one: remember what it is we're trying to achieve. Sanctions
should put pressure on the Russians to change their behavior. Sanctions
are not themselves a strategy. They are a tool, as good as the policy
they seek to advance. Specifically, the U.S. Government's (USG) Russia
sanctions seek to:
Support a settlement that will get the Russians out of the
Donbass and eventually Crimea, while dissuading the Russians
from a renewed military offensive or new forms of aggression
against Ukraine;
Deter or limit future Russia's deplorable actions in Syria
(though I would keep expectations regarding Syria under
control), continued sanctions evasion with respect to the DPRK,
and more use of nerve gas to murder its enemies;
Dissuade the Russians from repeated illegal interference in
our elections; and
Demonstrate that there will be a cost for the regime's
gross corruption and human rights violations, including inside
Russia.
Sanctions are not an alternative to diplomacy, as is sometimes
suggested. They advance diplomacy by giving weight to our proposals,
credibility to our threats, and leverage from which to negotiate.
Do sanctions work? They can, if we don't get greedy or impatient.
Sanctions, combined with other means of pressure, can sometimes bring
about changes surpassing expectations. In the 1980s, pressure, combined
with diplomacy and democratic resistance inside the Soviet empire such
as Poland's Solidarity, helped bring about the end of Communism in
Europe. But I would caution against outsized expectations. Sanctions
alone seldom cause their target to surrender, or to admit that it is
beaten. Sanctions usually work at a pace slower than you want (or have
promised to your boss or to Congress). Still, if maintained and
enforced, they can have a cumulative impact over time, especially when
accompanied by other forms of pressure.
Nevertheless, when sanctions work, they may bring about an
imperfect or incomplete outcome, as is often the case with diplomatic
action and was the case with Iran and the JCPOA (the Joint
Comprehensive Plan of Action, a.k.a. the Iran nuclear deal).
In my career, however, I learned not to dismiss imperfect outcomes.
In the case of Ukraine, the imposition of U.S. and parallel European
and Canadian sanctions, combined with Ukraine's own determined
resistance, probably convinced Putin to limit his objectives--including
by abandoning (for the present) Russia's floated claim of huge areas of
Ukraine as ``Novorossiya'' or ``New Russia''--and to accept the Minsk
framework for settlement in the Donbass. The Minsk framework is flawed,
and it does not include Crimea. But the Minsk framework does signify
Russia's formal agreement that the Donbass is in fact Ukrainian and
that a settlement there will include restoration of Ukrainian control
over its Eastern international border. The Minsk framework can be the
basis of a settlement that ends at least part of Russia's aggression
against Ukraine. Imperfect can be good enough.
Moreover, it is worth doing a thought experiment: what would Russia
have concluded and what would it have done, had the U.S. and Europe not
imposed sanctions at all after Russia's invasion of Ukraine in 2014?
Putin is certainly aware of--and probably follows--Lenin's old dictum,
``Thrust in the bayonet; when you hit fat, keep pushing; when you hit
steel, pull back.'' Had we done nothing, Russia might well have
attempted to do still worse, such as trying to seize the Ukrainian city
of Mariupol, pushing further West to create a land-bridge to Crimea, or
opening new fronts in Ukraine.
Sanctions have costs and risks, and we need to think these through.
Sanctions should not be imposed for their optics. We should not try to
prove our commitment to a policy by showing how much pain we're willing
to absorb ourselves. The point is to impose costs which fall on the
opponent, at a level minimal to ourselves.
Sanctions Options
This background suggests the following guide-to next steps:
Work with Allies. The U.S. imposed sanctions in solidarity with its
European and other allies, and our allies generally did their part.
Putin may not have expected that European Governments, given their
varying views about Russia, would agree to impose sanctions or be able
to sustain them. But they did. When they did, this international
solidarity extended the sanctions' power and may have frustrated
Putin's expectations.
Moving forward, the U.S. should choose Russian sanctions targets
aware of the relative impact on the U.S. and European countries, as
well as Japan, Canada, and other allied Nations. Those impacts are not
likely to be equal, but the U.S. should strive for some rough equity.
U.S. and European companies have taken hits from sanctions and should
not expect immunity in the future; companies should know by now that
doing business with Russia carries extra risks due to Russian
aggression. Nevertheless, both the Executive and Congress should be
aware of the costs to business and countries before making decisions.
Working with allies also means making clear that we will enforce
sanctions, including, if warranted, through action against either
European companies or our own for sanctions evasion. We must play it
straight, however: we cannot let a narrative develop that U.S.
companies get off the hook while European companies get hit.
Prepare credible escalatory options. In the short-term, Putin is
likely to continue his aggression and he may intensify it, either in
Ukraine, against the U.S. through election interference, or elsewhere.
Therefore, the U.S. should have, and the Russians should know that we
have, escalatory sanctions options that are tough enough to hurt but
restrained enough to use. Escalatory options can include two types:
intensified sectoral sanctions targeting specific sectors such as
finance, energy, defense/dual use technology, and cyber; and additional
sanctions against individuals, particularly those close to Putin. We
should escalate sanctions for cause--in response to specific malign
Russian actions--not as a show of general irritation or as part of a
domestic-driven political cycle.
Within sectoral sanctions, there remains plenty of reasonable
escalatory headroom, especially in finance and cyber. Viable options in
the finance sector could include steps against new Russian sovereign
debt, prohibition of new debt financing for all Russian State-owned
companies, and imposition of full blocking sanctions against selected
State-run financial institutions such as VEB. However, full blocking
sanctions against all the major Russian State-owned banks is likely to
trigger financial blowback that would not be in the U.S. or broader
Western interest. In the cybersector, the U.S. should be aggressive in
pursuing financial sanctions against Russian malign cyberactors and
their sources of funding, and in denying exports of technology relevant
to the cybersector generally. To strengthen export controls, it may be
worth reconstituting COCOM, the Cold War-era multilateral forum, to
coordinate Western export controls to the Soviet Union.
There may be escalatory room in the energy sector, but the U.S.
should be careful not to target current energy production or areas
where U.S. and EU companies could be quickly replaced by less
scrupulous actors. Doing so could panic markets and drive up prices,
which might perversely give the Putin regime a windfall, causing little
harm to Russian companies and effectively transferring western
investments to Asian or other energy players. DASKAA Sections 601/236
and 237, imposing mandatory sanctions and similar DETER Act sanctions
on large energy or oil projects are probably too broad. There is much
to be said against Nord Stream II. But sanctions explicitly targeting
that project would risk political blowback in Germany, which has
otherwise been key in upholding a strong European stance in support of
Russia sanctions generally.
Instead, in the energy sector the U.S. could intensify targeting of
future Russian oil production. This could include banning the export to
Russia of exotic technology such as fracking or all enhanced oil
recovery (EOR) technologies for all new energy projects. As an
additional escalation in response to additional Russian aggression, the
U.S. should explore the impact of banning EOR technologies, even for
existing and conventional fields. As a yet further escalation, we
should with our allies explore targeting the gas sector, focusing on
future (not existing) liquified national gas (LNG) projects.
There is also room to target additional individual Russians close
to Putin. CAATSA Section 241--a smart provision--instructed the
Executive branch to produce a study identifying these people (sometimes
called the ``The Kremlin Report''). The mere preparation of the Kremlin
Report triggered consternation last fall within elite circles in
Moscow, suggesting that its potential impact was significant. In fact,
using the Kremlin Report to target Putin's circle of cronies and agents
can demonstrate the costs of being close to Putin. The Administration
mishandled the rollout of the Section 241 unclassified report last
January, but appears to have drawn on the classified report, said to be
of high quality, in preparing its April 6 package of sanctions. The
Kremlin Report may well have considerable potential as a source of
future sanctions. Still, discretion in picking targets will be
required. When the Administration last April 6 imposed full blocking
sanctions against the aluminum magnate Oleg Deripaska, a justified
target given his actions and closeness to Putin, that required the
sanctioning of all the companies Deripaska owns or controls, and all
their subsidiaries, including companies located in EU member States.
The Treasury Department has been struggling since to mitigate the
spillover consequences while denying benefit to Deripaska, the target
of those sanctions.
Maintain operational flexibility. The Executive branch should make
clear that the USG is prepared and able to remove sanctions should
Russian behavior improve. The U.S., for example, needs to be able to
fulfill its commitment to remove most of the Ukraine-related sanctions
should there be an agreement that restores effective sovereignty of the
Donbass and Ukraine's Eastern international border to Ukraine (the
Crimea-related sanctions should remain in place while Russia occupies
Crimea). Given the limitations imposed by CAATSA, this could be a
challenge. Congress must be ready and willing to approve lifting
sanctions if Russia's actions warrant it. Happily, the DETER Act
outlines conditions for lifting sanctions imposed for Russian election
interference.
As it considers legislative options, Congress should allow the
Executive branch sufficient flexibility to administer sanctions,
especially by keeping OFAC's licensing authority intact. Licenses are
not a tool to weaken sanctions; on the contrary, they enable bolder,
faster action on sanctions by allowing the Executive flexibility to
rapidly deal with unintended consequences or excessive spillover.
Advance good legislative ideas. CAATSA Section 241 (mandating the
Kremlin Report) was a good idea. Other good ideas from pending
legislation include provisions targeting corrupt officials and their
family members (DASKAA Section 601/235), restricting U.S. persons from
dealing in new Russian sovereign debt (DASKAA Section 601/238; DETER
has parallel provisions), allowing the U.S. to designate persons
operating in the cybersector generally (DASKAA Section 601/239), and a
provision that would identify beneficial owners in high-end real estate
deals (DASKAA Section 702). This latter provision (especially if
focused on foreign beneficial owners) would restrict the ability of
corrupt oligarchs and others generally to easily disguise their
purchase of expensive real estate in Miami, New York, and elsewhere.
That said, this provision is relatively narrow and other legislation
has been introduced that seeks on a broad basis to get at the problem
of corrupt money flowing into the United States. Perhaps inspired by
CAATSA Section 241, DASKAA (Section 623) mandates a study of Putin's
wealth, which could generate additional sanctions targets.
Timing and conditions are important. Some legislative provisions,
such as those targeting corrupt officials or imposing greater
transparency on real estate markets, could be put into effect now. A
study of Putin's wealth should be launched as soon as possible and, in
combination with the Kremlin Report, used to provide material for
future sanctions. Preparing such a study could have deterrent value.
Other measures, such as escalation in the financial sector, might best
be held for future response to new acts of Russian aggression. Congress
(and the Administration) should try, as much as is practical, to tie
different sanctions to different aspects of bad Russian behavior,
rather than lump all sanctions together as a response to collective
malign actions. Advertising potential future sanctions can have
deterrent value, and the Obama administration used this technique. If
done thoughtfully, contingent sanctions authorities, whether in law or
in Executive orders, can be useful, especially when they are credible
and done in coordination or at least consultation with Europe.
