Congressional Hearings
COUNTERING RUSSIA: ASSESSING NEW TOOLS
Congressional Hearings
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Congress: Senate
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| AUTHORITYID | CHAMBER | TYPE | COMMITTEENAME |
|---|---|---|---|
| ssbk00 | S | S | Committee on Banking, Housing, and Urban Affairs |
[Senate Hearing 115-378]
[From the U.S. Government Publishing Office]
S. Hrg. 115-378
COUNTERING RUSSIA: ASSESSING NEW TOOLS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING A LIST OF POTENTIAL POLICY RESPONSES TO RUSSIA DRAWN FROM
VARIOUS SPHERES, INCLUDING TRADE, LAW ENFORCEMENT, MILITARY,
CYBERSECURITY, ENERGY, AND FOREIGN AID
__________
SEPTEMBER 12, 2018
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
32-665 PDF WASHINGTON : 2019
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
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
----------
WEDNESDAY, SEPTEMBER 12, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 26
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
Prepared statement....................................... 27
WITNESSES
Leon Aron, Resident Scholar and Director of Russian Studies,
American Enterprise Institute.................................. 4
Prepared statement........................................... 28
Responses to written questions of:
Chairman Crapo........................................... 41
Elizabeth Rosenberg, Senior Fellow and Director, Energy,
Economics, and Security Program, Center for a New American
Security....................................................... 6
Prepared statement........................................... 30
Responses to written questions of:
Chairman Crapo........................................... 42
Senator Reed............................................. 44
Senator Tester........................................... 45
Daleep Singh, Senior Fellow, Atlantic Council, and Adjunct
Professor, Johns Hopkins University............................ 8
Prepared statement........................................... 36
Responses to written questions of:
Chairman Crapo........................................... 46
Senator Reed............................................. 49
(iii)
COUNTERING RUSSIA: ASSESSING NEW TOOLS
----------
WEDNESDAY, SEPTEMBER 12, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:31 p.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.
Let me begin by thanking our witnesses for agreeing to
testify this afternoon and to help the Committee gain a better
understanding of what might motivate the Russian Federation's
President Vladimir Putin to change his present dangerous and
destabilizing course.
Further to the Administration's commitment to protecting
our Nation's elections from foreign interference, the White
House announced this morning a new Executive order, based on
its finding that the ability of foreigners to interfere in U.S.
elections is an unusual and extraordinary threat to the
national security of the United States.
The Executive order is entitled, ``Imposing Sanctions in
the Event of Foreign Interference in a United States Election''
and requires the Director of National Intelligence to analyze
and report on foreign Government actions, the AG and Homeland
Security to report on whether or not the election was
materially affected by any foreign interference, and then
requires the Secretaries of Treasury and State to impose
whatever sanctions they determine appropriate. A little bit
later, I am sure we may want to know what the impression of
this is from our witnesses.
Today the Committee meets for the third time in as many
weeks on the subject of Russia and President Putin's
aggressive, malign activities directed against the United
States, its allies, and spheres of influence.
The hearings we have held so far have centered on the
implementation status and the economic and political
effectiveness of the existing sanctions architecture on Russia,
including an assessment of the Countering America's Adversaries
through Sanctions Act of 2017, or ``CAATSA'', as it is now
known, and the Administration's use of its own authorities to
sanction Russia.
In the course of those hearings, the Committee also
explored the potential for expanding on the existing set of
sanctions authorities in order to amplify the economic effects
on Russia sufficient to cause a change in Putin's behavior and
strategic calculus.
In our first hearing, we asked Administration officials
drawn from the Departments of Treasury, State, and Homeland
Security to testify on the question of whether or not the
implementation of existing sanctions against Russia are working
to deter or otherwise change Putin's behavior or strategic
calculus with regard to the Kremlin's complete lack of regard
for sovereign territorial integrity and independence of
democratic institutions.
The Administration has sanctioned over 230 individuals and
entities for violations of congressional and Administration
sanctions authorities, and further reported that it was
stepping up its efforts to defend our Nation's critical
infrastructure and aggressively support State and local efforts
to secure the 2018 U.S. midterm elections.
Those targeted include the heads of major State-owned banks
and energy companies, many of Putin's closest associates or
oligarchs, and several Russian actors for interference in the
2016 elections.
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.
In our second hearing, a panel of outside experts testified
on the same question as the Administration, offering their own
views on the need for the Administration to have a cohesive
Russia strategy and implement CAATSA fully, while Congress
considers enacting new sanctions legislation.
The Committee received testimony from the outside experts
on the need for new, increased sanctions, since Russia has
adapted itself to the current round of sanctions and, in fact,
its economy has developed a resilience to the sanctions imposed
by the United States and Europe.
As Rachel Ziemba explained in her testimony from our last
hearing, ``Russia's economy may not be thriving, but it is
surviving.'' And many analysts believe that situation can exist
for a long time.
Yet we also received testimony from each witness that a
serious amplification of sanctions is fraught with the
potential for unacceptable blowback against the United States
and European interests and our interests in the Middle East and
Asia, unless carefully constructed and tied to specific
behaviors while appropriate discretion and off-ramps are
carefully tailored.
Sanctions alone are no silver bullet and do not guarantee
quick reversals of undesirable behaviors no matter how
draconian the sanction, especially since the more draconian the
sanction, the more difficult multilateral participation and
enforcement become.
It stands to reason then that new sanctions must at least
be accompanied by other tools to constrain a large Nation like
Russia and deter a ruler like Putin from future malign
activities.
I look forward to a broader discussion this afternoon on
resisting Putin's aggression from a broader range of
geoeconomic and strategic policy options available to the
United States and its allies.
In addition to the sanctions discussed in our previous
hearings, what other proposals should Congress and the
President be considering to reach a desirable outcome with
Russia? How susceptible to domestic unrest is Putin's regime?
How important is it that the United States and Europe support
each other's Russia strategy, and what would that have to look
like?
We must, as a Nation, find that prescription for sanctions
and other measures that break the factors contributing to a
Russian resilience to economic sanctions and put real pressure
on Putin to change his map for Kremlin hegemony.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for calling this
hearing and our earlier hearings on the impact of Russia
sanctions and what we might do to bolster them and to encourage
the Administration to do its job.
We are joined by a distinguished panel of witnesses. I look
forward to hearing from the three of you. Thank you.
We will hear some new ideas--sanctions and nonsanctions
tools alike--that might be more aggressively deployed to
counter Russian aggression.
This may include new sovereign debt and energy sanctions,
transparency and anticorruption measures to combat Russian-
generated money laundering through U.S. real estate
transactions and offshore sources; and other measures to combat
Russian illicit finance risks, or even to codify limits on
Russia's access to World Bank and other international financial
institution resources.
Our last hearing made clear that additional transparency
would hit Russian elites where it hurts--in their pocketbooks,
including their multimillion-dollar Manhattan and Miami condos.
As we have heard in prior hearings, there is little
disagreement that while sanctions have had some effect on
Russia's economy, they are not having much effect on Putin's
decision making.
Russian abuses in Crimea and Eastern Ukraine, Syria, and
here in the U.S. against our elections and other critical
infrastructure are common knowledge.
Just this week, reports surfaced that the Russians may be
behind the attacks on the health of our personnel in Cuba. They
are supporting Assad's efforts to overtake the holdout province
of Idlib, potentially with the use of chemical weapons, just as
they have so brutally used barrel bombs against civilians
there. With over 3 million refugees and other civilians trapped
by intensified bombing, the U.N. has described Idlib as
``potentially the largest humanitarian catastrophe of our new
century.''
Russian aggression continues unchecked here. During our
hearings, no one on this Committee has challenged established
conclusions of fact by the U.S. intelligence community about
Russia's involvement in ongoing attacks against our elections
and our infrastructure.
And as our witnesses observed last week, we have to quickly
resolve the growing tension between what military,
intelligence, diplomatic, sanctions, and other professionals in
the U.S. Government are doing to punish and deter Russia and,
conversely, too often what the President is saying and doing.
Our Government must speak with one voice. The President
should make clear how he will use CAATSA to forcefully respond
to Russian attacks and actually use the Executive order being
issued today to sanction Russian actors found responsible for
attacks directed at the midterms.
But as Ms. Rosenberg points out in her written testimony, a
permissive--and underwhelming, my word--Executive order on
election meddling is no substitute for further congressionally
mandated actions and sanctions.
An order which effectively permits but does not
automatically require sanctions for continued illegal Russian
attacks on our democracy will not substitute for mandatory
sanctions required by law and should not be used to preempt or
slow building congressional momentum on new legislated Russia
sanctions.
We should work with our allies on this rather than alienate
them. Putin would like nothing more than to drive division
between the United States and Europe and amongst the Nations of
Europe. He seems to be having that help from the executive
branch here. Europe can contribute more to NATO, as it
committed to do in 2014 and has been doing since.
Today, September 12th, marks the day 17 years ago that NATO
invoked Article 5, committing to take action alongside the U.S.
if those responsible for 9/11 were identified. Isolation is a
poor foreign or national security policy--then or now.
The same spirit of unity that marked our response in the
weeks and months after 9/11 should also infuse our response to
Russian attacks on our Nation's infrastructure and on our
democracy.
Thank you Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown.
We will hear testimony today from three experts drawn from
the think tank community, each of them with a particular
expertise in the use of sanctions and a deep understanding of
Russia, its leadership, and its position in the world.
We will begin with testimony from Dr. Leon Aron, a Russian
emigre to the United States during the cold war, and now a
prolific writer and expert analyst of all things Russian. He is
a resident scholar and director of Russian studies at the
American Enterprise Institute.
Following Dr. Aron, we will turn to Ms. Elizabeth Rosenberg
for her testimony. She is a senior fellow and director at the
Center for a New American Security and a recognized expert on
energy, market shifts, and the use of sanctions and economic
statecraft.
Finally, we will hear from Mr. Daleep Singh, a finance
professional and an architect of the 2014 sanctions on Russia
while at the Obama administration's Treasury Department. He is
now with the Atlantic Council and a Johns Hopkins professor of
geoeconomics.
Dr. Aron, you may please begin.
STATEMENT OF LEON ARON, RESIDENT SCHOLAR AND DIRECTOR OF
RUSSIAN STUDIES, AMERICAN ENTERPRISE INSTITUTE
Mr. Aron. Thank you, Chairman Crapo, Ranking Member Brown,
and Members of the Committee.
Before we discuss and evaluate specific measures, I think
it might be useful to begin by placing the sanctions on
Vladimir Putin's regime--which is not to be equated with Russia
or the Russian people--in a larger context.
Why do we impose these sanctions? Essentially to exact
domestic political costs on a country's foreign policy.
If that is the main purpose, there are two distinctions
that need to be made in evaluating the impact of these
sanctions. One is short-term versus medium- and long-term
effects; and the other, more important, is the difference
between economic effects and political effectiveness. The
former are relatively easy to achieve, especially when the
disparity between the respective economies is as great as it is
today between the United States and Russia. But the latter
purpose, to change the policies of the sanctioned regime, is
almost never achieved in the short term and has not been
especially successful even in the medium term.
The reasons for that are very simple. First, the regimes
are always--the sanctioned regimes are always hoping that the
sanctions will be lifted or at least lightened. And, more
importantly, authoritarian regimes, even the seemingly stable
ones, carry on what Churchill called the ``fight of bulldogs
under the carpet.'' A quick retreat could lead to a
hemorrhaging and eventually loss of the leader's power, which
could also be accompanied by the loss of his life. Hence,
defiance is almost always the first reaction.
Thus far, Russia has fit the general pattern, both with
respect to the economic effects of the sanctions and their
political effectiveness--which is to say that the economic
effects, while hardly overwhelming, have been undeniable,
damaging, and growing, but equally predictable has been the
regime's defiance in the face of these sanctions. And in my
written testimony, I provide details for both developments.
But the seeming absence of immediate political effects of
the sanctions must not be confused with their long-term
effectiveness.
To begin with, we should not underestimate the power of
moral outrage which the sanctions represent--especially if they
are initiated by the only country that ultimately matters to
Russia and the Russians, which is America. As we learned from
the Soviet Union experience after its collapse, the moral
outrage by the West has chipped at the legitimacy of the
regime, and Russia is not a totalitarian country. Public
opinion still matters.
We should keep in mind and not be disheartened by the fact
there are no silver bullets, as the Chairman said in the
introduction, and it is very hard to invent something that
would be both new and effective.
As a result, the several packages of measures in the
pipeline today, including the DETER legislation, appear to be
most promising when they build on or deepen those existing
sanctions that are most likely to have a domestic political
impact. I would single out two such measures.
First, building on the earlier ban on investment in and
transfer of technology to the Russian oil industry. In my
written testimony, I provide argumentation for this, but let me
just mention one quote from a leading Russian expert, a former
head of the Russia office of an oil multinational who commented
in an elite online Russian journal last month that, I quote my
translation from Russian, ``From my own experience . . . I know
that without Western technologies and investors the oil-and-gas
sector of Russia would be on a deathbed.''
The second measure I would like to mention as seeming quite
promising to me is a sizable domestic political effect on the
ban or at least restrictions on the buying of Russian sovereign
debt. This policy builds already, as I said, on the existing
restrictions on raising capital by several Russian private
companies and banks.
This past August, Russian media labeled the 14-day limit on
operations with sovereign debt one of the ``most serious
threats to the Russian economy.''
An outright ban on the sale of the OFZ, which is the
Russian acronym for Obligatsii Federal'nogo Zayoma, or Federal
loan bonds, would be a very serious blow. As a Russia expert
put it, the OFZs are the ``Finance Ministry's workhorse funding
instrument for the budget.''
In conclusion, making Vladimir Putin moderate, not to
mention retreat from, his current aggressive policies will
require measures targeted as precisely as possible at
increasing the domestic political costs of his regime's
policies, as well as a lot of patience from us.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Doctor.
Ms. Rosenberg.
STATEMENT OF ELIZABETH ROSENBERG, SENIOR FELLOW AND DIRECTOR,
ENERGY, ECONOMICS, AND SECURITY PROGRAM, CENTER FOR A NEW
AMERICAN SECURITY
Ms. Rosenberg. Thank you, Chairman Crapo, Ranking Member
Brown, and distinguished Members of this Committee, for
inviting me to appear today.
At present, the security and integrity of the United States
is under attack by Russia's threats to our democratic
institutions and our core values. Russia's malign activities
undermine sovereignty, rule of law, prohibitions against the
use of weapons of mass destruction, and protection of human
rights. Moreover, Russia's foreign interference is a
destabilizing affront to U.S. global leadership and to the
national interests of our closest allies.
Equally as alarming as these grave harms wrought by Russia
is the inadequate U.S. policy response. The directors of our
intelligence agencies, U.S. Cabinet-level officials, and the
executives of the most prominent social media companies have
spoken clearly about the threat. But the Administration's
policy response has appeared uncoordinated or contradictory and
has been insufficiently bold in indicating to Russia that its
activities will not be tolerated. How U.S. policy leaders
proceed now is of fundamental importance to the character of,
and future for, our democracy and national interests. I
strongly encourage the Members of this Committee to continue
your strong leadership in articulating a strategic vision for
addressing Russia's threats and deploying an array of policy
tools to respond.
