Halting Nord Stream 2 leaves Russia with ‘a long-term vulnerability,’ Biden advisor says
Yahoo Finance Video
Deputy National Security Advisor for International Economics under the Biden Administration Daleep Singh joins Yahoo Finance Live to discuss the Biden administration's first tranche of sanctions against Russia, the Nord Stream 2 pipeline, and the financial impacts stemming from the Russia-Ukraine conflict.
Video Transcript
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- Welcome back. You're watching "Yahoo Finance Live." And we continue to follow the potential economic fallout from Ukraine-Russia tensions. So let's get more context on how the sanctions are working and what's next.
I'm joined by Daleep Singh, Deputy National Security Advisor for International Economics under the Biden administration. Thank you for taking the time to join us. Now, we know the administration plans to impose sanctions on the company constructing the Nord Stream 2 pipeline between Russia and Germany following a similar move by Germany. What message does that send to Russia? And how damaging will that potentially be to Russia's economy?
DALEEP SINGH: Good to be with you, Michele. Well, it means that we are serious about atrophying Russia's power if he continues his aggression in Ukraine. You know, this was Putin's prized natural gas pipeline that runs to Germany. He put $11 billion into this investment. It would have generated billions and billions of cash for Russia's financial coffers.
And we've now, with the help of Germany, shut it down. And that means Europe is going to accelerate its diversification away from Russian energy. It also means that Russia is going to have a long-term vulnerability because it depends on oil and gas revenues to motor its growth. It's 2/3 of Russia's export revenues. It's almost half of its budget revenues. So this is a serious blow to Putin. It's just the beginning.
- And this certainly comes on top of the first tranche of sanctions that were already announced by the president targeting Russian banks and sovereign debt among others, still leaving room, though, to ramp up sanctions if needed. Now, how are you determining the effectiveness of the sanctions so far?
DALEEP SINGH: Yeah, well, first of all, we don't judge the effect by one day. But if you look at the last three months when we started to signal exactly what kinds of costs we would impose, the effects are extremely serious. The Russian stock market is down almost 30% over that time period. The Russian currency has lost almost 15% of its value. And government borrowing rates in Russia have spiked well above 10%.
Now, over time-- and looking back to 2014, this is not just an abstract expectation-- what we'll create is a negative feedback loop, a vicious feedback loop between capital outflows, a weaker currency, imported inflation, higher imported inflation, a hit to Russia's purchasing power, lower investment, and lower growth. And the velocity of that negative feedback loop, it will be determined by Putin's own choices, his escalation, not prescribed in advance by DC policymakers.
- So then as we look at this toolkit that the Biden administration has at its disposal, I want to talk about its use of the export administration regulations that do allow for the banning of foreign and domestic companies from exporting products to Russia. How do you see the administration potentially using this?
DALEEP SINGH: Yeah, this is an important tool in our toolkit. Much like financial sanctions, export controls deny something to Russia that it needs and that it can't replace from anywhere else. In the case of export controls, we're talking about critical technology inputs. In the case of financial sanctions, we're talking about foreign capital. So when I say critical technology inputs, I'm talking about the foundational technologies of our time-- artificial intelligence, semiconductors, quantum computing, robotics, hypersonic flight.
In almost each of those cases, these technologies are designed, they're produced, by the US or one of our allies and partners. And it's not surprising. The West and open societies tend to be where innovation, entrepreneurship, and risk-taking flourish.
If we shut down those critical technology inputs, then President Putin has very little ability to diversify his economy outside of oil and gas. He has very limited ability to modernize his economy. He said himself he has strategic ambition to develop an aerospace sector, a modern defense sector, a high-tech sector. He can't do that without these technologies.
- And so how does that work in concert with some of the efforts also then and the initiatives coming from allies and partners in Europe?
DALEEP SINGH: Yeah, it can only work in tandem with our allies and partners in Europe, but also in Asia. So take semiconductors. We know almost all of the leading-edge semiconductor chips are produced in Taiwan and Korea. And what this rule allows us to do is to move in lockstep with our European partners as well as our Asian partners.