As a veteran of the Executive branch, I generally support maximum
discretion for the Administration. If Congress chooses mandatory
sanctions, it should weigh each action to make sure that the U.S. and
its allies come out ahead in the balance. The current Administration
would strengthen its case for discretion in sanctions if its overall
message on Russia is steady; if it uses existing sanctions authorities
well and not minimally; and if, as needed, it extends its authorities,
such as through one or more new Executive orders, to deal with Russian
aggression such as continued election interference.
Strategic Context
This leads to a final thought: sanctions will have more power if
they are embedded in an overall policy that works, is credible, and is
consistently expressed. Russia policy has been a challenge for this
Administration, given some of the President's remarks, including during
his press event with President Putin in Helsinki earlier this summer.
Nevertheless, the Administration has significant tools, and through
wise legislation the prospect of more, to advance a strong policy of
resisting Russian aggression, defending U.S. interests and values, and
setting the stage for better days to come.
A strong Russia policy should be linked to an American Grand
Strategy which recognizes that a rules-based world which favors
democracy is in America's national interest. For the past 100 years,
American Presidents have advanced such a Grand Strategy, and America
and the world have benefited thereby. Putin, and like-minded
nationalists and despots, stand for nothing more than power. America
can do better. At the end of our current national debate about
America's role in the world, I hope and believe that we will recall the
values and purposes which have propelled American world leadership.
Mr. Chairman, Ranking Member Brown, I appreciate the opportunity to
appear before you to discuss these issues and look forward to your
questions.
______
PREPARED STATEMENT OF RACHEL ZIEMBA
Adjunct Senior Fellow, Energy, Economics, and Security Program, Center
for a New American Security
September 6, 2018
Thank you, Chairman Crapo and Ranking Member Brown, for giving me
the opportunity to testify before this Committee on the effectiveness
of sanctions on Russia and potential next steps.
Russia's economy has largely adjusted to sanctions imposed by the
U.S. and Europe, despite recurrent pressures on its financial markets
when new measures are imposed. This adjustment has sparked debate about
whether existing tools are insufficient and need to be extended or
merely implemented more stringently. Given the significant measures
being considered by Congress, I will lay out some of the factors that
have shaped the impact of sanctions on Russia's economy and the drivers
of Russian economic resilience to sanctions, in the hope of better
targeting measures to achieve political, rather than just economic,
objectives.
Given the sources of resilience and adjustment in Russia's economy,
there are grave potential consequences to the global economy and key
U.S. allies from significantly tighter broad-based sectoral sanctions
on Russia. These could include risks to global energy supply and
spillover effects on other financial markets, especially in emerging
economies. Russia has become more resilient to U.S. and European
sanctions in the last 3 years, thanks to higher global oil prices and
output, sound management of Russian macroeconomic policy (fiscal,
currency, banking, and monetary), and the deepening of Russia's supply
and financing channels at home and abroad, particularly from China and
the Middle East.
Paradoxically, many of the factors that cap Russian long-term
economic growth potential at around the current 1.5-2 percent pace have
contributed to its resilience to economic sanctions. These include
concentration of assets in its State banks, inefficiencies of selected
State-owned enterprises, and difficulty attracting long-term capital.
At the same time, Russia has used the last 4 years to build up its
domestic resilience, maintaining a tighter fiscal stance to reduce its
reliance on foreign capital markets, liberalizing its currency regime
to allow the currency to be part of its adjustment toolkit, and
deepening relationships with other State-led economies, including China
and Saudi Arabia. These countries have fewer governance or other
demands on Russia and empower those in Russia who are more focused on
self-reliance and extending State capitalism. The combination of
sanctions and the oil price shock helped Russia indigenize and bring
home selected financial assets and supply chains. Russia's economy may
not be thriving, but it is surviving. This increases the challenge of
imposing broad-based sanctions, as it diminishes U.S. leverage. Russian
resilience suggests that the sort of blunt measures that might impose
meaningful economic stress on Russia might also create damaging global
spillovers, primarily by increasing energy prices. This, in turn, could
dampen global consumption, spread contagion to emerging markets, and
extend U.S. dollar strength that challenges U.S. exports. Such measures
are also more likely to be seen by the Russian Government as acts of
war, and by others, including U.S. allies, as disproportionate, thus
limiting their impact.
That said, Russia does have vulnerabilities that proposed financial
sanctions would target. It has drawn down much of its sovereign wealth
savings, has many structural rigidities, and has low potential for
growth. The main source of vulnerability for Russia's economy lies in
its dependence on natural resource exports, especially oil and gas, but
also agriculture and metal production, which collectively account for
the bulk of Government revenues, trade revenues, and performance of its
financial markets. This implies that the sort of severe economic shock
that would prompt a recession in Russia might require significant
reductions in demand for Russian resources, including oil and gas. A
shock severe enough to force significant quantities of Russian oil and
gas off the market (a much more aggressive outcome than being
considered by current legislation), would come with significant global
costs, including potential sharp increases in energy prices for U.S.
and global consumers. These energy-price spikes, in turn, could provide
a potential windfall to Iran, undercutting U.S. policy toward that
country. Such measures should not be considered now given their
significant costs to the global economy and potentially international
stability.
The Russia sanctions program, at its most effective, has been
targeted and coordinated with allies, traits that contributed to its
initial economic and financial impact. This Committee, and Congress
more broadly, have an opportunity to refocus on targeting those
responsible for malign behavior by the Russian State, rather than broad
punitive actions, which would be less effective in achieving U.S.
policy with respect to Russia and could undermine the effectiveness of
future sanctions tools.
Impact of Past Economic Sanctions and Sources of Russian Resilience
The main macroeconomic impact of the financial sanctions
implemented since 2014 has been a financing shock that contributed to
capital outflows and more restrictive policy. Pressure on Russian
capital markets increased risk premiums, exacerbated capital outflows,
and amplified the economic pressures of the coincident oversupply of
global oil markets. Together these trends contributed to a rise in
inflation and contraction in real gross domestic product and earnings
in 2014-15. Russia gradually exited recession in 2016, economic
activity began to expand modestly in 2017, helped by the revival in
energy prices, and more recently volumes. Further sanctions, including
some of those implemented this year, have again triggered pressure on
the exchange rate and other securities, though these impacts have
tended to fade, due to Russia's by-the-book macroeconomic policy
choices and the stronger resource environment. The coincidence of these
shocks provided domestic political cover for Russian Government
officials who wanted to take tough decisions including fiscal cuts,
pension reform, and restrained investment.
U.S. and EU sanctions contributed to a major shock to Russia's
financial markets in 2014 and 2015, amplifying the impact of the sharp
decline in oil and gas prices in 2014, which weakened Russia's nominal
GDP, and lead to a contraction in economic output. Sanctions to
restrict the duration of finance, high interest rates at home to retain
capital, and austere fiscal policy all contributed to a mild recession
and left Russia reliant on financing from China and the Gulf States.
However, the economic output loss was much milder than it had been
during the global financial crisis or the Russian crisis of 1998, both
of which had sharper financial pressure, liquidation of inventories and
uncertainty about global demand. Several reasons explain the relative
resilience of Russia's economy to the twin shocks of sanctions and
falling energy prices. These include the lack of inventory rebuilding
by firms after the global financial crisis, the decision not to control
the exchange rate, and the availability of domestic financing to avoid
defaults. The Russian Government's adherence to orthodox macroeconomic
policies, while surprising to some at the time, helped it emerge from
this crisis and adjust to the economic sanctions over time.
Energy, and to a lesser extent other commodities (metals and
agriculture), remain key transmission channels of global shocks to the
Russian economy and financial markets. This trend holds, despite the
diversification of the economy, because export revenues and Government
funding remain based on commodities. Oil and natural gas prices and
demand, which hit Russian revenues, remain critical drivers of Russian
macroeconomic and market performance. Orthodox economic policymaking,
including tight fiscal and monetary policy and ample banking-sector
liquidity, helped Russia adjust to the economic sanctions and avoid
default. Indeed, Russia's external (foreign currency) debt was much
lower than most emerging-market peers (Turkey, Brazil) in 2014, and it
stands even lower today.
Depreciation of the ruble was a major tool of adjustment,
facilitating a drop in imports and helping to maintain the domestic
value of most resource exports. As the global energy market rebalanced,
due in part to the pact between Russia, OPEC, and other energy
producers, oil revenues began to increase. Now in 2018, Russia is one
of the few countries which has spare capacity to deploy to meet
increased global demand. As Brent crude currently approaches $80/
barrel, up from a low in the mid-$30s in late 2014, Russian global and
local revenues have increased significantly. Indeed, periods of weaker
ruble value due to sanctions uncertainty actually can increase the
local currency value of these exports, helping the Russian Government
meet its local spending needs and gain higher revenues for its
nonenergy exports (including other resources, military equipment, and
technology). Such unintended consequences may limit the effectiveness
of sanctions.
Russian economic growth has averaged a lackluster 1.5 percent for
the last 3 years after exiting recession. The 2017 pace of 2 percent
was above what economists estimate to be its potential suggesting that
continued growth at that level is not sustainable without incurring a
major inflation shock, or unless there is a major change that prompts a
productivity jump. While not a high rate of growth, 1.5 percent is not
far from the Russian Government's admittedly conservative estimates of
growth from the mid-2010s. \1\ This suggests that Russia adjusted to
sanctions (and the oil price shock) and that some of the weak growth
reflects limited capital investment, productivity, and low labor force
participation, all chronic for Russia.
---------------------------------------------------------------------------
\1\ Alexei Kudrin and Evsey Gurvich, ``A New Growth Model for the
Russian Economy'', Russian Journal of Economics 1, No. 1 (March 2015),
https://www.sciencedirect.com/science/article/pii/S2405473915000033
provide a review of these drivers and propose measures which could
change the low productivity environment, few of which seem likely to be
implemented, even in the absence of sanctions. More recently these were
reviewed in Martin Russell, ``EU Parliament Members Research Service'',
2018, http://www.europarl.europa.eu/RegData/etudes/IDAN/2018/625138/
EPRS_IDA(2018)625138_EN.pdf and numerous analyses by the EBRD, World
Bank and IMF.
---------------------------------------------------------------------------
In addition to the ruble flexibility, other elements of Russia's
policymaking contributed to its resilience including its textbook
adoption of restrained fiscal and monetary policy. Russia sped up
planned implementation of inflation targeting, which kept interest
rates high and retained capital. It also chose to follow a conservative
fiscal policy, reducing its need to issue additional debt. Finally,
Russian State companies and banks faced political pressure to return
capital and to buy up local assets rather than send it abroad. That
coordination helped to meet the end of 2014 financing pressures, and
would likely be used in the Future.