You have convened this hearing because you all know that
sanctions, tools of choice to counter rogue regimes and
security threats, are not the only option when dealing with
Russia. Indeed, there is a robust debate about whether
sanctions have effectively delivered policy success since
implementation of the major measures targeting Russia in 2014
and how much efficacy they can have in the future. Mixed
messages from the Administration and uneven sanctions
implementation provide a poor framework from which to expect
foreign policy success, even if foreign policy success were
clearly defined by the Administration. It is not.
Now, truly deterring Russia's malicious activities requires
a holistic foreign policy strategy, coordinated with
international allies as much as possible, the renewal of
sanctions and economic pressure to deliver consequences for new
offenses, and the use of an array of complementary U.S. policy
tools in the defense, economic, diplomacy, foreign assistance,
and intelligence operations arenas.
With regard to U.S. economic policy tools to address
Russia, I would like to take two points today in my oral
statement.
The first is a note of caution about potential new
sanctions which must aim at Russian interests rather than at
Russia's trading partners. I support a core goal of the leading
legislative proposals under consideration, and that is the
presentation of powerful consequences to deter Russia's threats
and interference in our democratic institutions, Russia's
territorial aggression, and its unacceptable breaches of
sovereignty and human rights.
To achieve these goals and avoid unintended consequences
that hurt our economy and the economies of our allies and that
undermine U.S. credibility, lawmakers must select sanctions
targets directly involved in threatening and insidious
activities to expose and undermine them. Where sanctions target
major Russian firms or financial sectors, lawmakers should
strive to impede future economic activity and foreclose future
growth rather than disrupt and distort current economic trading
flows. This will help to preserve U.S. leverage and prevent an
inadvertent enriching of Russian firms if foreign partners are
suddenly shut out of Russia. It may also help keep some U.S.
security partners aligned with the United States and avoid
undercutting, for example, U.S. oil sanctions on Iran.
My second point is one of strong encouragement to Congress,
and to this Committee in particular, to enact a requirement to
gather and disclose beneficial ownership information in the
corporate formation process. It must go beyond narrow
beneficial ownership requirements only for high-end real estate
purchase. Ultimately, passing sound beneficial ownership
legislation may be the most important policy that you all adopt
to promote transparency in our financial system, to close an
alarming gap in our national security defenses, and to directly
undermine and deter malicious Russian interference and
misinformation campaigns that warp our democratic processes and
sow discord in our homeland.
I address these points in detail in my written testimony
and would be happy to discuss them with you all further today.
I look forward to your questions.
Chairman Crapo. Thank you, Ms. Rosenberg.
Mr. Singh.
STATEMENT OF DALEEP SINGH, SENIOR FELLOW, ATLANTIC COUNCIL, AND
ADJUNCT PROFESSOR, JOHNS HOPKINS UNIVERSITY
Mr. Singh. Mr. Chairman, Ranking Member Brown,
distinguished Members of the Committee, thank you for convening
this hearing. I am honored to be here.
I have spent my career around financial markets, mostly as
a market participant, but from 2011 until 2016, I was a
Treasury official. My focus was to work on economic policies
that could help our country and others to recover from crisis.
But 2014 was very different. Together with a team of colleagues
from across the U.S. Government, our challenge was to impose
economic costs on Russia for its aggression in Ukraine. For me,
the mental exercise was to flip everything I had learned about
what makes economies succeed.
Of course, the stakes were high, both on the geopolitics
and the economics. Before 2014, the United States had never
imposed sanctions on a country with the size, complexity, and
connectedness of Russia. A number of principles guided our work
that I think remain instructive today.
Sanctions, number one, should be powerful enough to
demonstrate our capacity to impose overwhelming costs.
Number two, responsible to limit contagion and to preserve
our reputation as a trustworthy steward of the global economy.
Three, targeted to avoid the appearance of punishing
average Russian civilians.
Four, calibrated to increase the chance of partnering with
allies.
And, five, staged to preserve scope for escalation or
deescalation.
Putting these principles into action requires an
understanding of asymmetries. Where did our economic leverage
intersect with Russia's vulnerability? Foreign capital was and
is an obvious choice. So is energy technology. U.S. and
European firms are the dominant suppliers of something Russia
needs in large quantity and cannot easily replace.
What were the results? Restricting foreign capital proved
even more potent than we anticipated. It triggered a market-
driven negative feedback loop between capital outflows, the
depletion of Russia's reserves, a dramatic weakening of the
ruble, a spike of inflation and interest rates, and the
beginning of a 2-year recession.
Throughout this process, our words mattered at least as
much as our actions. They shaped market expectations about our
staying power and the capacity to do more. By the second half
of 2014, further sanctions had the potential to deliver a
knockout blow. But our purpose was not to cause panic. Due in
large part to this restraint, the depth of Russia's economic
recession and the breadth of spillovers were very much in line
with our expectations. Over the medium term, these sanctions
dealt Putin a weak strategic hand, a structurally weak, one-
dimensional economy.
Do these costs matter to Putin? Answering this question
goes beyond my expertise, but my observation is that even
autocrats are sensitive to recession. Yes, Putin's tolerance
for economic pain and his control of the domestic narrative are
higher than most. But there is a threshold above which his
calculus would change. If only we had the stamina, the
discipline, and the political will to get there.
For now, Russian aggression and violations of sovereignty
continue to spread while economic conditions in Russia have
improved markedly. The recession has ended. Inflation recently
hit an all-time low. Foreign reserves are back to presanctions
levels. Were it not for the threat of sanctions, Russia might
be the darling of global bond investors searching for yield.
Why is this happening? Because markets judge our words, not
just our actions, the President's more than any other. Markets
take signal from his words to shape their expectations of
sanctions policy and, therefore, the direction of Russia's
economy. I can only conclude that markets doubt our collective
resolve to hold Putin to account with a coherent and
coordinated strategy.
What can we do about it? I suggest five actions.
First, costs should be broadened to include the very
highest levels of the Russian Government. At a minimum,
Treasury and other authorities should conduct a study that
attempts to identify the holdings and intermediaries that
manage and benefit from Putin's wealth. Besides signaling to
the Russian people that our quarrel is not with them, this step
would provide a measure of transparency on his fortunes held
abroad.
Two, U.S. investors should be prohibited from purchasing
new Russian sovereign debt. In 2014, I was more cautious about
taking aim at Russia's risk-free asset when it was on the cusp
of full-fledged crisis. To be clear, this is still a serious
step, but circumstances have changed. Russia is far better able
to absorb a hit; investors have had years to reduce exposures;
and the contagion effects would be small. More to the point, I
can think of no credible reason why U.S. public pension funds
and savings vehicles should fund a Government that is actively
violating our sovereignty.
Fourth, a comprehensive package to counter Russian
aggression requires an offensive economic strategy, not only to
Ukraine but also Georgia, the Baltics, Moldova, and possibly
Central Asia. The overarching purpose is to create successful
alternatives to Russian-style autocracy.
And, finally, I would encourage a robust campaign to
improve transparency within Russia. Distributing verifiable
evidence of kleptocracy would help to counter the Government's
disinformation campaign and its control of the media.
To close on a positive note, we should still leave scope
for genuine exchange between U.S. and Russian businesses. If we
are ever to have better relations with Russia, the private
sector is not a bad place to start.
Mr. Chairman, Ranking Member Brown, I look forward to your
questions.
Chairman Crapo. Thank you, Mr. Singh.
I will start the questioning. As I indicated in my opening
statement, there is a new Executive order issued today. Have
any of the three of you have an opportunity to read it or to
become familiar with its terms?
Ms. Rosenberg. Thank you, Mr. Chairman, for the question. I
have not had a chance to see that. I do not believe, as of the
time we started this hearing, that they had released the text
of it, although in a press call this morning and also in
messages to you and some of your staff, they outlined some of
the principles for it.
Chairman Crapo. All right. I think that it is now out, but
it may have just come out as we were assembling for this
hearing. So I am not surprised that you have not seen its full
text.
According to the reports, the Director of National
Intelligence, with the input from all of the intelligence
community, will assess and identify foreign actors responsible
for election meddling, and then the Attorney General and
Homeland Security Secretary will report on the materiality of
that interference, followed by the Secretaries of Treasury and
State, who will determine what appropriate sanctions should be
imposed and then engage in the imposition of those sanctions.
It appears to me to be a pretty broad authority to Treasury and
State with regard to determining sanctions.
Right now I would just like an initial reaction from each
of you, if you have one, as to whether this is now a helpful
signal and a step toward combating election meddling, no matter
what the foreign source. Mr. Singh.
Mr. Singh. Mr. Chairman, at the risk of not knowing enough
of the details, it strikes me as more of a press release than a
change of policy. I do not know what costs are now authorized
to be imposed on Russia that were not authorized previously.
And my view is that if there is still complete discretion--in
other words, if nothing is made mandatory--the background
conditions in Russia, which have improved markedly, will just
continue to improve.
Chairman Crapo. Ms. Rosenberg.
Ms. Rosenberg. If I can add to that, by definition, this
authority for the Administration is discretionary. So while it
may outline the intent or resolve to take action should there
be a finding, a report, and a determination, there is supreme
discretion and flexibility for the Administration regarding
execution of sanctions. If such execution is not matched with a
clear message and a strategy to respond, then it is not an
advance in the policy, and it may even be a step backwards.
Chairman Crapo. Dr. Aron.
Mr. Aron. I am just a mere----
Chairman Crapo. Turn on your microphone.
Mr. Aron. I am just a mere Russia scholar, and I will defer
to my colleagues on this.
Chairman Crapo. Thank you. Both of you who responded on
that focused on the discretion that is available there. That is
actually one of the issues that has been brought to our
attention throughout this process of trying to determine how to
respond to Russia. I think historically there has always been
significant discretion given to the Administration in sanctions
law, and the reason I guess you probably know far better than I
do, and that is we are already at a point with the sanctions
being imposed against Russia where there is blowback from our
allies and concern about whether we are actually having--or
achieving results that are counterproductive to our own
interests in terms of our own alliances and to whether--well,
whether other Nations are willing to work with us. So the
argument made to the Committee is that we need to have
discretion.
I assume that you are not saying that discretion should not
be a part of a sanctions regime. So could you discuss that
conflict, the need for discretion with what I heard you saying
is that the discretion was too broad?
Mr. Aron. If I may at this point say something.
Chairman Crapo. Yes.
Mr. Aron. I think the key here is a balance, to find a
balance that gives the President, any President, enough
flexibility to conduct diplomacy and take care of national
security, and at the same time preserve the Congress' powers of
supervision and, I would say, morality and the expression of
public opinion in foreign policy. So I think this is--I am not
a constitutional scholar. The AEI has plenty of brilliant
constitutional scholars. But it seems to me it is the tug of
war that I hope will arrive at this balance.
Chairman Crapo. All right. Thank you. I am down to just a
few seconds, and I am pretty tough on my colleagues to stay
within their timeframe. And so, Ms. Rosenberg and Mr. Singh, I
am going to ask you if you would--I may get back to a second
round. I am not sure about that. But if not, I am going to ask
you to respond to me in writing to that question about the
balance for discretion and how we should work that issue into
whatever we develop as a Committee.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
None of us have had time to really digest the Executive
order, but pardon my suspicion, but when I hear in this
Executive order, no matter what the foreign source of attacks
in our elections, you know, until the President is willing to
say unequivocally the Russians are attacking our elections, are
trying to meddle in our elections, I do not know how we, or
Vladimir Putin for that matter, can take seriously our
Government's efforts, and that means it is up to us in this
Congress to write strong, strong sanctions language and push
and push and push this equivocating, or worse, that President
to take decisive action to protect American national interests.
Mr. Aron, you said something that made me smile when you
were talking about the Russian-U.S. oil technology. It made me
kind of harken back to Armand Hammer and all of that. But let
me ask Ms. Rosenberg and Mr. Aron about energy. Two main
sanctions bills--we are looking at the DETER Act and the
Graham-Menendez bill--urge different approaches on additional
energy sanctions against Russia. Of the possible approaches we
can take--blocking the assets of the largest Russian energy
companies if Putin continues his attacks, limiting access to
sophisticated Western fracking services and technology,
prohibiting or limiting investments in new Russian oil and gas
projects, or otherwise expanding CAATSA oil and gas project-
based sanctions--which one or two, to start with you, Mr. Aron
and Ms. Rosenberg, would be the most effective without unduly
harming ourselves and our allies?
Mr. Aron. Well, Russia is not a petro State like Saudi
Arabia. Only 15 percent of its GDP comes from oil and gas, but
50 percent of its State budget.
Senator Brown. Right.
Mr. Aron. And so this is what Putin uses as ready cash for
his key political constituencies: security services, the armed
forces, over 36 million pensioners, and millions of public
service workers.
The ban on financing and technology transfer is a ticking
bomb under Putin's regime because, while Russia is not running
out of oil, it is running out of cheap oil. Western Siberia,
there is plenty of oil, and it is all, unfortunately for
Russia, in northeast Siberia, above the Arctic Circle, under
the permafrost, offshore, Kara Sea, Laptev Sea, East Siberia,
where the temperatures go between minus 22 and minus 55 degrees
Fahrenheit. Just to start explorations, Russia would need
hundreds of billions of dollars, which it does not have, and
the technology cannot even imagine, much less touch.
So I think this is one of the sets of sanctions where I
would recommend really strengthening what we already have,
which is a complete ban on investment in Russian oil and
industry and complete ban on financing it.
Senator Brown. Thank you.
Ms. Rosenberg.
Ms. Rosenberg. To embrace an approach that would disrupt
the market now, such as by restricting the ability of U.S. or
non-Russian companies to participate in joint ventures or to
invest, could have a major impact on supply, on the market, and
on prices. That means an impact for us, U.S. consumers,
consumers everywhere else in the world, including, for example,
in Europe who are important consumers of Russian energy, oil,
and gas supplies. That would undermine our interest in European
energy security. If it also disrupts supply and has an enhanced
market effect, it will undercut our own goal with respect to
Russia because a higher price will compensate Russia somewhat
for a diminishment in its supply to the global market. It may
also undercut our policy with respect to Iran sanctions where
the United States Administration is trying to pull Iranian
supplies off the market. So further disrupting supply will
undermine the ability to enforce that policy.
I want to make a point about the technology. Right now most
of that sophisticated technology for extracting hydrocarbons
from low permeability formations, rock formations, the so-
called fracking technology, right now most of that technology
and the expertise, including supply chain expertise, is
proprietary and exists in Western upstream companies and
service companies that are European and American. However,
there are a broad array of Russian service companies, and while
it would be disruptive to Russia for those technologies to no
longer be available to Russia, it is not a certainty that
Russia will not be able to engineer and find substitutes over
time to be able to continue broad production of its hydrocarbon
base.
Senator Brown. Thank you.
Chairman Crapo. Thank you.
Senator Moran.
Senator Moran. Mr. Chairman, thank you very much. Thanks to
our witnesses for being here, and I appreciate what I have
heard so far, and it is capturing my attention.
Let me ask about--both our DETER and DASKA Acts have
recognized the importance of coordinating with European allies.
Last week in the Foreign Relations Committee here in the
Senate, a conversation was had about the effects of weaponizing
our financial power. Germany's Foreign Minister raised the need
for an alternative payment system to the United States to get
around ours. Chancellor Merkel rejected that idea. How
legitimate do you think a threat is against--what kind of
backlash would we expect from our friends in Europe if we take
those steps?