And so that's what shuts out-- that's what shuts out Russia from the critical technologies that it needs. China has been mentioned as a substitute. But if you look at each of those technologies, and you consider how much could China actually substitute, not just for what the US supplies, but also Europe and Asia, it's a very small percentage of the total.
- So then how much of this ramping up could we expect in the next tranche of sanctions?
DALEEP SINGH: That's up to President Putin. You know, this was the beginning of an invasion. And this was the beginning of our response. What I can tell you is that the cost could ratchet much higher. Yesterday, the financial sanctions we imposed on banks, on Russian banks, they had about $80 billion dollars in assets. If we were to take these measures on the two largest banks in Russia, you're looking at $750 billion in assets. It's almost 10 times higher.
We've yet to unveil any of these export controls that I just described. The sanctions that we placed on Russian elites, we had a list of five of them that we imposed sanctions on yesterday. There's a much longer list of people in Russia who benefited from kleptocracy and gained from corruption at the expense of the Russian people. And now, they're going to have to share in the pain of these sanctions.
- Now, as is always the case with sanctions, obviously the possibility of blowback. And we did see President Biden acknowledging that sanctions and possible retaliatory sanctions from Russia could impact American consumers, who are already dealing with record-high inflation. Now, we have seen that the US is eyeing a release from oil reserves as prices rise on Ukraine issues. What can Americans expect in terms of energy prices in the short to long term? And how are the supply chains being managed to try and lessen the blow?
DALEEP SINGH: Yeah, well, if you look at the linkages between the Russian economy and the US economy, the direct trade linkages are fairly modest. Russia's our 26th largest goods trading partner. The financial linkages as well, they're more significant, but they're also contained. And investors have had years and years to reduce their exposures to Russia. It's really in the energy markets where Russia has systemic importance-- second-largest producer of natural gas in the world, third-largest producer of crude oil.
Let me make a few points here, though. Number one, none of our measures are designed to reduce Russia's ability to supply crude oil to global markets. Number two, there's been no supply disruption thus far from Russia as it relates to oil. Number three, it would be a terrible mistake for Russia to weaponize its oil supply. As I mentioned before, it depends on oil and gas revenues for its exports and for the Russian government's budget revenues.
And number four-- and this is really important-- think of the counterfactual if we mounted no response to unchecked Russian aggression in the heart of Europe. This could be the largest land invasion in Europe in the post-Cold War era.
Think of the uncertainties it would cause if that occurred without any response from the West, the chilling effect it would cause, the questions that will be asked about which country is next and which autocrat, which bully was going to exert-- was going to try to exert a sphere of influence somewhere else. Those costs would be much higher. And those are not costs we're willing to tolerate.
- And it certainly is a balancing act between having these sanctions to try and calm things down versus perhaps pushing too far and seeing retaliation get further and further. But we did see that when it came to the annexation of Crimea, there were also tough sanctions put in place. But the annex-- and the annexation did still happen. How do you respond to concerns that either the sanctions don't go far enough or that they won't be enough to stop President Putin from claiming these regions of Donetsk and Luhansk?
DALEEP SINGH: Well, people need to understand is that we follow a set of guiding principles when we think about sanctions. We're not cowboys applying arbitrary and capricious sanctions to the rest of the world. They have to be-- they have to be powerful enough to demonstrate our resolve. That's important. But number two, they have to be responsible to avoid unwanted spillovers to the global economy.
Number three, they have to be-- we believe they have to be coordinated. So we design them to maximize the chance of moving in lockstep with our partners. Number four, they have to be sustainable. Sanctions work over the long term. And lastly, they have to be flexible. They have to preserve our option to escalate or de-escalate depending on Putin's choices.
- Well, thank you so much for joining us today. Daleep Singh, the Deputy National Security Advisor for International Economics under the Biden administration, thank you for your update.