Russia's increasing financial ties with China and the Middle East
have provided another important lifeline. Russia's sovereign
development platform, the Russia Direct Investment Fund (RDIF), has
been a major vehicle for attracting foreign investment. The RDIF,
created in 2011 to entice wary foreign capital via coinvestment with
the Russian Government, has been the means through which most
greenfield investment has entered Russia in the last 4 years. The RDIF
has established joint funds with many sovereign funds and pension
funds, allowing them to access assets not available on public markets
and to ensure Russian Government skin in the game to reduce
expropriation risk, another example of a tool created to temper
Russia's governance vulnerabilities and build its resilience against
sanctions and other shocks. Pledges include $10 billion coinvestment
funds with entities like Abu Dhabi's Mubadala, Saudi Aramco, various
Chinese public and private companies, and smaller funds with European,
South Korean, and Japanese entities. \2\ Even if not all of these
measures have been implemented these sovereign-to-sovereign
coinvestments appear to have helped Russia mitigate the effect of
sanctions, reinforcing the concentration of financing.
---------------------------------------------------------------------------
\2\ For a full list of coinvestment vehicles, sub-funds, and
holdings, please see the RDIF website https://rdif.ru/Eng_Partnership/.
---------------------------------------------------------------------------
Potential Future Economic Effects of Sanctions
Energy sector sanctions, which included shortening the duration of
lending to Russia's main energy companies, seem to have had more impact
on long-term investment than short-term output. The latter already
benefited from pre-2014 investment programs, high prices, and tax
changes that incentivized production. The reduction in investment from
European and U.S. energy companies and servicing firms is likely to
restrain oil and gas output in Russia beyond 2020. While Russian energy
companies have been able to find new financing from China, among
others, enabling them to procure capital and parts, the quality of
investment has likely declined.
Looking ahead, now that Russia has mostly recovered from the
recession of 2014-15, growth is likely to average around 1.5 percent in
the remainder of 2018 and 2019. What factors might prompt a slowdown?
The most likely negative shock would be a reduction in oil or natural
gas export volumes, which would cause a terms-of-trade shock and hit to
local revenues as well as weaker currency and higher interest rates. A
sharp decline in the ruble and selloff of Russian sovereign, sub-
sovereign, and financial sector assets would likely increase local
interest rates, dampening growth. However, local actors (financial
firms and pensions) would likely be willing to purchase these assets.
Other foreign actors, including State-linked vehicles in China,
elsewhere in Asia, and the Middle East might also be interested. The
net result would likely empower actors in Russia who look inward and
resent Western influence, and might increase the influence of U.S.
competitors like China.
Potential Consequences of Proposed Sanctions on Sovereign Debt, the
Energy Sector, and the Financial Sector
This Committee is currently considering several pieces of
legislation that would give the Administration powers to increase
sanctions on Russian entities or mandate additional sanctions. As
written, they would add to the powers present in past legislation (like
the Countering America's Adversaries through Sanctions Act (CAATSA))
which have yet to be fully implemented by the Administration. While the
economic and financial impact would vary based on implementation and
enforcement, it is possible to map the transmission mechanisms to
assess the impacts on Russian entities and potential spillovers to the
global economy and financial markets.
Sovereign Debt: Limiting the holding of newly issued Russian debt
by U.S. persons, either in the primary or secondary market would likely
reduce local liquidity as well as raising risk premia on other Russian
assets, State-owned or not. Merely the prospect of U.S. sovereign debt
sanctions has contributed to recent price pressures and capital
outflows, though these have been short-lived. Implementing these
measures would reduce the Russian Government's monetary and fiscal
policy space, but would be unlikely to cause a major financing
challenge for Russia given the significant availability of liquidity in
the banking system, the country's net asset position, and some of the
savings available both from local actors and Asian/MENA Governments
that have provided capital.
In short, imposing sanctions on sovereign debt might further
increase Russia's reliance on Chinese and GCC funding, as well as
prompting Government efforts to repatriate capital from the U.S. and
Europe, including via dedicated sovereign bonds.
Targeting Russian sovereign debt would also raise some important
precedents for global markets. Some people have looked to other
sanctions cases for comparison, especially Venezuela--where sanctions
were imposed on new sovereign debt--and Iran, which has no foreign-
owned debt and has been excluded from much of the global banking system
due to sanctions and severe money laundering violations. In Venezuela,
sovereign bonds were already trading well into default territory and
thus had very low correlations with other sovereign debt, given the
idiosyncratic risks of limited payment of debt, sizeable arrears, and
nationalization. Venezuela by its actions had already cut itself off
from the global financial markets in a way that Russia has not,
suggesting that there could be portfolio contagion effects if
concentrated emerging market investors look to exit Russia quickly,
selling to local actors. This in turn could add to volatility (rallies
and selloffs) of a range of mostly European, Middle Eastern, and
African higher-yielding assets, adding to political uncertainty.
As such, sovereign debt sanctions would likely imply some spillover
risk, as investors look to sell some of their other emerging market and
European, Middle Eastern, and African assets to compensate for losses
in Russia. While the U.S. itself might be relatively resilient to these
trends, the net result might be a weaker global economy, greater
uncertainty for U.S. exports, and greater impetus towards new payment
systems. In turn these might increase safe-haven flows toward USD-
denominated assets, strengthening the dollar and reducing these
countries' purchasing power and ability to maintain purchases including
of U.S. goods.
The Russian Government has also acted to build its resilience:
issuance of new sovereign debt has been falling due to its conservative
fiscal stance, with the bulk of the issuance in rubles rather than U.S.
dollars or euros. Conservative Russian fiscal policy suggests that the
country has the ability to reduce its issuance further if needed. This
might not be an ideal sustainable long-term solution, but could temper
the short-term impact on Russia. Foreign investors, including U.S.
actors and financial actors in Europe and Asia, who are more likely to
have U.S. persons among their investors and counterparts, would bear
the brunt, something Members of this Committee may want to consider and
weigh against possible damage to Russia.
Another possible unintended consequence might be increased pressure
to develop new payments and clearing systems, including measures that
China and Russia have been considering. While these measures are far
from being realized at this point, new sanctions on sovereign debt
might accelerate their development.
Banking Sector Measures: Proposed legislation would extend and
increase measures to restrict finance to Russia's major banks,
especially State-owned banks, in the hope that this would prompt policy
change and reduce cash flow. Some of these banks already face
restrictions issuing debt in European and U.S. markets, but have
largely been able to continue to finance themselves. Targeting the
larger banks not only would increase global counterparty risks but
might also be seen as a disproportionate act, reducing the willingness
of third-party States to comply.
Russian banks continue to operate in a liquidity surplus,
especially the big banks, and are cautious about lending to local
actors, especially the private sector. This liquidity surplus reduces
the need of State banks to issue debt locally or abroad as they are
funded with local deposits. Private sector banks are more vulnerable
due to domestic reasons. Since the global financial crisis, Russian
State banks like Sberbank have been winning the war for deposits and
loans over their smaller counterparts, who are struggling to grow
profits. Foreign banks too, have struggled to attract deposits, and
tend to be subject to more restrictions. Russian authorities might
respond to new sanctions with greater regulatory burdens on global
banks in retaliation.
The large State-owned banks like Sberbank have increased their
assets, liabilities, and share of the local market since 2008, and have
been a beneficiary of the Government's efforts to close down selected
small- and medium-sized banks. These smaller banks tend to have more
money-laundering allegations, terror financing risks and in some cases
related party lending to the conglomerates to which they are linked.
The central bank has been effective in dealing with a series of bank
failures, including some of the medium-sized private banks which were
more involved in high-risk lending, but the net result has been modest
credit growth due to supply and demand of credit restraints, which has
limited the willingness of local banks to pass on the additional
liquidity. As a result, restrictions on their foreign finance would
likely dent but not cripple Russia's banks who would likely be able to
find local finance. If so, the net result could be a further
consolidation of Russia's bank finance domestically and in the hands of
State actors.
It is worth briefly discussing the potential impacts of excluding
select Russian entities from the SWIFT payments system, something that
I believe is not currently being considered due to the potential risk
to this payment system. I share a concern about their potential risks,
which reflects Russia's role as a significant global counterparty, its
domestic financing notwithstanding. Looking to restrict Russian banks
from SWIFT would likely cause a real challenge for U.S.-EU relations,
potentially increasing the costs and uncertainties if the transatlantic
stance becomes less aligned. The heavy integration between the U.S. and
European banking systems argues against imposing new regulations that
would boost counterparty risk, hamper efforts to monitor money
laundering and terrorist finance violations and assess systemic risks.
Such divides could again encourage the development of new payments
systems, not only from entities like China and Russia, but also
eventually from Europe for select transfers, resulting in barriers that
might increase costs for U.S. actors, and make it harder for U.S.
policymakers to assess financial risks or impose sanctions. These are
not near-term risks, but could undermine the long-term leverage of the
United States not only on Russia but also other entities.
Energy Sector: Proposed energy sanctions under consideration would
extend existing measures to limit investment in and access to capital
for Russian energy firms, which are mostly State-owned. As with other
sanctions, the impact would be more likely to come in medium-term
production as underinvestment and lack of access to State-of-the-art
equipment might make it more difficult for Russia to replace depleting
fields.
Russia has been a major beneficiary of the recent rebalancing of
the global oil market, which stems in part from supply collapse in
Venezuela, smaller outages elsewhere, including in Africa, and, more
recently, the reduction in Iranian crude oil and product exports. \3\
Russia, along with Saudi Arabia and other oil producers in the Gulf
Cooperation Council, are among the few countries with sufficient spare
capacity to increase production, which has boosted Russia's U.S. dollar
and local currency earnings. This suggests that measures to temper
investment in the energy sector might have limited impact on Russian
policy decisions. This Committee would need to weigh several objectives
and risks to U.S. security, including the impact of even greater
Chinese influence on the Russian, Central Asian and Middle East/North
Africa energy sectors, as well as the priority placed on countering
Russian activity versus Iranian activity. Measures to counter Russian
energy sector finance might increase the incentive of Russian actors to
become involved with smuggling operations in Iran.
---------------------------------------------------------------------------
\3\ Ziemba, Rachel, Edoardo Saravalle, and Elizabeth Rosenberg,
2018, ``The Trump Administration's Iran Strategy May Be High-Cost, Low-
Return'', Center for a New American Security, https://www.cnas.org/
publications/commentary/the-trump-administrations-iran-strategy-may-be-
high-cost-low-return.
---------------------------------------------------------------------------
Proposed legislation does not seem to aim at measures that would
restrict current energy production, which I see as the most meaningful
potential shock to the Russian economy, and also to the global economy
through the risk of increased costs to consumers. Efforts to restrict
energy exports and revenue would likely be viewed by Russian officials
as a disproportionate response to U.S. concerns about Russian policy.
Moreover any efforts to restrict energy output would likely undermine
the already difficult task of restricting Iranian oil output. Russia,
along with the Gulf Cooperation Council and the U.S. are among the few
countries likely to increase oil production meaningfully in 2018-19. I
would see a high risk of damaging unintended consequences of any moves
to sharply restrict Russian resource exports, on U.S. consumers and on
U.S. allies in Asia and Europe, who are the primary buyers of Russian
supplies. Given the tightening balance of global oil supplies, and the
fact that OPEC+ is struggling to replace production declines in
Venezuela and Iran, the United States might need to choose among its
priorities or risk sharp increases in costs to consumers.