Ms. Rosenberg. There is interest in Europe by its political
leaders who are outraged about the U.S. departure from the
Iranian nuclear deal. That has precipitated the conversation
you have referenced about being able to conduct transactions
that might avoid U.S. jurisdiction. It is possible that that
could be, if you will, a laboratory experiment for future
activities that would get around U.S. jurisdiction for the
purpose of, for example, conducting business between Europe and
Russia. So another unintended consequence of aggressive U.S.
sanctions on Russia could be to accelerate the movement to
create these ecosystems, if you will, of financial transactions
that exist outside of U.S. jurisdiction. It is surely not in
our interest to accelerate those developments.
Senator Moran. How easy would those developments be--how
easy could Europe pursue that kind of development, that change?
Is that realistic?
Ms. Rosenberg. In its simplest form, these are barter
arrangements. They can be barter arrangements, and they can
grow into more sophisticated accounting schemes or even bespoke
currencies to be able to engineer this. It is not in the realm
of the impossible, and, in fact, that is a development that we
should look on with great concern in thinking about at what
point they could scale so as to undermine some of our economic
strength and the long arm of U.S. jurisdiction and U.S.
leverage. I would defer to my colleague Daleep who has also
worked on this issue.
Mr. Singh. I would just echo what Elizabeth just mentioned,
but I think the incentive for Europe or other regions or
countries in the world to develop alternate payment structures,
alternate financial infrastructures, that incentive grows when
the U.S. is perceived as abusing its power, abusing its
leverage. In my judgment, I do not think responding to Russia
in this context constitutes that.
There are many other examples that we could talk about, but
I think with respect to today's subject, I do not think we are
there.
Senator Moran. Dr. Aron, if we go after the kleptocracy of
Putin, we go after his inner circle, what would you expect to
be the reaction? What tools would they use to retaliate or
respond?
Mr. Aron. Well, thanks very much for the question. Going
after the oligarchs I think is the equivalent of--sort of
political or diplomatic equivalent of fast food. It feels very
good at the time. You can put the face on the sanction. But it
is very hard for me to believe that somebody like the Rotenberg
brothers or the Timchenkos or the Kovalovs will come to Putin
and say, ``I am sanctioned, Vladimir. How about you change your
policy?'' They will not leave that office if they do so. Nobody
in Russia today owns anything. They are managers of their
wealth if Putin allows them. The wealth could be taken away at
any time.
So I think that sanctioning oligarchs is probably a worthy
moral goal, an expression of our moral outrage. But I do not
think it is a formidable policy tool for us.
Senator Moran. So one of the things I should learn from
your response is that the power rests with Putin, not the
oligarchs?
Mr. Aron. Absolutely, 100 percent.
Senator Moran. OK. Thank you very much.
Chairman Crapo. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. And thank you to
the witnesses.
Let me start by saying that if our Government has a
strategy to counter and deter Russia, it is not working. We
have not been able to change Russian behavior, and in some
cases their behavior has gotten worse. Our witnesses have
persuasively argued we need a coherent strategy, policies with
teeth, clear signaling, and smarter sanctions. I think it is up
to Congress and hearings like this to help provide a vision and
develop a strategy to counter the threat from Russia. And I
would like to ask all witnesses and, Dr. Aron, I will begin
with you, what is the number one action Congress can take in
the next several months to change Putin's calculus?
Mr. Aron. To be honest, Senator, I cannot think of an
action that would change Putin's policy within several months.
Senator Donnelly. Let me say to begin----
Mr. Aron. To begin, we have to be realistic. I said that,
you know, for Putin now, it is not just my opinion, it is the
opinion of my independent Russian colleagues. The opposition to
the United States, the opposition to the sanctions is one of
the key legitimizing factors of his regime. He cannot give it
up.
As I said in the introduction, I think nothing new--I
cannot think of a silver bullet, but I think if we stick with
some policies which have--and we should always look at the
domestic political effects. Putin's audience is not the West.
Putin's audience is his own constituencies inside the country.
It is not a totalitarian police State yet. He cares about
public opinion. And so I think the ones that I mentioned,
depriving him of an inflow of foreign money via the sales of
sovereign debt and the ticking bomb under his regime, and that
is depriving him of funding and technology for his oil
industry. The former is proximate. It could be implemented,
obviously with the discretion and the expertise of people who
know better than I how to do it delicately without damaging the
interests of the United States and our allies. The latter,
which is the restriction on Russian oil policy and oil business
and oil industry, is something that we have to stick with if we
want to see results.
Senator Donnelly. Ms. Rosenberg.
Ms. Rosenberg. Thank you. To begin with, over the next
couple of months I would strongly urge a focus on Russia's
involvement in election interference and misinformation in our
democratic process. I note that this is the organizing
principle around today's Administration EO and, of course, the
organizing principle behind the DETER Act.
A couple of things that can be part of the strategy in the
immediate future are to urge the Administration to bring
forward further designations. It could have been helpful to put
them in the annex to today's EO, for example, to explain to the
public what methodologies Russia is using to interfere in U.S.
democratic institutions or processes. This could have included
which actors are involved to give information to U.S. social
media companies, and financial institutions in order to
understand when such malicious activity could occur. This
information could also help Congress to take action toward
enacting beneficial ownership legislation which will signal to
Russia that there will be no tolerance for anonymous companies
that facilitate their ad buying and interference in our
democratic process ahead of significant midterm elections
coming in the next several months.
Thank you.
Mr. Singh. Senator, I will give you three things: Number
one, exposing the scale of corruption in Putin's inner circle
and from Putin himself; Number two, increasing economic costs
on Russia by sanctioning new purchases of sovereign debt;
Number three, creating a successful alternative in Russia's
backyard--in other words, helping Ukraine, helping Georgia,
helping Moldova, helping Central Asia succeed as an alternative
to Russian-style autocracy.
Senator Donnelly. Let me ask one last question for any of
you. Would legislation requiring corporate beneficial ownership
transparency increase the ability to effectively apply
sanctions against corrupt oligarchs and officials? Ms.
Rosenberg.
Ms. Rosenberg. Absolutely. And, in fact, this is one of the
reasons why the law enforcement community has been asking for
quite a long time for such legislation. They come to a dead end
when there is no information behind shell companies or front
companies that they believe to be involved in such corrupt or
criminal activity, activity that undermines our democracy.
Senator Donnelly. OK. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you. Thank you all for being
here.
Last week the Washington Post reported that President Trump
agreed to a new strategy for Syria that may include new Russia
sanctions. The strategy follows a requirement that I worked
with my colleagues on the Armed Services Committee to include
in this year's NDAA.
My question for you is: What sanctions, if any, do you
think that our Government could impose on Russia that would
change its actions in Syria? And I will open it up to the
panel.
Mr. Aron. Well, again I hate to disappoint. When Putin on
Russian national TV in October of 2015 shook hands in the
Kremlin palace with Assad and said, ``Our goal is to restore
the legitimate Government of Syria,'' this was a promise not so
much to Assad; this was a promise and a larger strategy of
Putin's where he portrays himself now as the restorer of the
former glory of the Soviet Union, somebody who comes to aid of
the former Soviet clients and allies, and Syria is the oldest
one of them. And he is a wartime president, and this is how he
portrays his legitimacy.
I cannot think beyond the sanctions that already have been
discussed here--which are, I think, a sustained and a long-term
process, I cannot think of anything we can do at the moment to
make Putin change his strategy in Syria precisely because it
would undermine significantly his domestic political support.
Senator Cortez Masto. Thank you.
Ms. Rosenberg. I would associate myself with that
sentiment. I am not confident that sanctions are the tool to
change Russia's behavior in support of President Assad,
including condoning or supporting the use of chemical weapons
against the Syria population.
Senator Cortez Masto. Thank you.
Mr. Singh. I would just add I think it would require direct
Presidential involvement.
Senator Cortez Masto. OK. Thank you.
Last month several of us met with former Ambassador McFaul
following the Helsinki Summit, and as you know, President Trump
said after the summit that he would consider allowing Putin to
question McFaul and other former American civil servants. As
you can imagine, McFaul was quite concerned about his safety
net of other former civil servants traveling abroad. Congress
passed a resolution condemning Trump's statement not long after
that, but some of us feel we have a duty to the men and women
who have served this country to do more to protect them.
If you were designing an economic statecraft strategy to
deter Putin from arresting former American civil servants and
other Governments from cooperating with him, what would it look
like? Is there more that we can do to protect those Americans
who are serving abroad?
Mr. Aron. Thank you, Senator. Mike McFaul is not just a
colleague. He is a good personal friend of mine for many years,
a man whose both scholarly and personal integrity I highly
respect. It was painful for me personally to learn about this
promise to Putin. Again, I think the sanctions we already have
or that are in the works and the future sanctions are probably
enough, but my advice to Mike is not to travel to Russia.
Senator Cortez Masto. OK. Anyone else, any other thoughts
on----
Mr. Singh. I would just say I think the moment passed in
Helsinki. There should have been direct and immediate
consequences. There were none.
Senator Cortez Masto. It is too late, there is nothing we
can do now. Is that what you are saying?
Mr. Singh. It is never too late, but I think in order to
make a difference to Putin, again, this requires Presidential
engagement immediately after those actions were taken.
Senator Cortez Masto. Thank you. Anything else?
Ms. Rosenberg. No, I would just add that I am not confident
that, again, sanctions are the tool of choice here, that, in
fact, strong leadership must come from the Executive, as was
just mentioned, as well as from the diplomatic community and
diplomatic layers.
Senator Cortez Masto. Thank you. Thank you again for the
conversation. And let me just say to the Chair and Ranking
Member, thank you so much for the hearings. This is obviously
such an important topic and role that we play in Congress, and
I so appreciate the opportunity to explore further the actions
that we can and should be taking. So thank you.
Chairman Crapo. And thank you for your attentiveness and
support on this, Senator.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
Mr. Singh, back in 2014, when you were putting together
some of the sanctions around Ukraine's circumstances, you chose
at that point not to include any kind of sanctions on Russian
debt. And let me also state for the record I am proud to
support Senator Van Hollen and Senator Rubio's DETER Act, which
I think even with the President's announcement today, we need
that teeth that a legislative action would have because,
candidly, I do not trust this White House to fulfill their
obligations since we have seen an enormous, enormous blind spot
in terms of Russian activity by this President. One need only
look at the pitiful performance in Helsinki as an example.
Sorry about my editorial comment before I go back and give you
time to think about the question, Mr. Singh.
But back in 2014, with the Ukraine sanctions, you did not
think sanctioning on a going-forward basis Russian debt was
appropriate. My understanding is you think at this point that
should be back on the table. Can you talk about that? Can you
talk about the effects it might have, negative and--and what
other risks that would run into in terms of our allies who
still have some ongoing projects with Russia?
Mr. Singh. Sure. Thank you, Senator. You are correct; I was
cautious about sanctioning Russian sovereign debt in late 2014.
I have changed my mind because the circumstances have changed.
Back in late 2014, it was my view that sanctioning sovereign
debt could have tipped the scales in Russia into a full-fledged
financial crisis. A full-fledged financial crisis in Russia
would have been counterproductive in two main ways.
One is it would cause us to lose the narrative within
Russia. In other words, it would play into Putin's hands, that
the hardship the Russian people were facing was just the latest
in a long series of historical injustices.
Number two, it would harm us reputationally. If we were
seen as intentionally provoking a full-fledged crisis in
Russia, it could harm our hard-earned reputation as a
trustworthy steward of the global economy. That is hard to win
and easy to lose.
I think if I look at Russia now, the background conditions
are markedly improved. The recession has ended. Inflation has
fallen from the midteens in late 2014 to all-time record lows.
Foreign reserves in Russia have been fully replenished to
presanctions levels. The fiscal profile of Russia is better
than ours. Foreign investors----
Senator Warner. Is there a reason that is the case? I am
looking at some of these numbers. The Chairman and I spent a
long time together on a so-called Gang of Six around Simpson-
Bowles. I am pretty amazed. Is the number accurate that Russian
debt-to-GDP is only 13 percent?
Mr. Singh. That is right.
Senator Warner. Gosh, I wish we had a balance sheet like
that.
Mr. Singh. Yes, agreed. So Russia can absorb a hit, number
one.
Number two, sanctioning sovereign debt would not deliver a
shock wave across global markets. To your point, Senator, total
outstanding Russian sovereign debt is about $150 billion.
Americans own $10 billion of that debt. Foreigners as a whole
own $50 billion. That is tiny. The global sovereign debt market
is $45 trillion. Our Treasury market is $14 trillion. We would
not see major contagion effects if we moved on Russian
sovereign debt.
But I think most fundamentally, the provocation has
changed. I can think of no good reason why public pension funds
in the U.S.--teachers, policemen, firemen, Government
officials--why their savings are directly funding a country
that is violating our sovereignty.
Senator Warner. Let me follow up on that, and maybe some of
my colleagues have already raised this issue. As we think about
potential targets, I know there was a great deal of interest in
targeting some of the Russian oligarchs, many of those who are,
frankly, cronies or have that status because of their ties to
Putin. If that question has not been asked, I would love a
response on that. I would also love a response on the fact
that, you know, Special Prosecutor Mueller I think did a
brilliant job with the level of specificity on naming the GRU
agents who are involved in the election interference.
While chances of actually sanctioning those individuals
remain somewhat limited, would a sanction action on named
Russian intelligence agents carry any kind of chilling effect
on a going-forward basis?
Mr. Singh. I would defer to my colleagues on the change of
Putin's calculus himself. I am not an expert on his psychology.
But as a general matter, I like the idea of picking individuals
whenever possible rather than just sanctioning economic
sectors. You can deliver a comparable impact in terms of
changing behavior without nearly the same degree of spillover
costs. So I think we should look at the very highest levels of
the Russian Government. It should include Putin; it should
include the people that you mentioned, Senator.
Senator Warner. The GRU agents themselves.
Mr. Singh. Yes.
Senator Warner. Thank you, Mr. Chairman.
Chairman Crapo. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
The President with an Executive order is clearly, I
believe, trying a lay a line in the sand, and his message
clearly is pointed at Russia. I am just curious, and I
recognize that if some of my colleagues have raised this
already, I would defer. But how important is it to have a line
in the sand with regard to meddling within our election
processes?
Ms. Rosenberg. I think it is absolutely crucial that the
United States make clear to Russia or anyone who would meddle
in U.S. democratic institutions and processes that these are
the core of our sovereignty. They are only a space in which
U.S. citizens can participate.
Mr. Singh. Senator, with respect, I do not see how it is a
line in the sand. It would be if there were clearly delineated
consequences or if there were clearly spelled out costs for
actions that have already occurred. To my knowledge, those are
not laid out in the Executive order. So I do not see where the
line is. I do not see what the consequences are if that line is
crossed.
Ms. Rosenberg. May I add to what I said before to say I
think it is essential to make that statement. I agree that
there must be consequences. That is an excellent area for
congressional oversight in order to clarify what the line is
across which the United States will not permit Russia to go and
what the consequences shall be.