Impact of Potential Retaliation and Countersanctions from Russia
Russian countermeasures and policy choices are a major factor when
assessing the economic and political impact of sanctions. In 2014,
Russian counter sanctions on European food products contributed to
nonnegligible declines in EU food production, especially for countries
like Poland and Finland. \4\ These countermeasures amplified the impact
of the ruble depreciation (which would have discouraged imports to some
extent on its own) and helped to support a previously stated Russian
objective of deepening its domestic production on food production and
manufacturing sectors. Funding to support greater local production in
these areas was one of the few areas of increased Government funding in
the austere budget of 2015. Despite the increase in trade-related
inflows, Russian import growth has remained soft, growing much more
slowly and perpetuating its trade and current account surplus. While
trade ties between the U.S. and Russia remain very small and investment
flows have fallen, European firms and those in Korea could bear some
increased costs.
---------------------------------------------------------------------------
\4\ Iikka Korhonen, Heli Simola, and Laura Solanko, 2018,
``Sanctions, Counter-Sanctions and Russia--Effects on Economy, Trade,
and Finance'', Bank of Finland, https://helda.helsinki.fi/bof/
bitstream/handle/123456789/15510/bpb0418.pdf?sequence=1.
---------------------------------------------------------------------------
This trend of import substitution (replacing imports with local
production via new policies and boycotts) remains a major Russian
policy priority. There is more evidence of success in the military
production and energy technology sectors. Efforts that look to
eliminate Russia's access to global markets would be welcomed by some
members of the Putin Government and Russian officials who are looking
to make Russia more self-sufficient, and thus would be unlikely to
prompt policy change.
One area of recent concern has been Russia's holdings of U.S.
Treasurys and other U.S. assets. While any sharp drop in foreign
holdings would be meaningful and concerning, if it sparked a broader
trend among larger holders like China or the pension funds of Europe
and Japan. Official U.S. data suggested holdings fell from a recent
peak of $98 billion in early 2018 to $48 billion in April 2018 and $9
billion in May 2018--the biggest 2 month drop since the global
financial crisis, when Russia sold its reserves to prop up the
currency. The drawdown in U.S.-denominated assets may reflect outflows
following the implementation of sanctions on Rusal and other designees
in April. The data may overestimate the drop, though. \5\ Even if
Russia did sell its holdings, the volume is small compared to the
monthly treasury issuance (which is set to increase in 2019) and small
compared to potential Fed action should there be a notable sign of
yields rising. Holdings at their peak were $144 billion in 2011 and
fell to $108 billion at the end of 2014 due to currency intervention,
capital outflows and diversification of reserves to better match
Russian trading partners. The Russian sales would more meaningful
impact if they sparked a greater sales by China or other actors, but do
not seem to be a major concern for U.S. financial stability on their
own. China has several reasons not to sell its Treasurys including
concern about the resulting appreciation of their own currency and
domestic financial stability, a topic better addressed in another
venue.
---------------------------------------------------------------------------
\5\ The U.S. Treasury (TIC) data does not report holdings through
overseas custodians, something that complicates monitoring. Russia did
sell down agency holdings at a pivotal economic and political time
ahead Benn Steil, Council on Foreign Relations, 2018, https://
www.cobdencentre.org/2018/08/benn-steil-did-russia-really-dump-its-u-s-
debt/.
---------------------------------------------------------------------------
Conclusion
In conclusion, further sanctions would undoubtedly cause pain to
Russian actors and financial markets, but should take account of the
growing sources of resilience within Russia, especially the
stabilization of the global oil market and associated increase in
revenues. In fact, the recurrent financial and currency shocks
following sanctions implementation have helped Russia maintain the
local currency value of exports without meaningfully impacting ample
domestic liquidity. Furthermore economic stress does not necessarily
trigger political change, particularly in the case of a country like
Russia, when sanctions may provide political cover for domestic
priorities such as deepening of supply chains and reducing foreign
exposure. This resilience suggests that measures that target Russia as
a whole may need to be increasingly blunt, increasing the risk to the
global economy. This suggests that an effort to retarget sanctions to
the individuals involved in malign behavior may be warranted. This
would prevent mission creep, more closely tie penalties to the actions
involved and provide more incentives for compliance. It would also
limit the risk of empowering the very actors (Russian and foreign) who
seek to harm U.S. interests and security.
U.S. policymakers may need to weigh the costs of blunt measures
towards Russia as they may challenge coincident efforts to choke off
financing to Iran, or add to price volatility of fuel for American and
global consumers. Russia's increased reliance on local financing, and
that from China and Middle Eastern autocracies challenges U.S.
influence. Efforts to exclude Russia from select global financial
markets might not only contribute to additional pressure on emerging
markets economies and the energy markets, but might deepen the common
interests between Russia and the GCC, Turkey, and China in ways that
may reduce U.S. influence in all of these countries. The activities
Russia is involved in are serious and a threat to our institutions, so
too might be blunt U.S. measures that escalate pressure on Russia. One
way to temper these risks might be to increase U.S. policy coordination
with allies in Europe, as well as developed Asia, especially those that
have been at risk from these policies. Further sanctions targeting of
Russian actors involved in specific malign activities might assist in
building this coalition.
Thank you for your time and attention. I look forward to your
answering your questions.
______
PREPARED STATEMENT OF HEATHER A. CONLEY
Senior Vice President for Europe, Eurasia, and the Arctic, Center for
Strategic and International Studies, and former Deputy Assistant
Secretary of State for Eurasian Affairs (2001-05)
September 6, 2018
Mr. Chairman, Ranking Member Brown, and distinguished Members of
the Committee, thank you for this important opportunity to testify and
share my thoughts on the current effectiveness of Russian sanctions and
next steps. Unfortunately, the sanctions the United States has imposed
have not been effective, and our next steps must include developing a
comprehensive and durable U.S. policy framework toward Russia--one that
focuses like a laser-beam on stopping illicit Russian financing and
corrupt activities while substantially boosting transparency efforts,
such as on beneficial ownership.
Sanctions Tools in Search of a Policy
If my count is accurate, the U.S. currently has 58 separate sets of
sanctions against Russia across eight broad lines of effort that date
back to 2011. What have we achieved in 7 years? Very little. Russia has
not altered its behavior; if anything, the Kremlin has significantly
accelerated and expanded its malign activities. If something is not
working for 7 years, it earns the right to be reassessed. I am very
grateful that this Committee is willing to conduct such an assessment
as it considers new legislation that increases U.S. sanctions against
Russia.
This Committee has oversight and jurisdiction over some of the most
powerful and punishing tools in the U.S. arsenal: sanctions. But tools
are used to construct something; they are not sufficient in and of
themselves. For far too long, the U.S. has imposed sanctions in lieu of
constructing policy frameworks. When confronted by a State or non-State
actor that challenges international laws and norms, our first instinct
is to quickly demonstrate that we are ``doing something'' by sending a
policy signal through sanctions. But that is often where the process
seems to come to an abrupt stop and, over time, we accumulate a series
of sanctions that backs us into a policy rather than working towards
clear objectives.
In the case of Russia, we have now stretched this concept to a
breaking point. To summarize, we are currently sanctioning Russia under
the following categories:
Transnational and organized crime
Human rights violations and corruption
Illegal annexation of Crimea and violation of Ukraine's
territorial integrity and democratic institutions
Interference in the 2016 U.S. presidential election
Supporting the Syrian regime and its activities
Cyberenabled activities
Violating North Korea sanctions
Use of chemical weapons
Curiously, we have never sanctioned Russia for its ongoing
violation of the Intermediate Nuclear Forces (INF) Treaty, and one
would think that violating a nuclear arms treaty for the past 10 years
would have made this list, \1\ but this has not occurred for reasons
unknown to me.
---------------------------------------------------------------------------
\1\ Michael R. Gordon, ``U.S. Says Russia Tested Cruise Missile,
Violating Treaty'', The New York Times, July 28, 2014, https://
www.nytimes.com/2014/07/29/world/europe/us-says-russia-tested-cruise-
missile-in-violation-of-treaty.html.
---------------------------------------------------------------------------
The only policy framework that is attached to one of these
sanctions categories and that has benefited from a clear policy path
and a broader consultative framework with our European allies has been
the sanctions related to Russia's military incursion in eastern
Ukraine, the policy framework of the February 2015 Minsk Agreement
(also known as Minsk II) to which the United States is not party. And
even with the benefit of a policy framework, for the past 3\1/2\ years,
not only has there been no meaningful progress on the implementation of
the Minsk agreement, but cease-fire violations occur regularly, and
loss of life continues on a near daily basis. It is highly unlikely
there will be any further progress--rather, it is likely there may be
greater instability--until next year's presidential election in
Ukraine, which the Kremlin hopes will produce a more pliant Ukrainian
leader.
A Policy That Prioritizes
From this extraordinary list of sanctions, and as you consider
future sanctions legislation, I fear neither the Administration nor
Congress can adequately answer these questions: Do we and Moscow have a
clear understanding of what steps Russia must take (other than to cease
and desist its activities) to return to an international normative
framework? Do we understand how these different sanctions interact with
each other, or are potentially redundant? Do we understand the impact
of their cumulative effect on U.S. companies, and the economic impact
on our allies? Do we understand how U.S. sanctions against other
adversarial regimes such as North Korea and Iran interact with and
impact U.S. policy toward Russia?
We do not have answers to these questions, but we continue to
sanction Russia nonetheless.
Simply put, looking tough is not a substitute for clear policy.
In 1947, George Kennan provided the strategic underpinnings of the
``Sources of Soviet Conduct'' \2\ which formed the basis for an
overarching U.S. policy toward the Soviet Union that endured for more
than 50 years. The United States must now craft a similarly enduring
policy that addresses the global nature of Russia's disruptive and
malign behavior, which stretches from North Korea and Venezuela to
Syria, but focuses its most destructive intent on the United States and
Europe. We must develop a prioritized policy that establishes a clear
roadmap for Russia to return to international legal norms--to which it
is legally bound--as well as a clear and consistent path of punishments
that will escalate should Russia continue to violate these
international legal norms. The United States has lacked a coherent
policy toward Russia since the end of the ``reset policy'' in 2011,
largely after it had achieved its near-term objectives to negotiate the
new START Treaty, secure Russian support for the Iran nuclear
agreement, and gain Russian support to increase U.S. supply lines to
Afghanistan. For the past 7 years, we have needed a comprehensive
framework of action whose long-term policy direction and consequences
are understood by both Washington and Moscow, as well as fully
supported by our allies.
---------------------------------------------------------------------------
\2\ George F. Kennan (originally published under ``X''), ``The
Sources of Soviet Conduct'', Foreign Affairs, July 1947, https://
www.foreignaffairs.com/articles/russian-federation/1947-07-01/sources-
soviet-conduct.