Senator Rounds. That was the intent of the Secure Elections
Act, which a number of us are sponsors or cosponsors of. My
impression was that the Executive order was designed to make it
very clear that simply by the end of the election process, the
issue would not go away, and that it did not take anything off
the table. I am just curious if it's time that we actually let
them know that it is not simply a matter of a cyber-response
but, rather--or for that matter, a sanctions response. But is
it time to actually lay out, including the beefing up of our
military forces, places like Europe, sending in more assets,
and in strengthening and simply saying, look, this is just a
case of if we do--and I believe the President really did mean
it to be a line in the sand, and I think the fact that he has
Treasury actively involved with the issue, along with the
Secretary of State, requiring that they come back with a--not
just with an analysis but with a recommendation for a response,
I think his intent was to not simply say this is what we are
going to do but, rather, to say there will be consequences.
I would like your thoughts, because I do like the fact that
finally we have a very clear message that it is not acceptable
from the Administration. Second of all, he did not say what he
would do, and yet he appears to make it very clear that all
options are on the table. And so, you know, the question is
what deterrence. Can you simply say, ``Do not do it''? Or do
you have to say, ``If you do it, there will be the following
consequences,'' and then they can weigh them? I guess that is
my question.
Mr. Aron. I think it is clearly the latter. Putin grew up
in the slums of postwar Leningrad. It was a very tough
environment. He talks about it in his biography. He is a tough
man, and he respects credible force.
To the extent that we could persuade him that we are
credible, that these are not mere threats but there will be
consequences, I think he is not a madman. There is a very--it
is not easy to change his policy because, as I said, what he,
in effect, is having today in Russia is a wartime presidency.
His chief of staff, general staff of the Russian armed forces,
said we are at war with the United States. It is not a kinetic
war, but it is an economic war, it is a cyberwar, it is a moral
war, it is a political war, it is a geopolitical contest. Putin
cannot give up a lot of these assets, but I think he also
understands that, on balance, he would have to respect the
force and the real damage which he might read in these lines of
sand, on the sand, or whatever else you have between the
Congress and the executive branch.
Senator Rounds. So would any of you disagree with the
statement that it still requires Congress to move forward with
specific legislation that would codify what these sanctions
could be?
Mr. Aron. Absolutely. Absolutely. Putin, for all his--you
know, he made--again, his narrative of legitimacy is not that
Russia is good but that the West is bad, America is just as
corrupt and meretricious as we are, and this is the key thrust
of Russian propaganda media in Russia today if you watch it.
But with all of that, I think he understands and his advisers
tell him that the American Congress is not the Russian Duma,
that what it intends, if it pursues it and stays with it, is
something that he should be afraid of.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Thank you, Mr. Chairman.
I would like to follow up real quick, and thank you all for
being here today, and to the Chair and Ranking Member for
really informative and important hearings.
I would like to follow up real quick with what Senator
Rounds was asking, because I think that there will be a number
of people who see the actions today as drawing a line in the
sand. But as you said, Dr. Aron, Putin is not a madman, but he
is an opportunist. And a concern that I have and I have
raised--and we heard some testimony the last time--is that if
this, in fact, is a line in the sand that was drawn today, that
Putin may say, ``All right, we are not going to cross that line
this time.'' And I have a real concern that if we see a
pullback and an acknowledgment that that is a line in the sand,
we are not going to cross it, this election--that this
Administration may declare victory and will start lifting
sanctions and whatever.
Is that a possibility? Do you see that, or am I just kind
of like thinking out of my head? But I see that as a
possibility that that could happen, which could lead to
disaster in 2020 in our elections.
Mr. Aron. There is, in my view, a bit of a danger here in
getting too--sort of tying most of the sanctions, or at least
as far as the Administration is concerned, to the election. One
thing--I mean, you know, I love this country. I came here as a
refugee. But the problem with America a lot of times is that
nothing happens in the world until it happens to America. Putin
started undermining democracies in 2007. Ask the Estonian
Government, ask the Georgian Government, ask the Government of
Ukraine and Latvia. Cyberattacks, attacks on the Governments,
attacks on their banking institutions, power grids and so on.
It is a separate issue, I think. I think the attack on the U.S.
Presidential election was a target of opportunity. It is a
fascinating story which we can discuss later. But the point is
that, yes, I think Putin may indeed sit out this election.
Senator Jones. And if we do, we cannot let our guard down.
I mean, we cannot----
Mr. Aron. Exactly, exactly. What we have to understand is
that this election and the 2016 election were just points on
Putin's larger agenda.
Senator Jones. Right.
Mr. Aron. Which is to undermine democratic institutions of
the West. He could pick and choose his elections. He can pick
and choose his countries. But just because, as I believe, he
will not interfere in this election because of all this
attention to it, we cannot declare victory, no.
Senator Jones. All right. I would like to now follow up,
Mr. Singh, because you made a real point of talking about going
after or at least conducting a comprehensive study of Mr.
Putin's wealth, assets that he may have. And I agree with you.
I think that that needs to be done. And I would like--you know,
we have got unofficial reports of just massive wealth and
corruption. But they are just reports at this point.
So I would like to ask you a little bit about what kind of
study you are envisioning here. Is that something that we can
enlist our allies to do, since a lot of these assets are made
perhaps abroad in their countries? Can we coordinate with
allies? And, frankly, as to your experience in Treasury, do we
have that ability to just do that now without congressional
action? Could the Administration just say, yeah, we are going
to start this right now? Have they got that authority to do
that?
Mr. Singh. Yes, Senator, I think if the estimates of
Putin's wealth are anywhere close to being correct, most of his
money is outside of Russia and most of it is in liquid assets
in countries that we have good relationships with. So it will
require partnering with countries in Europe and other
jurisdictions to really get at where the ultimate investments
are held. Who are the financial intermediaries that are
benefiting from managing Putin's money?
This is expertise that resides within Treasury. I would not
part of the group in Treasury that did this type of forensic
work. Elizabeth could probably speak to it in more detail. But
certainly it is something we are capable of.
Senator Jones. All right. Thank you.
Ms. Rosenberg, real quick. I have got 6 seconds. Go ahead.
Ms. Rosenberg. Taking a leadership stand on beneficial
ownership--that is, corporate transparency in the United
States--and using the platform of the Financial Action Task
Force presidency, which the U.S. now holds, would be an
opportunity to ask many of these other countries in which
Putin's assets probably lie to embrace transparency. This would
help to illuminate that in other countries, supporting parallel
work here in the United States.
Senator Jones. Great. Thank you. I may follow up with a
couple of written questions. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you for
conducting these hearings, and I thank all the witnesses. I
have had a chance to look at today's Executive order, which
actually just did come out as we were in this hearing, and
reached the same conclusion that Senator Rubio reached earlier,
which is that the Executive order is like the DETER Act we
introduced, except without the certainty and without the
assurance of penalty, which is what is necessary in order to
provide a strong deterrent.
So as far as I can tell, part of the reason they did this
was not to deter Putin's action but to deter this Congress from
moving forward with something that would be significant, which
would have teeth and permanence, as our colleagues have talked
about.
Ambassador McFaul testified here last week that, based on
his assessment of Putin and the Russians, they would take into
account a penalty; and if they were very clearly put on notice
as to what the penalty would be in advance, it would influence
their behavior. As all of you have indicated, and I agree, it
is much harder to take action after the fact with sanctions and
say, you know, ``Mr. Putin, unless you get out of Syria now, we
are not going to lift these sanctions.'' It is very different
to draw a clear and bright line in advance.
Mr. Singh, if you could just talk a little bit more about
that, you mentioned it, but the idea of creating a certain
result and also a strong enough result to deter interference in
our elections, why that is important to set out in statute.
Mr. Singh. Yes, Senator, my expertise is in financial
markets, so I come at that question with that perspective. And
we all know markets are forward-looking. They are shaped by
expectations, and those expectations cannot be abstract. They
have to have concrete consequences laid out for them to react.
If we rely upon Executive orders which do not provide any
clarity as to the path of escalation of certain behaviors
continue, I do not think there will be any material reaction
through financial markets in Russia. And if there is no
reaction in financial markets in Russia, the economic costs
would continue to be minimal.
Senator Van Hollen. And, Ms. Rosenberg, I think you
indicated the same sentiment earlier, but do you share that
view?
Ms. Rosenberg. I do. Furthermore, I see value in putting on
notice, and creating consequences. But, without a strategy,
without steps of escalation, just the threat of blunt force,
which the market must weigh against the messages from the
Administration that this is all a hoax, there is not an
expectation that there would be implementation of this
discretionary policy. We need a strategy and that escalatory
letter. This is a role where Congress can provide significant
leadership.
Senator Van Hollen. Right. I appreciate that. The entire
purpose of putting this in statute with some automatic types of
severe responses is to take away the uncertainty and the fact
that, based on President Trump's statements, Putin would have
reason to doubt the willingness of this Administration to take
action. And as I look at this Executive order, it really falls
short in two areas.
One is when it comes to assessing whether or not there has
been interference. They first have the Director of National
Intelligence look at it, but those findings are not made
public.
Then you have another layer where the DOJ and Homeland
Security have to make a finding as to whether or not it was
material.
And then you have another layer where the Secretary of
State decides whether to implement any sanctions or not, except
with respect to individuals who they might have identified as
involved.
And so the kind of sanctions we have been talking about
here today, for example, sanctions on issuance of purchases of
Russian sovereign debt, which Dr. Aron and others have said
they thought would be a meaningful action, that is all left up
to the Administration under this Executive order. And, you
know, the Chairman made the point earlier that we have some
discretion in some of our sanctions, but more recently, the way
they have been designed is to say that you have mandatory
sanctions, they can then be subject to a waiver if there are
national security findings.
And so I believe--and I understand based on your
testimony--that the more we can make it clear in advance that
there will be consequences if we catch the Russians interfering
in our elections again, and that they will be severe, the more
likely we are--not a guarantee, but the more likely we are to
deter that interference. Would you all agree with that?
Mr. Aron. I would definitely agree with that. Again, as I
said answering previous questions, these sets of sanctions
ought to be preserved beyond the elections, be permanently on
the books, because Putin is like that man on the tiger. He made
the opposition to the United States and the West, and Russia is
a besieged fortress, the core of his legitimacy. It is very
difficult to get off the tiger, and who knows what the next
targets will be. I am very much concerned about the Baltics.
So, yes, elections and the specific findings and penalties
in connection with a possible Russian interference, but we have
got to look beyond that. This is just one item and probably not
even the largest item on Putin's agenda.
Senator Van Hollen. Right.
Senator Brown [presiding]. Ms. Rosenberg, Mr. Singh, make
your answers brief, please. He asked the question of all three
of you.
Mr. Singh. Sure. I think it is vitally important to
demonstrate resolve. The only caveat I would add is that we
should retain flexibility to calibrate the measures, to partner
with Europe, to have the highest probability of doing so, to
have the ability to stage our escalation and to deescalate if
the response is adequate, and to make sure we are fulfilling
our obligations to be a faithful steward of the global economy.
That is where we need flexibility.
Ms. Rosenberg. I agree with what has been said. I would be
remiss if I did not mention that, having been on the other side
of this equation from my prior work within the Treasury
Department, there is an important role for some measure of
flexibility. It is important that these measures would not be
provoked automatically and do not inadvertently undermine the
policy that they are intended to carry out.
I know that you are sensitive to that, and to me that is
where important congressional oversight is key and an important
pivot.
Senator Van Hollen. I agree. That is why we provide some
waiver authority. But I do think that the automatic feature is
essential to deterrence. That is my view.
Thank you, Mr. Chairman.
Chairman Crapo [presiding]. Thank you.
Senator Warren.
Senator Warren. Thank you. Thank you, Mr. Chairman. And
thank you to our witnesses for being here.
You know, it has been well documented by this Committee
that the Trump administration has not implemented seven
mandatory sanctions of the Russia sanctions law that was passed
overwhelmingly by Congress last year. Of course, it does not
mean that the Administration is doing nothing. Since January of
2017, the Trump administration has sanctioned 217 Russia-
related individuals and entities and blocked hundreds of
millions of dollars in Russian assets in the United States. And
that is well and good, but there is a disconnect between the
punitive actions taken against Russia by Treasury and the State
Department and the behavior of President Trump himself--
President Trump, who said it is an ``incredible offer'' to let
Putin's thugs interrogate our former diplomats.
So, Ms. Rosenberg, the former sanctions policy coordinator
at the State Department, Dan Fried, told this Committee last
week that, ``Sanctions will have more power if they are
embedded in an overall policy that works, is credible, and is
consistently expressed.'' Do you agree with that?
Ms. Rosenberg. Absolutely.
Senator Warren. Good. So what impact do mixed messages from
President Trump have on the effectiveness of our sanctions?
Ms. Rosenberg. They undermine credibility of the U.S.
policy posture, which is not a one-time problem. That goes on
until the United States wins it back. My colleague was just
saying that it is hard to gather and easy to lose.
Senator Warren. Actually, very well put on that. It sounds
like President Trump and the people he has appointed to be in
his Administration are not on the same page when it comes to
enforcing all our Russia sanctions and making sure that those
sanctions are part of a comprehensive policy to push back on
Russian aggression. And President Trump's mixed signals send
the message to Putin that he will not face maximum punishment
for trying to interfere in our democracy. That is not good for
our security. It is not good for the security of our allies.
Sanctions usually follow an effort to try to follow the
money, and the Russians close to Putin want to make it harder
for the United States to follow the money. In the Russia
sanctions law that was passed last year, Congress required
Treasury to provide a report on the net worth and the income
sources of senior Russians who were close to Putin. Instead of
doing that, the Treasury Department copied and pasted the
billionaires list that had already been published in Forbes.
Now, Ms. Rosenberg, in January, you recommended in an
article that you published that the Trump administration
``should provide additional public information about the
oligarchs and officials named in the list and publicly describe
which oligarchs and officials have engaged in acts of
corruption and/or supported Putin's malign activities''.
Presumably, much of this information is contained in the
classified portions of the reports and can be declassified
following appropriate review.
So let me ask you, does the Treasury Department need
additional authority from Congress to appropriately declassify
and publicize this information?
Ms. Rosenberg. No. They have independent authority to
declassify intelligence as appropriate.
Senator Warren. So without disclosing intelligence sources
and methods, do you think it would be helpful to the United
States and our allies if the Treasury Department published an
unclassified report on the assets of Putin and his closest
associates and the companies that they use to hide those assets
and publish that on, say, a public website?
Ms. Rosenberg. With the appropriate caveats that you
mentioned to not reveal sources and methods, I would say
transparency is our friend, and transparency is the friend to
the Russian people who have a right to know how their State
assets are being spent by their own Government.
Senator Warren. Well, thank you. I hope that the Trump
administration follows your advice and publishes this
information. If we want to squeeze Putin and his cronies, we
need to follow the money and expose the assets so that these
corrupt individuals have fewer ways to hide their assets and
keep themselves rich at everyone else's expense.
Thank you.
Chairman Crapo. Thank you very much, Senator Warren, and
that concludes the questioning.
Again, I want to thank our witnesses for not only your
written testimony but your answers to questions here and the
advice and guidance you have given us. And I am pretty
confident that you will be getting some more questions for the
record. I know I have at least one that I am going to submit to
you, and I advise Senators that questions for the record are
due September 19th, and I ask the witnesses, if you receive
questions, if you would please respond as quickly as possible.
Some witnesses drag that out a bit. It really helps us if you
will respond promptly.