---------------------------------------------------------------------------
One such policy consequence is inadvertently sliding into a larger
antagonistic posture with Russia as we escalate the imposition of
sanctions in the absence of a comprehensive policy framework. At some
point, Russia may view the culminating effect of U.S. sanctions as an
act of war or a direct threat to the regime's survival, all steps for
which I believe the U.S. Government is currently ill prepared. Please
do not take this warning as a signal that we should stop punishing
Russia for its malign behavior. Far from it. I believe the Russian
Federation is a pariah State that poses a threat to the United States.
But because this Committee is examining even more powerful sanctions
legislation against Russia--an adversary that has repeatedly
demonstrated it is willing to tolerate punishment and will take
military action to achieve its political objectives--it is essential
for us to fully prepare our policy for a time when Russia no longer
absorbs U.S. sanctions without taking direct action against us.
To fully prepare, we must prioritize. Our first policy priority
must be the defense of the homeland and the need to protect the United
States to the best of our ability against Russia's cyberenabled attacks
against U.S. voting systems, voter data and other critical
infrastructure. This also entails thwarting Russia's ongoing
disinformation campaign and influence operations through greater public
awareness and proactive deletion of fake social media accounts; and
ending the illicit use of the U.S. financial system, affiliated
institutions and U.S. citizens to advance its malign influence and
subvert our democratic institutions.
Our second priority must be the Russian Government's return to
abiding by international legal norms, which includes respect for the
territorial integrity of neighboring sovereign Nations Ukraine,
Georgia, and Moldova, and for the U.N. Chemical Weapons Convention and
current arms control treaties, including the INF Treaty. We must
modernize the foundations of the Helsinki Final Act, and in particular
the Vienna Document, to restore the transparency of Russian military
forces and exercises, and to return to confidence-building measures to
avoid miscalculation, particularly as there continues to be
unprofessional conduct by Russian forces near U.S. vessels and
aircraft.
Our third priority must be to restore our focus on the human
dimension and the dignity and rights of the individual because
ultimately, the success of U.S. foreign and security policy rests on
this pillar. As President Reagan understood, peace through strength
meant both a strong U.S. military and a proactive foreign policy that
promoted democratic values and worked closely with civil society. The
success of U.S. policy in the Cold War, particularly after 1975, was
the United States' focus on the human dimension and the whole-of-
Government effort to support democratic impulses wherever they were
growing. As neo-authoritarianism and illiberalism finds fertile ground
across Europe, U.S. policy must return to its offensive posture on
elevating the dignity of the individual and the importance of civil
society in its relation to the State.
Why Russia Has Not Responded to U.S. Sanctions
As we develop this overarching policy framework, it is essential to
understand why we are not seeing any near-term changes in Russian
behavior after 7 years of U.S. sanctions: the Kremlin has largely been
able to stabilize economically despite 7 years of increasing sanctions.
With the recent increase in energy prices and depreciation of the
Russian ruble, the Kremlin has found an economic equilibrium of sorts.
Its GDP is anticipated to grow by 1.5 percent in 2018. \3\ Contrary to
conventional wisdom, Russia is not currently suffering economic
hardship. Conveniently, Moscow can blame any hardships on Western
sanctions and not its own long-term economic mismanagement, which is
beginning to manifest with growing public discontent over the regime's
timid efforts to reform. By redirecting trade patterns, Russia has
renationalized portions of its agricultural and energy sectors and
forced the cannibalization of Russian companies and banks. Russia's
economy will remain vulnerable to volatility in emerging markets and
uncertainty in the commodities market but largely, our economic
sanctions have had little effect on either the regime's economy or
behavior. At the same time, President Putin has effectively
consolidated his leadership of a national security State that is
prepared for a prolonged period of economic stagnation and decline.
---------------------------------------------------------------------------
\3\ ``World Bank Lowers Russia 2018 Economic Growth Forecast'',
Reuters, May 23, 2018, https://www.reuters.com/article/us-russia-
economy-worldbank/world-bank-lowers-russia-2018-economic-growth-
forecast-idUSKCN1IO2MM?il=0.
---------------------------------------------------------------------------
This is not a regime that is tiring; it is a regime that is ready
for the long haul. We, and our European allies, however, are not ready.
Interestingly, of all the sanctions that the U.S. has imposed or
threatened to impose over the past 7 years, what appears to disturb the
Kremlin the most is the worldwide adoption and spread of the Global
Magnitsky Human Rights Accountability Act. This Act shines an
international spotlight on the excesses and corrupt nature of Russia's
oligarchic capitalism, and how it functions within Russian society.
Because the Kremlin has based its economic model and its survival on
kleptocracy, sanctions and other policy instruments dedicated to
preventing the furtherance of corruption--or worse yet in the minds of
the Kremlin, to providing accurate information to the Russian people of
the extent of this corruption--are a powerful countermeasure to
Russia's malign behavior.
A Better Way To Sanction: End Russian Illicit Financing (and U.S.
Complicity With It)
CSIS's longstanding research into better understanding how Russian
malign economic influence works to undermine democratic institutions
and the rule of law in Europe has shown how extensively Russian-backed
corruption, money laundering, illicit financing and opaque beneficial
ownership allows Russian malign influence to persist and proliferate.
The 2016 release of the Panama Papers \4\ exposed extensive levels of
corruption by Russian Government officials and oligarchs through
investigative journalism, to the great embarrassment of the Kremlin.
This was furthered by the 22 million-plus downloads of the ``He Is Not
Dimon to You'' documentary produced by Russian opposition figure,
Alexei Navalny, which showed the extraordinary and extravagant wealth
of Russian Prime Minister Dmitri Medvedev that was reportedly channeled
through charitable foundations. The documentary motivated spontaneous
demonstrations across 80 Russian cities in 2017 and 2018. \5\
---------------------------------------------------------------------------
\4\ Organized Crime and Corruption Reporting Project, ``The Panama
Paper'', 2016, https://www.occrp.org/en/panamapapers/.
\5\ Doug Stanglin, ``Rallies in 80 Russian Cities Protest
President Vladimir Putin on His 65th Birthday'', USA Today, October 7,
2017, https://www.usatoday.com/story/news/2017/10/07/rallies-80-
russian-cities-protest-president-vladimir-putin-his-65th-birthday/
743050001/.
---------------------------------------------------------------------------
The most powerful elements of proposed sanctions legislation, such
as the Defending American Security from the Kremlin Aggression Act of
2018 among others, is the enhanced financial transparency specifically
related to domestic title or beneficial ownership. This legislation has
a vital dual purpose: it simultaneously strengthens U.S. institutions
and rebuilds trust in these institutions while ending Russia's illicit
and corrupt activities. I strongly urge this Committee to quickly craft
and pass legislation enhancing anti- money laundering measures and
fostering greater transparency in ultimate beneficial ownership with a
specific focus on Russia. It is essential to substantially elevate and
empower the Department of the Treasury's Financial Crimes Enforcement
Network (FinCEN) to trace and prosecute illicit Russian-linked
financial flows. \6\
---------------------------------------------------------------------------
\6\ See detailed recommendation in: Heather A. Conley, et al.,
``The Kremlin Playbook: Understanding Russian Influence in Central and
Eastern Europe'', Center for Strategic and International Studies
(October 2016), 31.
---------------------------------------------------------------------------
To my great frustration, if this were an issue of terrorism
financing, there would be no question about our resolve. But when it
comes to addressing Russian illicit financing, which is causing great
damage to our democracy, we hesitate. Why? It is one thing to sanction
a Russian oligarch on the Forbes list, but it is another to dry up
their ill-gotten gains which have left the Russian people in greater
poverty. We must place anti- money laundering on an equal policy
footing with our advanced financial infrastructure to combat terrorism
financing.
This endeavor is also an ideal opportunity for the United States to
work closely with the European Union, which is currently working on a
more robust (5th) anti- money laundering directive, as well as with the
United Kingdom which is also finally getting serious about addressing
its economic dependency on Russian illicit funds, though there is still
much to do. As the Foreign Affairs Committee of the U.K. House of
Commons recently stated, ``associates and allies of the Russian
President . . . use money laundered through London to corrupt our
friends, weaken our alliances and erode faith in our institutions,''
and noted that it was time to ``close the laundromat.'' \7\ We are
given daily reminders of our inability to shut down the Western
``laundromat'' as recent reports of over $30 billion of Russian and
other post-Soviet Nations' funds that went through the Estonian branch
of Danske Bank undetected for years attest. \8\ It is time for the
United States to close the Russian laundromat and affiliated enabling
services that operates within and through the U.S. financial system,
and to work closely with our allies to drain this international swamp.
By doing so we protect the U.S. homeland, as the growing nexus between
the illicit U.S. and international financial systems and attempts by
Russia to influence the 2016 presidential election becomes clear. \9\
---------------------------------------------------------------------------
\7\ House of Commons Foreign Affairs Committee, ``Moscow's Gold:
Russian Corruption in the U.K.'', Eighth Report of Session 2017-2019
(HC 932), https://publications.parliament.uk/pa/cm201719/cmselect/
cmfaff/932/932.pdf.
\8\ Jim Brunsden, Caroline Binham, and Claire Jones, ``Scandals
Expose Flaws in EU Fight Against Dirty Money, Say Watchdogs'', The
Financial Times, September 4, 2018, https://www.ft.com/content/
1090520e-b05a-11e8-8d14-6f049d06439c.
\9\ USA v. Manafort, Jr., et al., Case No. 17-cr-201, October 27,
2017, http://www.dcd.
uscourts.gov/sites/dcd/files/17-201.pdf.
---------------------------------------------------------------------------
Decades ago, the United States successfully established a durable
policy toward the Soviet Union that won the Cold War without direct
military conflict and helped spread greater security and prosperity for
over 100 million people in Central and Eastern Europe. Our future
success therefore does not necessarily lie in imposing new and more
painful sanctions, but it does rest in our ability to develop a clear
long-term policy toward Russia which: (1) defends the homeland; (2)
develops a clear path to return Russia to international legal norms;
and (3) positions the U.S. to once again promote and prioritize the
dignity of the individual and the governed over the privileges of the
State-fed kleptocratic forces in Moscow. We can have the most
significant impact on all three lines of effort by ending illicit
Russian transactions through stronger anti- money laundering, greater
transparency of beneficial ownership, and exposing Russian corruption.
This is fully within this Committee's scope and writ. When it comes to
addressing Russia malign behavior today, the Senate Banking Committee
may be more powerful than the Senate Armed Services Committee.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM MICHAEL A. MCFAUL
Q.1. Discretion and Flexibility. From your testimony, each of
you understand that sanctions, are themselves, not a policy,
strategy, or alternative to diplomacy. In fact, they are a
powerful tool used to advance that policy or strategy.
Based on the experience each of you gained from your
employment with past Administrations, what is your response to
the idea of imposing automatic mandatory sanctions, generally,
and giving the authority to make determinations and
designations to the discretion of the intelligence community?
Drawing on your professional experience with sanctions,
generally, and specifically with regard to Iran, North Korea,
and Russia, how much discretion or flexibility and what kind is
appropriate for an executive branch to retain in using this
tool?