We will keep the record open for the next 7 days, and,
again, I just want to thank the witnesses for your help. This
is an incredibly important issue. It is very complicated, and
it is important that we get it right. So thank you for being
here with us today.
With that, this hearing is adjourned.
[Whereupon, at 3:54 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Let me begin by thanking our witnesses for agreeing to testify this
afternoon, and to help the Committee gain a better understanding on
what might motivate the Russian Federation's President Vladimir Putin
to change his present dangerous and destabilizing course.
Further to the Administration's commitment to protecting our
Nation's elections from foreign interference, the White House announced
this morning a new Executive Order, based on its finding that the
ability of foreigners to interfere in U.S. elections is an unusual and
extraordinary threat to the national security of the United States.
The EO is entitled, ``Imposing Sanctions in the Event of Foreign
Interference in a United States Election'', and requires the Director
of National Intelligence to analyze and report on foreign Government
actions, the AG and Homeland Security to report on whether or not the
election was materially affected by any foreign interference and then
requires the Secretaries of Treasury and State to impose whatever
sanctions they determine appropriate.
A little bit later, I'm sure we may want to know what the
impression of this is from our witnesses.
Today, the Committee meets for the third time, in as many weeks, on
the subject of Russia and President Putin's aggressive, malign
activities directed against the United States, its allies, and spheres
of influence.
The hearings we have held so far have centered on the
implementation status and the economic and political effectiveness of
the existing sanctions architecture on Russia, including an assessment
of the Countering America's Adversaries through Sanction's Act of 2017,
or ``CAATSA'' as it is now known, and the Administration's use of its
own authorities to sanction Russia.
In the course of those hearings, the Committee also explored the
potential for expanding on the existing set of sanctions authorities in
order to amplify the economic effects on Russia sufficient to cause a
change in Putin's behavior and strategic calculus.
In our first hearing, we asked Administration officials drawn from
the Departments of Treasury, State, and Homeland Security to testify on
the question of whether or not the implementation of existing sanctions
against Russia are working to deter or otherwise change Putin's
behavior or strategic calculus with regard to the Kremlin's complete
lack of regard for sovereign territorial integrity and independence of
democratic institutions.
The Administration has sanctioned over 230 individuals and entities
for violations of congressional and Administration sanctions
authorities, and further reported that it was stepping up its efforts
to defend our Nation's critical infrastructure and aggressively support
State and local efforts to secure the 2018 U.S. midterm elections.
Those targeted include the heads of major State-owned banks and
energy companies, many of Putin's closest associates or oligarchs and
several Russian actors for interference in the 2016 elections.
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.
In our second hearing, a panel of outside experts testified on the
same question as the Administration, offering their own views on the
need for the Administration to have a cohesive Russia strategy and
implement CAATSA fully, while Congress considers enacting new sanctions
legislation.
The Committee received testimony from the outside experts on the
need for new, increased sanctions, since Russia has adapted itself to
the current round of sanctions and, in fact, its economy has developed
a resilience to the sanctions imposed by the United States and Europe.
As Rachel Ziemba explained in her testimony from our last hearing,
``Russia's economy may not be thriving, but it is surviving.'' And,
many analysts believe that situation can exist for a long time.
Yet, we also received testimony from each witness that a serious
amplification of sanctions is fraught with the potential for
unacceptable blowback against U.S. and European interests, and our
interests in the Middle East and Asia, unless carefully constructed and
tied to specific behaviors while appropriate discretion and off-ramps
are carefully tailored.
Sanctions alone are no silver bullet and do not guarantee quick
reversals of undesirable behaviors no matter how draconian the
sanction, especially since the more draconian the sanction, the more
difficult multilateral participation and enforcement become.
It stands to reason, then, that new sanctions must at least be
accompanied by other tools to constrain a large Nation like Russia and
deter a ruler like Putin from future malign activities.
I look forward to a broader discussion this afternoon on resisting
Putin's aggression from a broader range of geoeconomic and strategic
policy options available to the United States and its allies.
In addition to the sanctions discussed in our previous hearings,
what other proposals should Congress and the president be considering
to reach a desirable outcome with Russia?
How susceptible to domestic unrest is Putin's regime?
How important is it that the United States and Europe support each
other's Russia strategy, and what would that have to look like?
We must, as a Nation, find that prescription for sanctions and
other measures that break the factors contributing to a Russian
resilience to economic sanctions and put real pressure on Putin to
change his map for Kremlin hegemony.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you Mr. Chairman, for calling this hearing and our earlier
hearings on the impact of Russia sanctions and what we might do to
bolster them.
We are joined this morning by a distinguished panel of witnesses
and I look forward to hearing from them.
Today we'll hear about some new ideas--sanctions and nonsanctions
tools alike--that might be more aggressively deployed to counter
Russian aggression.
They may include new sovereign debt and energy sanctions,
transparency and anticorruption measures to combat Russian-generated
money laundering through U.S. real estate transactions and offshore
sources; and other measures to combat Russian illicit finance risks, or
even to codify limits on Russia's access to World Bank and other
international financial institution resources.
Our last hearing made clear that additional transparency would hit
Russian elites where it hurts--in their pocketbooks, including their
multimillion-dollar Manhattan and Miami condos.
As we've heard in our prior hearings, there is little disagreement
that while sanctions have had some effect on Russia's economy, they're
not having much effect on Putin's decision making. Russian abuses in
Crimea and eastern Ukraine, Syria, and right here in the U.S. against
our elections and other critical infrastructure, are common knowledge.
Just this week, reports have surfaced that the Russians may be
behind the attacks on the health of our personnel in Cuba. And that
they're supporting Assad's efforts to overtake the holdout province of
Idlib, potentially with the use of chemical weapons, just as they have
so brutally used barrel bombs against civilians there.
With over 3 million refugees and other civilians effectively
trapped by intensified bombing, the U.N. has described this crisis as
potentially the largest humanitarian catastrophe of our new century.
Russian aggression here also continues unchecked. During our
hearings, no one on the Committee has challenged established
conclusions of fact by the U.S. intelligence community about Russia's
involvement in ongoing attacks against our infrastructure and
elections.
And as our witnesses observed last week, we have to quickly resolve
the growing tension between what military, intelligence, diplomatic,
sanctions, and other professionals in the U.S. Government are doing to
punish and deter Russia, and what the President himself is saying and
doing.
Our Government must speak with one voice. The President should make
clear how he will use CAATSA to forcefully respond to Russian attacks,
issue an executive order that clearly outlines the sanctions
consequences for continuing attacks directed at the midterms, and
implement that order forcefully if attacks continue.
But as Ms. Rosenberg points out in her written testimony, a
permissive executive order on election meddling is no substitute for
further mandatory sanctions.
We should work with our allies rather than alienate them. Vladimir
Putin would like nothing more than to drive division between the United
States and Europe, and amongst the Nations of Europe. Europe can
contribute more to NATO, as it committed to do in 2014 and has been
doing since.
But today, September 12th, marks the day 17 years ago that NATO
invoked Article 5, committing to take action alongside the United
States if those responsible for 9/11 were identified. Isolation is a
poor foreign or national security policy--then or now.
The same spirit of unity that marked our response in the weeks and
months after 9/11 should also infuse our response to Russia's attacks
on our Nation's infrastructure, and on our democracy.
______
PREPARED STATEMENT OF LEON ARON
Resident Scholar and Director of Russian Studies, American Enterprise
Institute
September 12, 2018
Thank you Chairman Crapo, Ranking Member Brown, and Members of the
Committee: Before we discuss and evaluate specific measures, I think it
might be helpful to begin by placing the sanctions on Vladimir Putin's
regime (which is not to be equated with Russia or the Russian people!)
in a larger context.
Why are sanctions, like those on Russia, imposed on countries?
Essentially to exact domestic political costs on a country's foreign
policy.
If that is the main purpose, there are two distinctions that need
to be made in evaluating the impact of sanctions. One is short-term vs.
medium- and long-term effects. And the other, more important
distinction, is the difference between economic effects and political
effectiveness. The former are relatively easy to achieve, especially
when the disparity between the respective economies is as great as it
is between the United States and Russia today. But the latter purpose,
to change the policies of the sanctioned regime, is almost never
achieved in the short term and has not been especially successful in
the medium term either.
This has been the case almost everywhere and at all times. One
reason is the hope that the sanctions will be lifted or at least
lightened. Secondly, and most importantly, authoritarian regimes, even
the seemingly stable ones, carry on what Churchill called the fight of
bulldogs under the carpet. A quick retreat could lead to a hemorrhaging
and eventually loss of the leader's power, which could be accompanied
by the loss of one's life as well. Hence, defiance is almost always the
first reaction.
Thus far, Russia has fit the general pattern, both with respect to
the economic effects of the sanctions and their political
effectiveness. Which is to say that the economic effects have been
undeniable, damaging, and growing--but equally predictable has been the
regime's defiance in the face of these sanctions. Alexei Kudrin,
Putin's former and longest-serving Minister of Finance and still
reportedly among Putin's most trusted economic advisors, has estimated
the losses from sanctions and the absorption of Crimea into the Russian
Federation from 2014 to 2017 at $100-150 billion in a country whose GDP
last year was around $1.57 trillion. \1\
---------------------------------------------------------------------------
\1\ ``Russia's Losses From Crimea Integration Estimated at $150-
200 bln--Ex-Finance Minister'', TASS, March 31 2015, http://tass.ru/en/
russia/786132.
---------------------------------------------------------------------------
Similarly, according to the International Monetary Fund, the
sanctions could initially reduce Russia's inflation-adjusted GDP to
between 1 and 1.5 percent. \2\ The actual losses are almost certainly
higher because of the impact of capital flight, the drop in foreign
direct investment, and imports of technology in a country where 90
percent of industry operates on imported equipment (and 100 percent in
the most advanced sectors).
---------------------------------------------------------------------------
\2\ Anders Aslund, ``Want To Hit Putin Where It Hurts? Target His
Friends'', The Hill, September 2, 2018, http://thehill.com/opinion/
international/404524-want-to-hit-putin-where-it-hurts-target-his-
friends.
---------------------------------------------------------------------------
As to the pattern of defiance in the face of the sanctions, there
is no need to detail it to this audience; a short list of Russia's
postsanctions actions would do: the shooting down of a Malaysian
airliner over Russia-controlled territory in July 2014; six months
later the deployment of regular Russian troops in the battle against
Ukrainian forces around the town of Debaltseve; nine months later the
sending of Russian troops to Syria; a year later an attempted coup in
Montenegro to prevent it from joining NATO; and then of course the
interference into the U.S. presidential election and the poisoning of a
former intelligence officer in Britain.
But the seeming absence of immediate political effects of the
sanctions must not be confused with their ineffectiveness.
To begin with, we should not underestimate the power of moral
outrage which the sanctions represent--especially if they are initiated
by the only country that ultimately matters to Russians: America. As we
learned after the Soviet Union collapsed, the moral outrage which U.S.
sanctions represented chipped away at the regime's legitimacy. And
Russia is not a totalitarian country. Public opinion matters.
Similarly, we should keep in mind, and not be disheartened by the
fact there are no silver bullets and it is very hard to invent
something that is both new and effective.
As a result, the several packages of measures in the pipeline
today, including the DETER legislation, appear most effective when they
build on or deepen the existing sanctions that are most likely to have
a domestic political impact.
I would single out two such measures.
First, the earlier ban on investment in and transfer of technology
to the Russian oil industry--a measure that is furthered by the DETER
package to including ``blocking'' or freezing assets of two of Russia's
three largest oil companies.
This is a ticking bomb under the Putin regime.
A former head of the Russia office of an oil multinational has
commented in an elite Russian online journal that, I quote my
translation, ``From my own experience . . . I know that without Western
technologies and investors the oil-and-gas sector of Russia would be on
a deathbed.'' \3\
---------------------------------------------------------------------------
\3\ Konstantin Eggert, ``Voina budet proigrana. Pochemu putinskaya
elita boitsya sanktsii bol'she sovetskoi'' (The War Will Be Lost. Why
the Putin Elite Fears Sanctions More Than the Soviet Elite), Snob,
August 10, 2018 https://snob.ru/entry/164380.
---------------------------------------------------------------------------
True, Russia is not a petro-State like Saudi Arabia. No more than
15-20 percent of its GDP comes from oil and gas. But the tax revenues
from energy exports constitute at least 50 percent of the Russian State
budget. This is ready cash for President Putin to pay for his key
political assets: the security services, the armed forces, over 36
million pensioners, \4\ and millions of public-sector workers. Yes, in
theory, if he does not have the money to feed these constituencies
Putin may decide to turn Russia into a totalitarian State like Cuba or
North Korea, where public opinion does not matter at all. Does he have
the temperament for the inevitable bloodshed or for the risks involved?
He may or may not. We simply don't know. But these are exactly the kind
of tough choices that sanctions should be designed to force Putin to
make.
---------------------------------------------------------------------------
\4\ ``Kakoe kolichestvo pensionerov zafiksirovano v Rossii v 2017
godu'' (How Many Pensioners Are Registered in Russia in 2017),
Straxovoi Portal, https://insur-portal.ru/pension/kolichestvo-
pensionerov-v-rossii.
---------------------------------------------------------------------------
The ban on financing and technology transfer is a ticking bomb
because while Russia is not running out of oil, it is beginning to run
out cheap oil in Western Siberia. There is plenty of oil still left in
Russia, more than any other country in the world, but most of it in
Northeast Siberia is at or above the Arctic Circle, under permafrost,
much of it offshore in the Kara Sea, Laptev Sea, and the East Siberia
Sea. Virtually all of it must be mined at temperatures between minus 22
and minus 55 degrees Fahrenheit.
The startup investment in exploration and extraction is likely to
run into the hundreds of billions of dollars, which Russia does not
have--in addition to the required technology that Russia cannot even
touch.
The second measure that is likely to have a sizeable domestic
political effect is the restrictions under the DETER legislation that
ban the sale of Russian sovereign debt. This policy builds on the
already existing restrictions on raising capital by several Russian
private companies and banks.
This past August, Russian media labeled the 14-day limit on
operations with sovereign debt the ``most serious threats to the
Russian economy.'' \5\
---------------------------------------------------------------------------
\5\ Arnold Khachaturov, ``Rubl' Trepeshchet'' (The Ruble Is
Trembling), Novaya Gazeta, August 9, 2018, https://www.novayagazeta.ru/
articles/2018/08/09/77446-rubl-trepeschet.
---------------------------------------------------------------------------
An outright ban on the sale of the OFZ, the Russian acronym for
Obligatsii Federal'nogo Zayoma, or Federal Loan Bonds would be a very
serious blow. As a Russia expert put it, OFZ's are the ``Finance
Ministry's workhorse funding instrument for the budget.'' \6\
---------------------------------------------------------------------------
\6\ Ben Aris, ``Even the Specter of Sanctions Is Hurting Russia'',
The Moscow Times, August 25, 2018, https://themoscowtimes.com/articles/
even-the-specter-of-sanctions-is-hurting-russia-op-ed-62666.
---------------------------------------------------------------------------
A third of Russian State debt is already held by foreigners, and
Russian experts anticipate a massive fire sell-off for cents on the
dollar and ``nonresidents exit'' from Russian ``papers.'' \7\ Finally,
the sale of sovereign debt, according to Russian experts, helps
finance, among others, the Russian Pension Fund. \8\
---------------------------------------------------------------------------
\7\ Khachaturov, op. cit.