In the context of foreign interference in U.S. elections,
should the penalties imposed on interference by Russia be any
different from that imposed against similar interference by
Iran, North Korea, China, or any other foreign actor?
A.1. Response not received in time for publication.
Q.2. Next Steps and Overuse of Sanctions. The United States is
currently running about 25 active sanctions programs against
rogue Nations and other bad actors, and Ms. Conley notes in her
testimony that there are about 58 separate sets of sanctions
against Russia, alone, spread across 8 broad categories of
policy objectives.
In terms of U.S. policy or strategic objectives, and
according to each of your testimony, very little has been
gained, so is the answer, just to pile on more sanctions and
objectives?
Do we run the risk of losing the effectiveness of the
sanctions tool, if we overuse it?
A.2. Response not received in time for publication.
Q.3. Each U.S. Administration since 1991 has sought to improve
its relationship with Russia, at least at the beginning of its
term, and the Trump administration is not very different in
that respect.
Can there be a path forward to both either preserve or
intensify sanctions and still improve relations with President
Putin and the Russian Federation?
A.3. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM MICHAEL A. MCFAUL
Q.1. I'd like to compare what we saw in 2016, and what we are
seeing today, with Russia's past covert influence efforts. As
most people are aware, the most detailed accounting of Russia's
past activities is the Mitrokhin Archive. On page 243 of the
Mitrokhin Archive, as detailed in ``The Sword and the Shield'',
it states,
It was the extreme priority attached by the Centre (KGB
Headquarters) to discrediting the policies of the
Reagan administration which led Andropov to decree
formally on April 12, 1982, as one of the last acts of
his 15-year term as chairman of the KGB, that is was
the duty of all foreign intelligence officers, whatever
their ``line'' or department, to participate in active
measures. Ensuring that Reagan did not serve a second
term thus became Service A's most important objective.
On February 25, 1983, the Centre instructed its three
American residences to being planning actives measures
to ensure Reagan's defeat in the presidential election
of November 1984. They were ordered to acquire contacts
on the staffs of all possible presidential candidates
and in both party headquarters . . . The Centre made
clear that any candidate, of either party, would be
preferable to Reagan.
Residences around the world were ordered to popularize
the slogan ``Reagan Means War!'' The Centre announced
five active measures ``theses'' to be used . . . his
militarist adventurism; his personal responsibility for
accelerating the arms race; his support for repressive
regimes around the world; his responsibility for
tension with his NATO allies. Active Measures
``theses'' in domestic policy included Reagan's alleged
discrimination against ethnic minorities; corruption in
his Administration; and Reagan's subservience to the
military-industrial complex.
So, in 1982, over 35 years ago, we had the KGB using active
measures in the United States to sow racial discord, try to
create problems with NATO, discredit our nuclear modernization,
undercut military spending, highlight corruptions, and try to
encourage the U.S. to retreat from the world stage.
How would you compare the themes and tactics the KGB used
in 1982, to those we saw in 2016, and are seeing in 2018?
A.1. Response not received in time for publication.
Q.2. The Senate Intelligence Committee has heard testimony in
open session, most notably from then CIA Director Mike Pompeo,
that the Russians are using active measures to undermine our
missile defense deployments, nuclear modernization efforts, and
to try and drive a wedge between the U.S. and NATO on these
issues. Additionally, we know from Mitrokhin and Bob Gate's
memoir ``From the Shadows'' (p. 260) that this was part of
their playbook in the 1980s as well.
How do you believe that the Russians are attempting to use
active measures to undermine U.S. missile defense deployments
and nuclear modernization efforts today?
How do you believe their tactics in these areas today
differ from 1982?
A.2. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM MICHAEL A. MCFAUL
Q.1. American Grand Strategy. In his written testimony,
Ambassador Fried mentioned that a strong Russia policy should
be linked to an ``American Grand Strategy.'' The
Administration's National Security Strategy mostly combines the
threats facing the U.S. in the same categories alongside the
threats we face from China, North Korea, and Iran.
Are you aware of any coordinated efforts from this
Administration, outside of the National Security Strategy, that
specifically addresses the threats we face from Russia?
In addition to sanctions, what do you feel would be an
equivalent response to the actions taken by Russia to interfere
in U.S. elections and undermine American interests abroad?
Please provide any examples of what should you feel should
be included in an ``American Grand Strategy'' that would
contain Russian aggression against U.S. interests, and protect
our democracy from further interference?
A.1. Response not received in time for publication.
Q.2. State Department in Russia. Earlier this year, Russia
expelled 60 U.S. diplomats and closed the U.S. Consulate in St.
Petersburg in the wake of the expulsion of 60 Russian officials
from the United States.
Given your former position as U.S. Ambassador to Russia, in
what ways did the expulsion of these diplomats from Russia
affect our mission in Russia?
In your estimation, how has this action affected the
implementation of U.S. sanctions, if at all?
What State Department programs in Russia are, in your
estimation, currently most effective to advance U.S. interests
there?
A.2. Response not received in time for publication.
Q.3. INTERPOL. In your testimony, you mention that Russia has
an extensive history of violating INTERPOL procedures and
practices in an attempt to detain innocent people in third
countries. Now, in the aftermath of the Helsinki Conference, I
am sorry that you now must worry about being harassed by Russia
through its abuse of INTERPOL.
In your opinion, how should the U.S. address Russian abuse
of the INTERPOL system?
A.3. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM DANIEL FRIED
Q.1. Discretion and Flexibility. From your testimony, each of
you understand that sanctions, are themselves, not a policy,
strategy, or alternative to diplomacy. In fact, they are a
powerful tool used to advance that policy or strategy.
Based on the experience each of you gained from your
employment with past Administrations, what is your response to
the idea of imposing automatic mandatory sanctions, generally,
and giving the authority to make determinations and
designations to the discretion of the intelligence community?
Drawing on your professional experience with sanctions,
generally, and specifically with regard to Iran, North Korea,
and Russia, how much discretion or flexibility and what kind is
appropriate for an executive branch to retain in using this
tool?
In the context of foreign interference in U.S. elections,
should the penalties imposed on interference by Russia be any
different from that imposed against similar interference by
Iran, North Korea, China, or any other foreign actor?
A.1. In general, I am skeptical about legislation that mandates
sanctions and do not favor giving the intelligence community
authority to make policy determinations either generally or
with respect to sanctions designations; such is not its
responsibility. The intelligence community's responsibility, of
course, includes making analytic judgments, including about the
extent of Russian interference in U.S. elections. More broadly,
the executive branch's argument for policy discretion (and
legislative restraint) is stronger when its policy is
understandable and consistent. This Administration, especially
the President, has struggled to articulate a consistent policy
with respect to Russia, and has sometimes obfuscated the
challenge of Russian aggression. Inconsistencies of the
Administration's Russia policy, particularly at the top levels,
may have triggered the various sanctions legislation under
consideration.
Executive branch flexibility is important both in general
and with respect to implementation of sanctions programs. The
Treasury Department's licensing authority is especially
important to mitigate unintended consequences of sanctions in a
timely fashion.
The United States should respond to (and resist)
interference in U.S. elections from all foreign sources, e.g.,
including the Governments of Russia, Iran, and the DPRK. The
tools we chose will differ because, among other things, our
relations with these countries differ, as do the sanctions
regimes we have developed in response to their behavior.
Q.2. Next Steps and Overuse of Sanctions. The United States is
currently running about 25 active sanctions programs against
rogue Nations and other bad actors, and Ms. Conley notes in her
testimony that there are about 58 separate sets of sanctions
against Russia, alone, spread across 8 broad categories of
policy objectives.
In terms of U.S. policy or strategic objectives, and
according to each of your testimony, very little has been
gained, so is the answer, just to pile on more sanctions and
objectives?
Do we run the risk of losing the effectiveness of the
sanctions tool, if we overuse it?
A.2. I do not agree that ``very little has been gained''
through sanctions against Russia. Sanctions imposed against
Russia for its 2014 invasion of Ukraine and illegal attempted
annexation of Crimea appear to have contributed to Russia's
decision to limit its aggression (e.g., retreating from a
trial-balloon claim to even more Ukrainian territory), and may
have convinced Russia to agree to the Minsk Accords framework.
If implemented, the Minsk Accords would restore Ukrainian
sovereignty in the Donbass, a significant success. Additional
sanctions against Russia--for human rights violations,
interference in the 2016 U.S. elections, and the use of nerve
gas in attempted assassinations on U.K. territory--are not a
piling on, but a measured response to continued Russian
aggression in separate contexts.
Misuse of sanctions--for example by failure to work in
concert with allies, overambitious objectives in the use of
sanctions, or moving goalposts with respect to sanctions--can
indeed result in the loss of effectiveness of sanctions.
Continued coordination of Russia sanctions with U.S. allies in
Europe and elsewhere is important to maintain (and if necessary
increase) their impact.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM DANIEL FRIED
Q.1. I'd like to compare what we saw in 2016, and what we are
seeing today, with Russia's past covert influence efforts. As
most people are aware, the most detailed accounting of Russia's
past activities is the Mitrokhin Archive. On page 243 of the
Mitrokhin Archive, as detailed in ``The Sword and the Shield'',
it states,
It was the extreme priority attached by the Centre (KGB
Headquarters) to discrediting the policies of the
Reagan administration which led Andropov to decree
formally on April 12, 1982, as one of the last acts of
his 15-year term as chairman of the KGB, that is was
the duty of all foreign intelligence officers, whatever
their ``line'' or department, to participate in active
measures. Ensuring that Reagan did not serve a second
term thus became Service A's most important objective.
On February 25, 1983, the Centre instructed its three
American residences to being planning actives measures
to ensure Reagan's defeat in the presidential election
of November 1984. They were ordered to acquire contacts
on the staffs of all possible presidential candidates
and in both party headquarters . . . The Centre made
clear that any candidate, of either party, would be
preferable to Reagan.
Residences around the world were ordered to popularize
the slogan ``Reagan Means War!'' The Centre announced
five active measures ``theses'' to be used . . . his
militarist adventurism; his personal responsibility for
accelerating the arms race; his support for repressive
regimes around the world; his responsibility for
tension with his NATO allies. Active Measures
``theses'' in domestic policy included Reagan's alleged
discrimination against ethnic minorities; corruption in
his Administration; and Reagan's subservience to the
military-industrial complex.
So, in 1982, over 35 years ago, we had the KGB using active
measures in the United States to sow racial discord, try to
create problems with NATO, discredit our nuclear modernization,
undercut military spending, highlight corruptions, and try to
encourage the U.S. to retreat from the world stage.
How would you compare the themes and tactics the KGB used
in 1982, to those we saw in 2016, and are seeing in 2018?
The Senate Intelligence Committee has heard testimony in
open session, most notably from then CIA Director Mike Pompeo,
that the Russians are using active measures to undermine our
missile defense deployments, nuclear modernization efforts, and
to try and drive a wedge between the U.S. and NATO on these
issues. Additionally, we know from Mitrokhin and Bob Gate's
memoir ``From the Shadows'' (p. 260) that this was part of
their playbook in the 1980s as well.
How do you believe that the Russians are attempting to use
active measures to undermine U.S. missile defense deployments
and nuclear modernization efforts today?
How do you believe their tactics in these areas today
differ from 1982?
A.1. Current Russian disinformation efforts indeed recall
earlier tactics of Soviet disinformation, including in the
1980s and even the 1930s.
Current Russian disinformation campaigns, especially in
Europe, are aimed at weakening local support for NATO
deployments to NATO's eastern tier of countries (e.g., the
Baltic States, Poland, and Romania) and weakening transatlantic
solidarity generally.
Russian tactics have evolved with technology. For example,
in the 1980s, the Soviets planted stories in African newspapers
that the CIA had created the HIV virus. Within weeks, this
story had migrated to European media and gradually entered the
mainstream media network. Today, however, false stories can be
planted online and given prominence through bots, trolls, and
cyborgs, and can and do enter the mainstream media within a
matter of days or even hours.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM DANIEL FRIED
Q.1. American Grand Strategy. In his written testimony,
Ambassador Fried mentioned that a strong Russia policy should
be linked to an ``American Grand Strategy.'' The
Administration's National Security Strategy mostly combines the
threats facing the U.S. in the same categories alongside the
threats we face from China, North Korea, and Iran.
Are you aware of any coordinated efforts from this
Administration, outside of the National Security Strategy, that
specifically addresses the threats we face from Russia?
In addition to sanctions, what do you feel would be an
equivalent response to the actions taken by Russia to interfere
in U.S. elections and undermine American interests abroad?
Please provide any examples of what should you feel should
be included in an ``American Grand Strategy'' that would
contain Russian aggression against U.S. interests, and protect
our democracy from further interference?
A.1. The Administration has built on the last Administration's
efforts to resist Russian aggression, including by continuing
sanctions from the Obama administration and adding new ones. It
has also continued and even strengthened the Obama
administration efforts to increase NATO's ability to defend
countries on its eastern flank most vulnerable to Russian
aggression. That said, the President's language, e.g., at his
Helsinki press conference with Russian President Vladimir Putin
last July, has sent mixed messages, probably weakening the
impact of otherwise laudable policy steps.
The United States should lead its allies in Europe and Asia
in efforts to resist Russian aggression. In addition to
sanctions, this should include increasing NATO's military
support for its most vulnerable members, efforts to plan for
(and potentially counter) Russian hybrid and cyberattacks, and
development of potential escalatory sanctions and other actions
to deploy if Russia intensifies its aggression. Finally, the
U.S. and its allies should support countries not in NATO or the
EU, such as Ukraine and Georgia which are seeking to strengthen
their sovereignty against Russian pressure within a framework
of democratic and free-market reforms. At the same time, the
U.S. and its transatlantic allies should maintain ties with
Russian society, keeping in mind that Russia is more than just
President Putin and the Kremlin power structure.
American Grand Strategy for the past hundred years has
sought to advance a rules-based world system which favors
democracy. First articulated by Woodrow Wilson in 1918, and
later by Presidents Roosevelt, Truman, Kennedy, and Reagan,
American Grand Strategy held that our interests would advance
with our values; and that America would prosper in an open
world regulated by rules, not a world with closed economic
empires and spheres of influence. Since 1945 and again since
1989, the U.S. has led the Nations of the free world to advance
our mutual values and interests, and resist aggression from
predatory powers. American Grand Strategy should be built on a
foundation of free Nations, democracies committed to the rule
of law, working together, and on that basis should seek to
contain Russian (and Chinese) aggression and predatory
behavior.
Q.2. State Department in Russia. Earlier this year, Russia
expelled 60 U.S. diplomats and closed the U.S. Consulate in St.
Petersburg in the wake of the expulsion of 60 Russian officials
from the United States.
In what ways do you believe the expulsion of these
diplomats from Russia affect our mission in there?
In your estimation, how has this action affected the
implementation of U.S. sanctions, if at all?
What State Department programs in Russia are, in your
estimation, currently most effective to advance U.S. interests
there?
A.2. As was the case with rounds of reciprocal expulsions of
Soviet and U.S. diplomats in the 1980s, the loss of trained and
skilled foreign service personnel in our Embassy and Consulates
in Russia does damage our ability to advance U.S. interests.
Experience suggests, however, that a strong response to Russian
aggression (these latest expulsions were a response to Russian
use of nerve gas in the U.K. in an attempt to murder two
Russians living there) is worth the cost.
The loss of U.S. diplomatic personnel in Russia should not
significantly damage U.S. ability to administer our sanctions
program, since most U.S. sanctions are administered and
enforced the U.S. Treasury.
It is important to maintain regular contacts with the
Russian Government and Russian society. In a society without a
free press, which has been the case in Russia for some time,
direct knowledge of developments is critical. Beyond daily
diplomatic work and regular contacts with society, the long-
term impact of cultural exchanges and other forms of outreach
to Russians can advance our interests by helping counter the
reach of Russian official propaganda. This was one lesson of
the Cold War and it remains viable today.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM RACHEL ZIEMBA
Q.1. Discretion and Flexibility. From your testimony, each of
you understand that sanctions, are themselves, not a policy,
strategy, or alternative to diplomacy. In fact, they are a
powerful tool used to advance that policy or strategy.
Based on the experience each of you gained from your
employment with past Administrations, what is your response to
the idea of imposing automatic mandatory sanctions, generally,
and giving the authority to make determinations and
designations to the discretion of the intelligence community?
Drawing on your professional experience with sanctions,
generally, and specifically with regard to Iran, North Korea,
and Russia, how much discretion or flexibility and what kind is
appropriate for an executive branch to retain in using this
tool?
In the context of foreign interference in U.S. elections,
should the penalties imposed on interference by Russia be any
different from that imposed against similar interference by
Iran, North Korea, China, or any other foreign actor?
A.1. Response not received in time for publication.
Q.2. Next Steps and Overuse of Sanctions. The United States is
currently running about 25 active sanctions programs against
rogue Nations and other bad actors, and Ms. Conley notes in her
testimony that there are about 58 separate sets of sanctions
against Russia, alone, spread across 8 broad categories of
policy objectives.
In terms of U.S. policy or strategic objectives, and
according to each of your testimony, very little has been
gained, so is the answer, just to pile on more sanctions and
objectives?
Do we run the risk of losing the effectiveness of the
sanctions tool, if we overuse it?
A.2. Response not received in time for publication.
Q.3. Russia's banking interests are powerful, global, and
certainly not the most transparent. Almost everyone would agree
that Russian laundering must be stopped as a national security
priority.
Is the world prepared to unravel the myriad of networks
that encompass Russia's nested shell corporations within shell
corporations to find a true Russian beneficial owner?
Is this something that can be accomplished by the U.S.
alone?
A.3. Response not received in time for publication.
Q.4. Russia's Energy Sanctions. When sectoral sanctions were
first imposed, the energy sector sanctions only targeted deep-
water, offshore Arctic and shale oil exploration.
Can energy sector sanctions bear expansion, over those
prescribed in CAATSA and in what way?
What would be the consequences or costs of expansion?
In your opinion, would such an expansion lead to a change
in Putin's behavior?
A.4. Response not received in time for publication.
Q.5. Russian Mitigation Efforts. The Russians are said to be
taking steps to prepare for a next round of Administration
sanctions or new legislation that may involve financial,
energy, and sovereign debt sanctions.
Could you explain what defensive steps are available to the
Russians and how successful they might be against that next
evolution of sanctions?
How is Russia adapting to mitigate the impact of current
sanctions, and can the United States counter that mitigation?
A.5. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM HEATHER A. CONLEY
Q.1. Discretion and Flexibility. From your testimony, each of
you understand that sanctions, are themselves, not a policy,
strategy, or alternative to diplomacy. In fact, they are a
powerful tool used to advance that policy or strategy.
Based on the experience each of you gained from your
employment with past Administrations, what is your response to
the idea of imposing automatic mandatory sanctions, generally,
and giving the authority to make determinations and
designations to the discretion of the intelligence community?
A.1. Mandatory sanctions are appropriate for the most clear and
heinous violations of international law and for those
individuals and entities that significantly threaten U.S.
national security. I do not support giving the sole authority
to make such determinations and designations to the
intelligence community (IC). The IC should present its findings
to the legislative and executive branches, and it is for the
executive branch to propose and the legislative branch to place
into law--should that be necessary--the imposition of
sanctions. Should the executive branch fail to implement the
law, Congress must hold the executive branch accountable and
develop legislation that is consistent with U.S. treaty
obligations and other areas of import to U.S. national
security.
Q.2. Drawing on your professional experience with sanctions,
generally, and specifically with regard to Iran, North Korea,
and Russia, how much discretion or flexibility and what kind is
appropriate for an executive branch to retain in using this
tool?
A.2. Discretion and flexibility--like respect--must be earned.
They are not rights. If there is strong oversight of the
executive branch's policy actions by Congress and bipartisan
support for those policies, discretion and flexibility are
appropriate and very important to policy formation. If,
however, oversight is lax or partisan in nature and/or the
executive branch's proposed policies do not achieve the
promised or anticipated results, it would be appropriate for
Congress to reduce the degree of discretion and flexibility
afforded the executive branch over sanctions policy. It is
equally important that Congress conduct rigorous oversight over
the implementation of existing sanctions legislation. If
implementation by the executive branch is found to be lacking,
further reduction of discretion and flexibility is fully
warranted, and Congress must step in to develop legislation
that is consistent with U.S. treaty obligations and the
protection of U.S. national security.
Q.3. In the context of foreign interference in U.S. elections,
should the penalties imposed on interference by Russia be any
different from that imposed against similar interference by
Iran, North Korea, China, or any other foreign actor?
A.3. There should be a standard penalty for State actors which
interfere in the U.S. election process. The executive branch,
in consultation with the legislative branch, should establish
clear thresholds of behavior that would constitute gross
interference in the U.S. election process and its institutions
at the tribal, local, State, or Federal level by any foreign
actor. This could include a cyberattack on or the implantation
of malware in election infrastructure, cybermanipulations of
voter registration data, etc.
More difficult to counter is the widespread use of
disinformation and voter suppression efforts by foreign actors
with the unwitting or witting support of American proxies. The
U.S. Government can and has sanctioned individuals and entities
that are involved in disinformation, but it is impossible to
know the impact that disinformation could have on American
citizens and their voting or nonvoting preferences. To combat
disinformation, the U.S. Government must develop a
comprehensive public education and awareness strategy that
could consist of public service announcements, bipartisan
political announcements at the local, State and Federal level
and news literacy initiatives. This could include national
awareness campaigns regarding the risk of foreign interference
from actors such as Russia.
Q.4. Next Steps and Overuse of Sanctions. The United States is
currently running about 25 active sanctions programs against
rogue Nations and other bad actors, and Ms. Conley notes in her
testimony that there are about 58 separate sets of sanctions
against Russia, alone, spread across 8 broad categories of
policy objectives.