\8\ See, for example, Vladislav Inozemtsev, ``Prishli za Putinym''
(They've Come for Putin), Forbes.ru, August 9, 2018, http://
www.forbes.ru/biznes/365639-prishli-za-putinym-chem-grozyat-kremlyu-
novye-sankcii-ssha.
---------------------------------------------------------------------------
Moreover, an ambitious economic program announced by President
Putin after his inauguration this past May calls for nearly $115
billion in additional spending over the next 6 years, and--along with
hiking the Value Added Tax from 18 to 20 percent, \9\ and raising the
retirement age, the Finance Ministry had planned to raise nearly $36
billion by selling the OFZs, most of them to foreign investors. \10\
---------------------------------------------------------------------------
\9\ ``Russia's Duma Passes Bill Raising Value-Added Tax to 20
Percent'', The Moscow Times, July 24, 2018, https://themoscowtimes.com/
news/russia-duma-passes-bill-raising-value-added-tax-20-percent-62331.
\10\ Ben Aris, ``Russian Government Gets a New Programme and
People'', bne Intellinews, May 20, 2018 http://www.forbes.ru/biznes/
365639-prishli-za-putinym-chem-grozyat-kremlyu-novye-sankcii-ssha; and
see Aris, ``Specter of Sanctions''.
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In conclusion, making Vladimir Putin moderate, not to mention
retreat from, his current aggressive policies will require measures
targeted as precisely as possible at increasing the domestic political
costs of his regime's behavior--as well as a great deal of patience.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF ELIZABETH ROSENBERG
Senior Fellow and Director, Energy, Economics, and Security Program,
Center for a New American Security
September 12, 2018
Chairman Crapo, Ranking Member Brown, distinguished Members of the
Committee, thank you for inviting me to appear before this Committee to
discuss new tools to counter Russia.
Today, the security and integrity of the United States is under
attack by Russia's threats to our democratic institutions.
Additionally, Russia's malign activities actively undermine our core
policies and values linked to respect for national sovereignty, rule of
law, prohibitions against the use of weapons of mass destruction, and
protection of human rights. Russia's malicious and aggressive foreign
interference is also a destabilizing affront to U.S. global leadership
and to the national interests of our closest allies.
Equally as alarming as the grave and deeply damaging harms wrought
by Russia is the inadequate U.S. policy response. The directors of our
intelligence agencies, U.S. cabinet-level officials, including the
Secretaries of State, Treasury, and Defense, and the executives of the
most prominent social media companies have spoken clearly about the
threat. But so far, the Administration's policy response has appeared
uncoordinated or contradictory, and has been insufficiently bold in
indicating to Russia that its activities will not be tolerated. How
U.S. policy leaders proceed now is of fundamental importance to the
character of, and future for, our democracy and core values. Now, U.S.
lawmakers must continue their strong leadership role in articulating a
strategic vision for addressing this threat and deploying an array of
policy tools to push back on Russia and uphold our national security.
The Trump administration has embraced a maximum financial pressure
strategy to address many of our leading national security priorities,
including responding to threats from Iran and North Korea. With regard
to Russia, however, U.S. policy has suffered from uneven execution and
limited implementation of the law, and a lack of strategy, uniform
messaging, and long-term vision. The Administration has offered tough
rhetoric and has embraced the use of sanctions. However, the White
House has also telegraphed a desire to relieve tensions with Russia at
times, sending confused signals to political leaders and to global
financial and energy markets, and contributing to a loss of credibility
for U.S. policy. The White House is reportedly considering tough new
sanctions to respond to foreign meddling in U.S. elections. \1\
However, the discretionary nature of such new authorities, coupled with
signals from the President that Russian interference into U.S.
elections is a ``hoax'', undermines their deterrent effect. Members of
the U.S. policy community are more keenly aware of these unfortunately
mixed signals than most, which is what led Congress to almost unanimous
support for tough Russia sanctions legislation last summer, and what
motivates the current push for more aggressive Russia measures.
---------------------------------------------------------------------------
\1\ Shane Harris, Josh Dawsey, and Ellen Nakashima, ``White House
Drafting Sanctions Order To Punish Foreign Interference in U.S.
Elections'', The Washington Post, August 8, 2018, https://
www.washingtonpost.com/world/national-security/white-house-drafting-
sanctions-order-to-punishforeign-interference-in-us-elections/2018/08/
08/ef0939f2-9b0a-11e8-843b-
36e177f3081c_story.html?noredirect=on&utm_term=.9bfdc2f24896.
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I applaud the seriousness of purpose demonstrated by members of
Congress to address the threats from Russia, and I support the notion
that much more must be done. It is impossible, and possibly morally
reprehensible, to countenance the threats we face and contemplate
inaction. However, I urge policy leaders not to embrace policy that
appears tough but lacks teeth, that strives to deliver consequences to
Russia but instead imposes unintended consequences to our country and
its allies, and undermines our foreign policy goals. Sanctions have
been a U.S. tool of choice for addressing rogue regimes and thugs, and
a favorite tool to address Russia since 2014. But they are not the only
option or solution, and their pathological use can diminish U.S.
credibility, and the cogency and availability of sanctions more
generally. It is possible that the practical utility of U.S. sanctions
on Russia is now primarily in the realm of messaging and of exposing
malicious activity, rather than as a force to deter Russian malicious
activities. Actually achieving such deterrence now will require an
adaptation of the sanctions and economic pressure applied to Russia, a
holistic foreign policy strategy, and the simultaneous use of an array
of complementary policy tools.
The Role of Sanctions in Countering Russia
The present U.S. sanctions regime targets a wide swath of Russia's
malign activity. Currently, authorities are in place to expose and
target Russia's illegal annexation of Crimea and territorial aggression
in eastern Ukraine; support for Syrian President Bashar Assad's war
crimes, including his use of chemical weapons on his own people; use of
chemical weapons on the soil of a close U.S. ally; malicious
cyberactivity; violations of human rights; and violations of various
sanctions programs, including the North Korea sanctions program.
There has been a robust debate about whether sanctions have
effectively delivered policy success since implementation of the major
sanctions measures targeting Russia in 2014. The critics have a strong
case that becomes more and more convincing with the passage of time, as
the list of ills sanctions are meant to address becomes longer, as the
United States loses credibility and allies in the campaign to push back
on Russia, and as the policy delivery appears episodic and lacking in
strategy. \2\ This is a poor framework from which to expect policy
success.
---------------------------------------------------------------------------
\2\ ``America's Escalating Russian Sanctions: A Thickening Web'',
The Economist, August 30, 2018, https://www.economist.com/europe/2018/
08/30/americas-escalating-russian-sanctions; Julia Ioffe, ``How Not To
Design Russia Sanctions'', The Atlantic, January 31, 2018, https://
www.theatlantic.com/international/archive/2018/01/kremlin-report-
sanctions-policy/551921/.
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In fact, it appears likely that for these measures to deliver
enough of an economic blow to Russia to compel policy change, they will
involve an enormous set of economic consequences for the United States
and its allies and trading partners. That may involve costs that the
United States is only willing to bear if there is a broadly held view
that we are truly at war with Russia, a political belief that is far
from mainstream at present.
This does not mean that sanctions should not be part of the policy
approach to address Russian threats, but rather that their application
must be used to specifically expose and impose consequences for
malicious Russian activities. They can also be used successfully to
impede the flow of Russian money and curb Russia's malicious
activities. Sanctions must not be overemphasized to the exclusion of
other forms of economic statecraft, and sanctions must be paired with
other tools of national power and coordinated with allies. Divided from
our transatlantic partners on sanctions, we will struggle for clarity
and strength in our Russia policy and we will alienate and harm our
closest friends in the fight. Ultimately, U.S. sanctions cannot alone
be expected to deliver foreign policy success; they must be combined
with other tools of national power. Policymakers must proceed from this
starting point when deploying this tool in the future.
Looking forward, policymakers must be especially mindful of the
size and global interconnectedness of Russia's economy and the
willingness and ability of its leaders to cope with economic hardship
and not make political concessions in the face of this stress. While
sanctions implemented by the United States and the European Union in
2014 and 2015 did cause economic damage to the Russian Federation, the
Russian economy has shown itself to be resilient, and the Russian
Government has shown itself to be an effective manager of the
sanctions-imposed stress. Russia's recession ended in 2016, and while
its growth has been a meager 1.5-2 percent since, this has been enough
to avoid broad discontent with Putin's foreign policy. Rising oil
prices and the ability of Russian State and private executives to court
foreign exchange, particularly in light of the declining ruble, has
been a powerful buoy to the Russian economy. Its leaders have worked
diligently to bail out institutions under sanctions stress and raise
capital to insulate itself from further sanctions. It has ``on-shored''
many critical capabilities, especially in its energy sector, is looking
to China as an alternative market and financier, and is bracing for a
long fight with the United States. \3\
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\3\ Rachel Ziemba, Senior Adjunct Fellow, Center for a New
American Security, ``Russia Sanctions: Current Effectiveness and
Potential Future Steps'', Testimony before the U.S. Senate Committee on
Banking, Housing, and Urban Affairs, September 6, 2018, https://
www.cnas.org/publications/congressionaltestimony/testimony-before-the-
u-s-senate-committee-on-banking-housing-and-
urbanaffairs?token=khIvHdgtVWsdRODQ0Q7LdfXd8eGg34y.
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New Policy Measures on Russia
The Senate is currently considering two major, bipartisan pieces of
Russia sanctions legislation--the Defending Elections From Threats by
Establishing Redlines Act of 2018 (DETER Act) and the Defending
American Security From Kremlin Aggression Act of 2018 (DASKA Act). Both
would impose sanctions on new issuance of Russian sovereign debt, place
Russian banks on the U.S. Specially Designated Nationals and Blocked
Persons (SDN) list, which would freeze any bank assets in the U.S. and
block all transactions with the banks that come into U.S. jurisdiction,
and would tighten sanctions on Russia's energy sector, which remains a
dominant source of Russian Government revenue. There are many ideas in
the legislation worth careful evaluation and development, and I
strongly support a premise and goal of the legislation: presenting
powerful consequences to Russia to deter its threats and interference
in our core democratic institutions, its territorial aggression, and
Russia's unacceptable breaches of sovereignty and human rights. The
introduction of these pieces of legislation has already achieved a
powerful political goal for U.S. foreign policy. It has signaled
outrage and critique to Russia, and a clear intent to escalate policy
measures in the face of Russian aggression and breaches in
international norms that the United States cannot abide.
Lawmakers must proceed in earnest to refine proposed sanctions
measures, but they must be mindful of the unintended consequences and
the need to target the economic pressure on Russian interests rather
than Russian trading partners. Lawmakers should aim squarely at
sanctions targets directly involved in threatening and insidious
activities. Doing so will expose this conduct in the public domain,
garnering credibility for the United States and forming a basis for
building multinational support to counter these Russian activities.
Maximalist sanctions designed to deliver a punishing blow to
Russia's biggest economic actors may seem appealing to security hawks
eager to constrain or punish Russia, but they are not savvy. If U.S.
policymakers attempt to unilaterally and suddenly sever ties between
the largest Russian energy companies and their foreign partners they
may negatively impact U.S., European, and Asian energy consumers or
investors exposed directly or indirectly to the Russian market, and
undercut U.S. sanctions strategy on Iran. U.S. policymakers may also
inadvertently enrich Russian energy firms that replace foreign firms,
thereby consolidating Russian influence in global supply and pricing. A
further potential unintended consequence might be increases in the role
Chinese firms play in the Russian market, undermining U.S. leverage on
Russia. By contrast, a U.S. policy approach attempting to impede future
investment and production capacity in the Russian energy sector,
perhaps by limiting the provision of technology, specialty equipment,
services, and capital, may deliver the economic pressure U.S. lawmakers
intend but avoid disruptive market effects and harm to U.S.
relationships with partners in Europe and developed Asian economies.
Similarly, U.S. sanctions measures targeting the entire stock of
Russian debt trade and transactions can also have wide-ranging and
disruptive market impacts. A more targeted sanctions policy approach of
tailoring restrictions just on future debt issuance may achieve a
strong economic and political signal and limit the consequences to U.S.
interests. Although Russian authorities may be able to replace the
foreign finance of new debt with either domestic sources (such as State
banks, pension funds, or rich individuals) or rely on funds from
autocratic States, doing so will impose costs in terms of rising rates,
further restricting fiscal policy space and free cash flow of the
Russian Government. As foreign ownership of Russian local currency debt
has already fallen, at 28 percent of total outstanding issuance in late
July according to Russian Government data, the contagion risk to other
emerging markets via direct portfolio effects may have fallen. The
symbolic effect of sanctions on primary issuance of sovereign debt
might still be meaningful, and the economic effects would be
concentrated in Russia and, to the extent that there is contagion,
sentiment impacts on emerging markets with weak balance sheets, such as
Brazil, South Africa, and Turkey, rather than on the debt of developed
markets such as the United States.
Additionally, new defense measures may be most effective by taking
a targeted approach to restricting Russia's ability to procure
internationally made component parts for use in weapons and defense
systems, possibly through an updated application of Countering
America's Adversaries Through Sanctions Act (CAATSA) section 231. This
could be done while maintaining reasonable pressure to reduce Russia's
defense exports and earnings. When it comes to using sanctions to
target cronies close to President Putin, it will be important to train
these authorities on individuals who are actually part of Putin's inner
circle and to the greatest extent possible expose their involvement in
Russia's malicious and destabilizing activities.
There are certainly an array of other policy options that
legislators must study to counter Russia, including through increased
force posture and projection in Europe, the Eastern Mediterranean, and
the Black Sea, and through offensive cyberoperations. There are also
proactive measures the United States should pursue, through provision
of aid and technical assistance, to advance European energy security,
shore up support for backsliding democracies in Eastern and Central
Europe, and support an informed and free press into Russia and in
countries it seeks to influence and misinform.
Financial Transparency as a National Security Priority
Now, in the realm of economic statecraft to address Russia, I urge
U.S. lawmakers, and the Members of this Committee in particular, to
pair any new set of sanctions measures on Russia with critical and
much-needed policy to promote financial transparency and the disclosure
of beneficial ownership information in the corporate formation process.
This may have broad-ranging and powerful effects in exposing and
deterring Russian corruption and illicit financial activity in the
United States and Russia's interference in our democratic processes.
Ultimately, it may be the most effective thing that Congress can do to
root out and confront Russia's insidious influence and destabilization
campaigns in our homeland. It should be a centerpiece of the array of
tools the United States uses in a holistic policy to address the
Russian threat, including military, diplomatic, intelligence, economic,
technical and development assistance, and legal measures.
The current version of DASKA includes a provision to expand
Geographic Targeting Orders for obtaining information from title
insurance companies on beneficial owners of entities that purchase
high-value residential properties. \4\ While this would represent a
useful new measure of financial transparency, it is wholly insufficient
on its own to meet the scale of the vulnerability.
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\4\ United States Senate, Defending American Security Against
Kremlin Aggression of 2018, S. 3336, 115th Congress, https://
www.congress.gov/bill/115th-congress/senate-bill/3336/titles.