In terms of U.S. policy or strategic objectives, and
according to each of your testimony, very little has been
gained, so is the answer, just to pile on more sanctions and
objectives?
Do we run the risk of losing the effectiveness of the
sanctions tool, if we overuse it?
A.4. No, piling on is not the answer. The more you randomly
pile on and the more policy objectives you have, the less
efficacious the overall effect of sanctions becomes. Sanctions
must be selectively used for an urgent policy imperative,
selectively targeted to maximize pressure, and very powerfully
applied at the beginning of the policy violation rather than
slowly turning up sanctions pressure over a long period of
time. This is a change in approach to how sanctions are
normally applied, i.e. imposed slowly and ratcheted up over
time.
The United States is already experiencing the effects of
sanctions overuse, which will eventually lead to diminishing
policy returns on U.S. sanctions. Adversaries and allies alike
are able to resist sanctions more effectively by creating
parallel and alternative structures to the U.S. financial
system to avoid the impact of sanctions or secondary sanctions.
For example, the European Union is establishing a Special
Purpose Vehicle (SPV)--a clearing house of sorts--to attempt to
shelter firms from the impact of U.S. secondary sanctions from
the snap-back of sanctions against Iran. China is creating
bartering-like systems and separate financial mechanisms to
prevent interaction with U.S. banks. Thus, there is a clear
risk of losing the power of sanctions if they are too often
applied, or without clear objectives and timelines.
Q.5. Russia's banking interests are powerful, global, and
certainly not the most transparent. Almost everyone would agree
that Russian laundering must be stopped as a national security
priority.
Is the world prepared to unravel the myriad of networks
that encompass Russia's nested shell corporations within shell
corporations to find a true Russian beneficial owner?
A.5. Certainly, the political Western world is not prepared for
the full truth about how much it has enabled illicit Russian
financial flows or how much of this money runs through
communities in the United States and in Europe. Like the
political explosions following the release of the Panama
Papers, the Paradise Papers, and the Russian Laundromat report,
Governments may fall, prime ministers and senior officials may
be forced to resign, political party financing will be
scrutinized, and high-level individuals may go to jail. There
will be great embarrassment and careers will be ruined.
However, shining a full light on the extent of these networks
is the only way to begin to: (1) restore and rebuild trust and
confidence in open and free democratic societies, their leaders
and institutions; (2) shut down a mechanism through which
foreign adversaries can influence and manipulate a country's
policies; and (3) place a crippling blow against corrupt
authoritarians, kleptocrats and murderous regimes. The only
question is: Why wouldn't the full force and power of the U.S.
Government be used to expose these networks--unless the U.S.
itself has grown susceptible to the monied influence of these
networks?
Q.6. Is this something that can be accomplished by the U.S.
alone?
A.6. No, the U.S. cannot do this alone. It must work closely
with like-minded allies and partners because when illicit
networks are foiled in one place, these networks will
reconstitute in another environment that is more hospitable to
illicit financing. Just as the U.S. financial system is an
extraordinarily powerful tool when it comes to sanctions, it is
an equally powerful tool when it comes to stopping illicit
financing of any kind. Examples of this are the closure of the
Latvian ABLV Bank and the significant fines against Deutsche
Bank, Societe Generale, and potentially Danske Bank. While the
U.S. has demonstrated great leadership externally, it has not
focused enough on its own institutions and affiliated enablers
of illicit financial transactions such as boutique investment
firms, as well as tax and legal counsel, and legal support to
construct opaque shell companies and tax havens that may be
used for illicit purposes--the so-called `corporate service
providers' or Designated Non-Financial Businesses and
Professions as they are classified by the intergovernmental
Financial Action Task Force. \1\
---------------------------------------------------------------------------
\1\ Financial Action Task Force Glossary, http://www.fatf-
gafi.org/glossary/d-i/.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM HEATHER A. CONLEY
Q.1. I'd like to compare what we saw in 2016, and what we are
seeing today, with Russia's past covert influence efforts. As
most people are aware, the most detailed accounting of Russia's
past activities is the Mitrokhin Archive. On page 243 of the
Mitrokhin Archive, as detailed in ``The Sword and the Shield'',
it states,
It was the extreme priority attached by the Centre (KGB
Headquarters) to discrediting the policies of the
Reagan administration which led Andropov to decree
formally on April 12, 1982, as one of the last acts of
his 15-year term as chairman of the KGB, that is was
the duty of all foreign intelligence officers, whatever
their ``line'' or department, to participate in active
measures. Ensuring that Reagan did not serve a second
term thus became Service A's most important objective.
On February 25, 1983, the Centre instructed its three
American residences to being planning actives measures
to ensure Reagan's defeat in the presidential election
of November 1984. They were ordered to acquire contacts
on the staffs of all possible presidential candidates
and in both party headquarters . . . The Centre made
clear that any candidate, of either party, would be
preferable to Reagan.
Residences around the world were ordered to popularize
the slogan ``Reagan Means War!'' The Centre announced
five active measures ``theses'' to be used . . . his
militarist adventurism; his personal responsibility for
accelerating the arms race; his support for repressive
regimes around the world; his responsibility for
tension with his NATO allies. Active Measures
``theses'' in domestic policy included Reagan's alleged
discrimination against ethnic minorities; corruption in
his Administration; and Reagan's subservience to the
military-industrial complex.
So, in 1982, over 35 years ago, we had the KGB using active
measures in the United States to sow racial discord, try to
create problems with NATO, discredit our nuclear modernization,
undercut military spending, highlight corruptions, and try to
encourage the U.S. to retreat from the world stage.
How would you compare the themes and tactics the KGB used
in 1982, to those we saw in 2016, and are seeing in 2018?
A.1. The tactics of Soviet-era active measures are very similar
to those that the Russian Federation deploys today, with the
difference being that the Kremlin has harnessed 21st century
information technologies for much greater and damaging affect.
But, unlike in 1982, the United States has not developed an
effective response. Moreover, during the Cold Ward, the
American people clearly understood that the Soviet Union was
its adversary, and there was a general national consensus
regarding Soviet disinformation tactics against the United
States, such as the use of doctored photographs, documents and
placement of false stories in newspapers. Unfortunately, this
national consensus for a new generation of Americans does not
exist today. There is little bipartisan or national
understanding of the sophisticated and encompassing nature of
the threat, and there is no national strategy to combat it.
Tragically, the many manifestations of Russian malign influence
have become caught in growing American partisanship to such a
point where the Kremlin does not need to exert itself much to
exploit and deepen divisions within American society.
In 1982, President Reagan understood the leadership
imperative to combat Soviet active measures: (1) the clarion
call that the Soviet Union was ``an evil empire'' (although
this was very controversial at the time); (2) the use all
Government resources and instruments of power which were
focused uniquely on one adversary to defeat the Soviet Union at
home and abroad; and, perhaps most importantly, (3) the issuing
of a presidential directive that instructed the U.S. Government
to go on the democratic, civil society, and human rights
offensive to provide encouragement and hope to those who
believed in and fought for the dignity of the individual over
the repression of the State. None of those elements exists
today. And finally, it would be hard to believe that if anyone
on Ronald Reagan's campaign--most of whom had served in combat
or were steeped in the Cold War ethos--had been approached by a
Russian official or intermediary, they would not have quickly
alerted Government officials to the approach.
Q.2. The Senate Intelligence Committee has heard testimony in
open session, most notably from then CIA Director Mike Pompeo,
that the Russians are using active measures to undermine our
missile defense deployments, nuclear modernization efforts, and
to try and drive a wedge between the U.S. and NATO on these
issues. Additionally, we know from Mitrokhin and Bob Gate's
memoir ``From the Shadows'' (p. 260) that this was part of
their playbook in the 1980s as well.
How do you believe that the Russians are attempting to use
active measures to undermine U.S. missile defense deployments
and nuclear modernization efforts today?
How do you believe their tactics in these areas today
differ from 1982?
A.2. Again, the Kremlin does not need to exert itself much,
particularly in relation to the status of the Intermediate-
Range Nuclear Forces (INF) Treaty, because of actions taken by
the U.S. Government. President Trump's mention of U.S.
withdrawal from the INF Treaty at a campaign rally on October
20 without prior consultation with allies and prior to
Ambassador John Bolton's meeting with Russian leaders,
significantly undermined alliance unity and led to condemnation
of the United States for unilateral withdrawal from the treaty,
rather than where the international condemnation rightfully
belongs: Russia's material breach of the INF Treaty for at
least the past 5 years. Therefore, tactics for ``personal
responsibility for accelerating the arms race'' and
``responsibility for tensions with NATO allies'' were exactly
the same mission the Kremlin had in 1982, except that the
United States is now aiding and abating it. All the Kremlin
needs to do is amplify American actions and subsequent
criticism of these actions; it does not need to do much to
undermine the treaty or nuclear modernization efforts. Their
work is being done for them.
Prior to the INF Treaty controversy, the Kremlin had
frequently used scare tactics regarding nuclear weapons.
Whether it was the provocative address by President Putin on
March 1 of this year where he demanded that all countries
``listen to Russia now'' as it has developed and is willing to
use new nuclear weapons, senior Russian officials giving
provocative statements and making threatening comments in the
press (e.g., the Russian Ambassador to Denmark suggesting that
Russia could retaliate with nuclear weapons were Denmark to
join NATO's missile defense shield \1\), or exercising with
nuclear weapons, \2\ Moscow seems to target those countries
that are closely working with NATO and the United States
bilaterally, those who could become NATO members in the future
(Finland and Sweden), those countries that are hosting
components of NATO's missile defense system (Poland and
Romania) or contemplating hosting future missile defense
components. These tactics are in part meant to reinforce
Russia's status as a great power ``that will be listened to''
by the West, but for the most part they are designed to
influence public opinion and turn it against cooperation with
the United States or NATO.
---------------------------------------------------------------------------
\1\ Adam Withnall, ``Russia Threatens Denmark With Nuclear Weapons
if It Tries To Join NATO Defence Shield'', The Independent, March 22,
2015, https://www.independent.co.uk/news/world/europe/russia-threatens-
denmark-with-nuclear-weapons-if-it-tries-to-join-nato-defence-shield-
10125529.html.
\2\ Robin Emmott and Andrius Sytas, ``Russia's Zapad War Games
Unnerve the West'', Reuters, September 13, 2017, https://
www.reuters.com/article/us-russia-nato/russias-zapad-war-games-unnerve-
the-west-idUSKCN1BO1OG.
---------------------------------------------------------------------------
Typically, these heavy-handed tactics have the exact
opposite effect: Governments seek to work more closely with
NATO and the United States, like they did during the Cold War.
However, because of the political fragmentation in Europe as
well as the spread in Russian malign influence, Russian active
measures may be much more successful today. The United States
is also much less focused on Russia as a national security
challenge in 2018; it has a much-weakened national security
interagency process and leadership team; and it is in a chronic
antagonistic posture toward its allies. These are perfect
conditions for Russian active measures to be much more
successful than they were in the 1980s.