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I urge you to take up new legislative language to require the
collection and disclosure of beneficial ownership information in the
corporate formation process and on an ongoing basis. This would offer a
powerful solution to the problem of anonymous companies in the United
States, which represents an appalling gap in the integrity of our
financial system and an enormous loophole that enables malicious
actors, including Russian operatives seeking to undermine U.S.
democratic institutions and processes, to operate anonymously and with
utter impunity in the United States.
The United States boasts the most sophisticated and preeminent
financial system globally, with unparalleled financial crimes
enforcement capabilities and resources. Yet, even with all of those
advantages, our financial system has a wide-open back door for our
adversaries to march through, set up shop and wage an enormous and
well-funded influence campaign, laundering money, and paying for
attacks on our democracy. U.S. law enforcement agencies have been
asking for access to beneficial ownership information for some time,
the likes of which could help to expose and deter Russian attacks on
our democracy. But, despite the severity of the threat, these requests
from the law enforcement community have been ignored. \5\ Banking
executives also support the requirement for collection of beneficial
ownership information, as it would help them to better protect
themselves from abuse by criminals and other illicit financiers. \6\
---------------------------------------------------------------------------
\5\ M. Kendall Day, Acting Deputy Assistant Attorney General,
Criminal Division, U.S. Department of Justice, ``Beneficial Ownership:
Fighting Illicit International Financial Networks Through
Transparency'', Testimony to the Senate Judiciary Committee, February
6, 2018, https://www.judiciary.senate.gov/imo/media/doc/02-06-
18%20Day%20Testimony.pdf.
\6\ Greg Baer, President, The Clearing House Association,
``Implementation of FinCEN's Customer Due Diligence Rule--Financial
Institution Perspective'', Testimony to the House Financial Services
Subcommittee on Financial Institutions and Consumer Credit, April 27,
2018, https://financialservices.house.gov/uploadedfiles/hhrg-115-ba15-
wstate-gbaer-20180427.pdf.
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The international community is well aware of the gaps in U.S.
oversight of corporate entities. The Financial Action Task Force
(FATF), the global standard-setter for financial crimes compliance,
found the United States ``noncompliant'' in its most recent review of
our approach to transparency and beneficial ownership. As FATF stated:
``Beyond [a SEC requirement for entities which issue securities] there
is no requirement for other companies or company registries to obtain
and hold up-to-date information on their [beneficial owner] or to take
reasonable measures to do so.'' \7\ This is an alarm bell about a
tremendous gap in our national security, one we know that Russia is
exploiting.
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\7\ Financial Action Task Force, ``Anti- Money Laundering and
Counter-Terrorist Financing Measures: Mutual Evaluation Report''
(December 2016), http://www.fatf-gafi.org/media/fatf/documents/reports/
mer4/MERUnited-States-2016.pdf, 224.
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At present, anonymous companies are free to operate without
providing accurate information to law enforcement. This enables their
involvement in illicit activity, such as money laundering, or the
funding of major political and social influence campaigns to undermine
our democracy and sew discord. \8\ Other jurisdictions also rated by
FATF as noncompliant during this evaluation period include: Nicaragua,
Sri Lanka, Zimbabwe, and Panama. \9\ It is disgraceful that this level
of international public humiliation for inadequate beneficial ownership
regulations has done nothing to motivate policy change.
---------------------------------------------------------------------------
\8\ Matea Gold, ``Did Facebook Ads Traced to a Russian Company
Violate U.S. Election Law?'', The Washington Post, September 27, 2017,
https://www.washingtonpost.com/news/postpolitics/wp/2017/09/07/did-
facebook-ads-traced-to-a-russian-company-violate-u-s-electionlaw/
?noredirect=on&utm_term=.46220204c35d.
\9\ Financial Action Task Force, Table of ratings for assessment
conducted against the 2012 FATF Recommendations, using the 2013
Methodology (September 2018), http://www.fatfgafi.org/media/fatf/
documents/4th-Round-Ratings.pdf.
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Why have our financial and national security leaders failed to act?
Efforts to advance beneficial ownership over the last year have
foundered on concerns about privacy and the burden of imposing such
regulations on small businesses. But these protestations are often
inflated, ideological, and impractical. It is possible to responsibly
balance civil liberties concerns and the requirement to disclose basic
beneficial ownership information. Our national security and the need to
maintain the integrity of our democracy demand it.
Even before the chilling revelations about insidious Russian
threats from the U.S. intelligence community and social media
executives before Congress, there was a broad coalition of law
enforcement, business interests, and national security supporters that
supported beneficial ownership legislation. Kenneth Blanco, the
Director of the Treasury Department's Financial Crimes Enforcement
Network (FinCEN) testified to the House Committee on Financial Services
about the importance of collecting beneficial ownership information for
the implementation of the new Customer Due Diligence (CDD) Rule. \10\
---------------------------------------------------------------------------
\10\ Kenneth Blanco, Director, Financial Crimes Enforcement
Network, ``Testimony for the Record'', Testimony to the Subcommittee on
Terrorism and Illicit Finance, House Committee on Financial Services,
May 16, 2018, https://financialservices.house.gov/uploadedfiles/hhrg-
115-ba01-wstate-kblanco-20180516.pdf.
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The Financial Accountability and Corporate Transparency (FACT)
Coalition, a nonpartisan alliance of civil society and public interest
organizations, has highlighted the high cost of allowing illicit money
to flow absent greater transparency measures. \11\ They have focused
specifically on the threat of illicit finance originating through the
use of anonymous corporate entity formation as a grave national
security concern, most recently in an open letter to the House
Committee on Financial Services from distinguished experts on the topic
with decades of relevant Government experience. \12\
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\11\ FACT Coalition, ``Briefing Memo: IRS Does Not Collect
Beneficial Ownership Information and Additional Concerns With an IRS
Approach'', May 7, 2018, https://thefactcoalition.org/briefing-memo-
irs-does-notcollect-beneficial-ownership-information-and-additional-
concerns-with-an-irsapproach?utm_medium=policy-analysis/briefing-memos.
\12\ FACT Coalition, ``36 Former Military and Civilian National
Security Leaders Urge House of Representatives To End Anonymous Shell
Companies'', June 1, 2018, https://thefactcoalition.org/36-former-
military-civilian-national-security-leaders-urge-congress-end-
anonymous-shellcompanies?utm_medium=resources/incorporation-
transparency.
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State Governments, which have specific responsibility for
regulating corporate entities within their borders, are also starting
to sound the alarm. Earlier this year, 24 State attorneys general
signed a letter to Congress calling for tightening of beneficial
ownership transparency. \13\ The need to effectively address Russian
threats, including to our democratic institutions and processes, must
be the catalyst to motivate policy change on beneficial ownership now.
Lawmakers should adopt this policy and make it part of the economic
statecraft targeting Russia, embracing it alongside broader economic
and financial sanctions in any forthcoming legislation targeting
Russia.
---------------------------------------------------------------------------
\13\ ``Ferguson Calls on Congress to Require Shell Company
Transparency'', Washington State Office of the Attorney General, press
release, August 2, 2018, https://www.atg.wa.gov/news/news-releases/
fergusoncalls-congress-require-shell-company-transparency.
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Additionally, to further promote financial transparency that can
protect us from Russia's meddling and threats to our homeland, Congress
should consider long-delayed crossborder funds transmittal reporting
requirements. \14\ Current regulations require financial institutions
to retain records of electronic funds transfers of greater than $3,000.
However, there is no requirement that this information be furnished to
FinCEN, merely that it be retained in the event that FinCEN asks for
it. This passive approach stands in contrast to other leading economies
that require disclosure of international value transfers as a matter of
course. The countries, including close U.S. allies, have found this
information valuable for understanding and combating national security
threats, including the progress of rogue regimes in the financing of
proliferation of weapons of mass destruction and other financial
crimes. Congress should revisit the feasibility of the FinCEN proposed
rule and consider what implementation of the crossborder rule would do
to address and combat the Russian threat to U.S. national security.
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\14\ Financial Crimes Enforcement Network, ``Implications and
Benefits of Cross-Border Funds Transmittal Reporting'' (January 2009),
https://www.fincen.gov/sites/default/files/shared/
ImplicationsAndBenefitsOfCBFTR.pdf.
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Further Congressional Oversight
Beyond these measures there are other policy options that the U.S.
Congress should consider to advance its efforts to promote transparency
and expose and counter Russia's threats. First and foremost, lawmakers
must keep up the pressure in their oversight efforts, calling the
Administration to regularly account for its strategy and implementation
of policy. The Treasury Department's repeated extension of a sanctions
wind down period to the Russian aluminum firm Rusal should serve as a
lesson to Congressional overseers in needing to better understand the
potential consequences of sanctions action, and in playing a more
active role in making sure that their message and effect are consistent
with a coherent policy toward Russia. Rusal was targeted because it is
controlled by Russian oligarch Oleg Deripaska, whose holding company
was also sanctioned. In designating the entire firm, however, the
Treasury Department put the aluminum market into a spiral, with
potential long-term consequences for the firm's operations worldwide,
including in the United States, supply chains, and how traders and
observers perceive--and unfortunately misperceive--the intent of U.S.
sanctions. \15\
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\15\ Donna Borak and Marshall Cohen, ``Sanctions on Russia's Rusal
Could Be Lifted, Mnuchin Says'', CNN.com, July 27, 2018, https://
www.cnn.com/2018/07/27/politics/mnuchin-russia-sanctionsrusal/
index.html.
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Congress also has an important role to play in elevating oversight
of sanctions authorities already in place. Additionally, CAATSA
required the Administration to produce an annual report that identifies
and maps ``illicit financial flows linked to the Russian Federation if
such flows affect the United States financial system or those of major
allies of the United States.'' Congress should use this report as a
roadmap for identifying areas in which the Treasury Department could
use additional resources, or be encouraged to expand existing efforts
to share information with allies, break down barriers to interagency
cooperation, identify typologies of Russian illicit finance, and better
repair other gaps in our regulatory or legal infrastructure. \16\
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\16\ Public Law 115-44, ``Countering America's Adversaries Through
Sanctions Act'', August 2, 2017, Section 243; the first report can be
found at Treasury Department, Report to Congress Pursuant to Section
243 of the Countering America's Adversaries Through Sanctions Act of
2017 Regarding Interagency Efforts in the United States to Combat
Illicit Finance Relating to the Russian Federation (August 6, 2018),
https://home.treasury.gov/sites/default/files/2018-08/
U_CAATSA_243_Report_FINAL.pdf.
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While Congress considers various measures to advance the
transparency of how categories of corporate entities in the U.S.
financial sector operate, it should not lose sight of the opportunity
to extend transparency to other ways the Russian Government and Putin's
inner circle funnels money into the United States. Lawmakers can
consider restrictions on investment of Russian money in the U.S.
market, especially by individuals identified as oligarchs, many of whom
have demonstrable connections to Russian President Vladimir Putin. The
U.S. Treasury has wide authority to freeze assets and impose other
sanctions on these actors, and initial evidence from the April
sanctions of some of these cronies and oligarchs suggests that
investment restrictions do put pressure on members of Putin's inner
circle. \17\ The current version of the DETER Act includes authorities
for mandatory sanctions on ``any senior foreign political figure or
oligarch in the Russian Federation'', including a visa ban if the
Director of National Intelligence determines that the Russian
Government, or agents acting on its behalf, knowingly interfered in a
U.S. elections. \18\
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\17\ Tom Keatinge, ``This Time, Sanctions on Russia Are Having the
Desired Effect'', Financial Times, April 13, 2018, https://www.ft.com/
content/cad69cf4-3e40-11e8-bcc8-cebcb81f1f90.
\18\ U.S. Senate, ``Defending Elections From Threats by
Establishing Redlines Act of 2018'', S. 2313, 115th Congress, 2nd
Session, January 16, 2018, https://www.congress.gov/bill/115th-
congress/senatebill/2313/text#toc-idA56783BD8F5140649B72C1AA9AE7BCA9.
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An additional idea that Congress should begin to study is the
development of new anti- money laundering requirements, which currently
apply primarily to banks and money services providers, to cover other
kinds of professional services providers that Russian oligarchs and
cronies rely on to move money into the U.S., such as investment
advisors, venture capital and private equity firms, and certain
professional services providers. Press reports have highlighted the
potential threat from Russian venture capital firms in Silicon Valley,
who may be using Russian State resources to acquire sensitive national
security-applicable technology. \19\
---------------------------------------------------------------------------
\19\ Zach Dorfman, ``How Silicon Valley Became a Den of Spies'',
Politico, July 27, 2018, https://www.politico.com/magazine/story/2018/
07/27/silicon-valley-spies-china-russia-219071.
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Conclusion
Every American should be concerned about Russia's efforts to
undermine our democracy, to violate sovereignty, and to blatantly
support and enable grave abuses of human rights and use of weapons of
mass destruction. The scope of these threats is broad, and there is
limited indication that Russia is deterred by any of the policy
measures that have been undertaken to date. Congress has used coercive
economic and financial measures to push back against this malign
activity, measures which are justified by the severity of the threat.
However, those tools must be used wisely, in conjunction with other
financial, diplomatic, and military tools, and in coordination with
allies.
In particular, the financial transparency measures I outlined today
would constitute a powerful weapon to push back against the flow of
Russian money into our financial system, which has been difficult for
law enforcement officials to track and account for. These measures
would lose deficiencies that have made the United States a haven for
illicit finance from a variety of sources, including those who work on
behalf of Russia's malign influence campaigns. Many of the solutions I
have outlined have been proposed or considered in previous agency
regulation or legislation. All that is required is the political will
to follow through on their adoption and implementation.
Congress has taken an active role in the application of sanctions
to the variety of areas in which the United States and Russia are at
odds. Congress has a direct role to play in this aspect of the fight as
well, by eliminating the pervasive use of anonymous corporate entities,
providing more resources to Treasury/FinCEN, but also exercising
oversight of their activities, and pursuing other disclosure measures
that will shine a light on dirty money flowing through the U.S.
financial system. In doing so, Congress can put tremendous pressure on
Russia's malign activity and offer a strong complement to the other
methods the United States is using to defend itself against this
unprecedented threat.
Thank you for your time and attention. I look forward to answering
your questions.
______
PREPARED STATEMENT OF DALEEP SINGH
Senior Fellow, Atlantic Council, and Adjunct Professor, Johns Hopkins
University
September 12, 2018
Mr. Chairman and Ranking Member Brown, thank you for the
opportunity to appear before this Committee.
As a Treasury official, I worked extensively on the design of
Russia sanctions in 2014. Looking back, I draw three main conclusions
from the experience: (1) sanctions ``do their job'' if they are
carefully designed and embedded into a coherent foreign policy; (2) the
signaling of future sanctions is at least as potent as the actions
themselves (like any weapon, the best sanctions are never used); and
(3) sanctions aren't enough to change behavior. Bearing these lessons
in mind, I will offer suggestions to counter ongoing Russian aggression
and malign behavior--both using sanctions and other economic tools.
For context, allow me to share perspective from the 2014
experience.
How Were Sanctions Designed in 2014?
Before 2014, the United States had never imposed sanctions on a
country the size of Russia. It was the tenth largest economy in world,
with a GDP roughly the size of Italy. More important than its size was
the complexity of Russia's economy and its connections to the rest of
the world. Russia was and is of systemic importance in global energy
markets, ranking second and third in the production of natural gas and
oil, respectively. Its largest banks were comparable in size and
complexity to Lehman Brothers before 2008. Given the high stakes
involved, our objective was clear: design a menu of options that could
deliver \1\ economic costs while minimizing spillovers to the U.S. and
global economy.
---------------------------------------------------------------------------
\1\ Strictly speaking, maximizing costs (financial crisis) was not
the objective.
---------------------------------------------------------------------------
We pursued this objective by first writing down a set of guiding
principles that remain instructive. Sanctions against a large, complex,
and integrated market economy such as Russia should be: (1) powerful
enough to demonstrate U.S. resolve and our capacity to impose
overwhelming costs; (2) responsible to limit contagion through the U.S.
and global financial system; (3) targeted to avoid the appearance of
punishing the Russian civilian population and, in doing so,
strengthening Putin's domestic narrative; (4) calibrated to increase
the chance of partnering with European and international allies; and
(5) staged to preserve scope for escalation or deescalation, in
addition to learning from previous steps.
Putting these principles into action required an understanding of
Russia's economic pressure points. We focused on asymmetries. Where did
U.S. economic leverage intersect with Russia's vulnerability? Foreign
capital was and is an obvious choice. U.S. and European firms are the
dominant suppliers of something Russia needed in large quantity and
could not easily replace from other sources. Similarly, in energy,
Russia's supply chains were dependent upon U.S. and European technology
to boost their long-term production capacity and innovative potential.
Here again, U.S. and EU companies are major suppliers of goods and
services that Russia needs and cannot easily replace.
Financing Restrictions Proved Especially Potent
Restricting foreign capital proved even more potent than we
anticipated. By removing U.S. and European supply of debt and equity
financing to the largest Russian State-owned enterprises in the most
critical sectors of the economy, the 2014 sanctions triggered a wave of
capital outflows from Russia, followed by economic recession.
The mechanism by which the financial restrictions operated is worth
recalling to appreciate their potency. For sanctioned entities, the
restricted supply of Western capital spiked their cost of borrowing and
reduced their access to foreign capital at any price. The sudden
financing shock impaired our targets' credit profiles, leading to
record levels of capital outflows from Russia as a whole. In a futile
attempt to defend the ruble, the Russian central bank depleted about a
quarter of its foreign currency reserves before allowing the currency
to depreciate up to fifty percent from its presanctions level against
the U.S. dollar. Importantly, the speed of the negative feedback loop
in Russia was determined by market forces and Putin's own actions, not
prescribed in advance by U.S. policy.
Import prices surged in tandem with the weakened currency and
pushed overall inflation to the midteens, forcing several rounds of
emergency interest rate hikes by the central bank to extreme levels.
Banks required Government injections of capital and regulatory
forbearance to avoid insolvency. Adjusted for inflation, wages and
spending collapsed. Bank lending and investment dried up.
Spillover Risks Were Managed Carefully
By the second half of 2014, we knew these sanctions had the
potential to deliver a knockout blow, particularly with lower oil
prices causing a dual shock, \2\ but we took care to limit unwanted
spillovers--both to increase the staying power of sanctions and to
avoid appearances of targeting Russian civilians. Our sanctions only
targeted a handful of State-owned companies in key sectors. We did not
target private companies, nor we did not sanction all sectors of the
economy. We prohibited new U.S. flows of financing to the targets of
our sanctions, but existing stocks of risk were not disrupted. U.S.
investors remained free to reduce exposure to Russia at a pace and
magnitude of their own choosing. Derivatives and money markets, both of
which tend to be the ``dry tinder'' of financial crisis, were largely
untouched by sanctions.
---------------------------------------------------------------------------
\2\ Most credible estimates are that 10 to 40 percent of Russia's
economic contraction during this period was due to sanctions, with
lower oil prices playing a larger role.
---------------------------------------------------------------------------
Impact and Spillovers Were Largely as Expected
Due in large part to this restraint, the economic impact to and
spillovers from Russia were in line with our expectations. The Russian
economy contracted 2.8 percent in 2015, the largest decline among large
economies, and the recession continued in 2016. Somewhere between one-
half and two-thirds of this impact was likely caused by lower oil
prices; the rest we can conservatively attribute to sanctions.
Over the medium term, these sanctions dealt a weak strategic hand
to Putin's Russia. Its already depleted capital stock was starved of
much-needed financing and direct investment. Removal of U.S. and
European energy technology, and the deintegration of Russia from the
global financial system, deprived Russia of key inputs to productivity
growth and made its economy even more brittle. The overall chilling
effect reportedly prompted defections from talented portions of
Russia's declining labor force. As of last July, the IMF estimated
potential growth in Russia over the medium-term at no more than 1.5
percent.
Meanwhile, unwanted spillovers within Russia and to Western
economies were largely contained. Sanctions forced the Russian
Government to deplete a portion of its finite set of resources to
contain financial and economic stress, but we avoided causing
widespread panic and impoverishment among the general public. This was
consistent with our purpose: to create diplomatic leverage and deal
space, not to deliver a knockout blow.
Blowback to the U.S. economy was minimal in the aggregate, although
certain businesses and sectors were more negatively affected. (By
construction, sanctions are an economic distortion; spillovers are
unavoidable). Even for Europe, where direct trade and financial
linkages to Russia are far more significant, the effects were
summarized by the European Commission as ``contained.'' \3\ In fact,
without sanctions, it is fair to project that the costs and
uncertainties brought about by unchecked Russian aggression in the
heart of Europe would have been far less contained that what was
experienced.
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\3\ 0.3 percent of GDP in 2014 and 0.4 percent in 2015.
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Signals Were at Least as Important as Actions
Throughout this process, both the impact and spillovers from
sanctions were managed through signaling. The signals were expressed by
the most senior officials of the U.S. Government, and they were made
credible by a coherent, multifaceted, and coordinated foreign policy.
In March 2014, after announcing the first round of sanctions
against Russia, President Obama signaled the possibility of further
escalation with a new executive order that authorized broader sanctions
against key sectors of the Russian economy. In the same statement, he
pushed forcefully in favor of an IMF bailout program for Ukraine--a
recognition that the best defense against Russian aggression was a
strong economic offense. Vice President Biden was dispatched to the
Baltic States to reinforce our Article 5 commitment to NATO countries,
and to step up cooperation with Europe on developing buffers against
energy shortfalls in the region.
After announcing sanctions in July 2014 against Russia's largest
banks, energy companies, and defense firms, President Obama warned
again that the costs on Russia would ratchet higher if Putin's
aggression in Ukraine continued. He also signaled that European allies
were poised to replicate our sanctions after close consultations (which
they did, multiplying the direct effect of sanctions and reducing the
competitive disadvantage to U.S. firms). The same credible threat of
escalation was repeated by President Obama in September after another
round of sanctions, this time targeted at Russia's largest bank, even
amid diplomatic efforts in Minsk to broker a cease-fire.
Many of the most punishing days in Russian markets during 2014 were
not those in which new sanctions actions were formally announced; some
of the biggest impacts were delivered after signals about future policy
were revealed. This makes intuitive sense. Markets are forward-looking;
asset prices determined by expectations about the future. Escalatory
signals were often enough to could deliver impact to Russian markets
without taking any new action, and they were perhaps a small
counterweight to Putin's so-called ``escalation dominance'' in the
military realm. Of course these effects become muted when investors
doubt the credibility of the threat, but this has only become a
relevant concern more recently.
Changing Behavior
Did any of these costs ultimately matter to Putin? Answering this
question is beyond my expertise, but I would observe that any leader--
however rogue--cares about popularity (at least as a method of
control), and recessions do not win hearts and minds. Putin's tolerance
for economic pain is demonstrably higher than that of most Western
leaders, but I believe there is a threshold above which his calculus is
changed. Pointing out Putin's history as a tactical opportunist, some
have argued convincingly that were it not for the mounting costs to the
Russian economy in late 2014, Putin's forces would have marched all the
way to Kyiv; or, at a minimum, he would have rejected even half-hearted
engagement in the Minsk process. We'll never know the counterfactual,
but by the Russian leadership's own admissions the impact of sanctions
was appreciable during this period. Even less clear is whether we
managed to win the narrative. Do the Russian people understand that
U.S. sanctions were an attempt to defend the sovereignty and
territorial integrity of a free country? Or do most Russians believe in
Putin's story that the recession of 2014-15 is just the latest in a
series of historical injustices perpetrated by the West? We simply
don't know the answer, and this is a subject I will address in the
recommendations section.
Current Context and Recommendations
Turning to the current context, we know that Russian aggression and
violations of sovereignty have spread across Europe and the U.K., into
Syria, and certainly here at home. At the same time, economic and
financial conditions in Russia have improved markedly. The economy is
out of recession. Inflation recently touched an all-time low. Oil
prices have tripled from their trough. Foreign reserves have been
replenished to presanctions levels. The Government's deficit and debt
profiles remain sound. Both the provocations from Russia, and its
ability to absorb a hit from sanctions, have increased.
Against this background, I would emphasize that the sanctions
toolkit designed in 2014 does not need to be reinvented. What matters,
ultimately, is the political willingness to use our sanctions tools in
a sustained and coherent fashion, together with high-level signaling
that expresses our resolve to change Putin's behavior. Escalation can
take two general forms: increasing the scope of existing sanctions to
cover a broader set of targets, or deepening the scale of impact on any
particular individual or institution. Sanctions can go broader, deeper,
or both.
Below I sketch out an illustrative set of options that apply the
principles described earlier.
First, costs should be broadened to include the very highest levels
of the Russian Government. At a minimum, Treasury and other authorities
should conduct a study that attempts to identify the location,
holdings, and financial intermediaries that manage and benefit from
Putin's wealth. Even in the unlikely scenario that this effort has no
effect on Putin's geopolitical calculus, it will signal to the Russian
people that our quarrel is not with them, and it might provide a
measure of transparency on his fortunes held abroad.
Second, U.S. investors should be prohibited from purchasing new
Russian sovereign debt. In 2014, I was more cautious about the
unpredictable spillover effects that could result from a sudden
disruption to Russia's risk-free, benchmark asset, particularly during
a period of acute stress. To be clear, this is still a serious step--
but circumstances have changed. Russia is far better able to absorb a
hit to its sovereign debt market, considering the background conditions
described earlier, \4\ and investors have had years to reduce exposures
in Russia. More to the point, I can think of no credible argument why
U.S. public pension funds and savings vehicles should indirectly fund
the Russian Government while the latter continues to sponsor violations
of U.S. sovereignty.
---------------------------------------------------------------------------
\4\ In fact, the Russian Finance Ministry recently suggested it
would buy back its domestic debt in an adverse scenario.
---------------------------------------------------------------------------
Third, while I am not in favor of prohibitions on secondary market
trading \5\ of Russian assets as a general matter, there is merit in
constructive ambiguity. Requirements on U.S. persons to disclose any
existing holdings of Promsyvazbank (Russia's designated bank to service
the defense sector), and possibly VEB, would be an effective step to
generate a broader chilling effect, especially if it includes a grace
period. By itself, this measure would not prohibit any activities, but
markets are conditioned to read the signals. These financial
institutions are appendages of the Russian Government, oriented around
domestic lending with relatively fewer international linkages than
other large Russian banks.
---------------------------------------------------------------------------
\5\ Secondary market trading refers to the buying and selling of a
financial instrument (e.g., Russian debt) after it has been issued.
---------------------------------------------------------------------------
Fourth, a comprehensive package to counter Russian aggression
requires an offensive economic strategy in its near abroad, not only to
Ukraine but also to Georgia, the Baltics, Moldova, and possibly central
Asia. Possible steps could include conditions-based financial support
to reinforce long-standing IMF priorities in the region to improve the
rule of law, battle corruption, and implement market-oriented reforms.
The overarching purpose is to create successful alternatives to
Russian-style autocracy.
Finally, I would strongly encourage a robust campaign to improve
transparency within Russia. Distributing verifiable evidence of
corruption, and the dependence of the current regime on kleptocracy,
would help to counter the Government's disinformation campaigns and its
control of the media. Working with the IMF and other multilateral
institutions could also shine a light on the basic challenges of doing
business in Russia--enforcing contracts, protecting intellectual
property, and defending property rights. Fostering genuine private-
sector exchanges between the U.S. and Russia could also help in this
regard.
Mr. Chairman and Ranking Member Brown, thank you once again for the
invitation to testify, and I look forward to your questions.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM LEON ARON
Q.1. Discretion and Penalties. In your discussion of the
President's recent Executive Order ``Imposing Certain Sanctions
in the Event of Foreign Interference in a United States
Election'', issued on September 12, 2018, you each raised some
concern over the amount of discretion the Administration
retained in the process of coming to a sanctions determination.
In your opinion, what is the optimum amount of discretion
for this or any future Administration to retain in this
particular case, or sanctions determinations more generally?
A.1. The standard practice is to grant the Executive
flexibility and discretion as to the timing and scope of
application, while preserving the overall Congress-mandated
framework.
Q.2. The Director of National Intelligence is tasked with
investigating and reviewing election meddling from almost any
foreign source, should that review culminate in assessment of
foreign interference, in your opinion, should sanctions be
automatically imposed on that assessment, or should there be a
further finding of materiality by the Attorney General and
Secretary of Homeland Security?
A.2. Given the sensitivity of the issue and that, in the case
of Russia, the other nuclear superpower would be sanctioned, I
would support the involvement of the AG and Homeland Security.
Q.3. In other words, would it be good policy, in your opinion
to have the intelligence community making sanctions
determinations, itself?
A.3. See the above.
Q.4. The Executive Order and the DETER Act, each contemplate
sanctions against any foreign actor, but the specific types of
sanctions and their targets are only specified with regard to
Russian interference.
In your opinion, should the types of sanctions and their
targets be any different for other foreign actors who interfere
in U.S. elections?
A.4. I believe sanctions ought to be meted out based on the
severity of offense, not on the country of origin.
Q.5. Other Tools. The Committee has held two hearings, before
today, and a number of Senators, and witnesses alike, have
advocated for harsher restrictions, moving forward.
How much more can the U.S. amplify sanctions against an
economic and political target like Russia, before contagions
and spill-overs make their use unacceptable to the United
States?
A.5. Since the target is the world's other superpower, Congress
should understand that at least some negative consequence for
the U.S. are inevitable. As I mentioned at the hearing, a ban
on the purchase of Russian sovereign debt (OFZ) is one such
option. Russia's exclusion from the SWIFT system would
represent an ultimate escalation (bearing in mind that Russian
officials have called such a move a ``declaration of war'').
Q.6. What other tools or policies, beyond sanctions, might
encourage Russia to reverse course in Ukraine, or cease its
information warfare operations against the democratic processes
of the United States and European Union?
A.6. Outside the sanctions, the toolbox is rather small. A more
vigorous and robust support of Ukraine in its ongoing war with
Russia would represent one such step.
Q.7. In your opinion, which tools in the U.S. toolbox would
Putin fear more than sanctions?
A.7. Being forced to withdraw from Ukraine.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM ELIZABETH ROSENBERG
Q.1. Discretion and Penalties. In your discussion of the
President's recent Executive Order ``Imposing Certain Sanctions
in the Event of Foreign Interference in a United States
Election'', issued on September 12, 2018, you each raised some
concern over the amount of discretion the Administration
retained in the process of coming to a sanctions determination.
In your opinion, what is the optimum amount of discretion
for this or any future Administration to retain in this
particular case, or sanctions determinations more generally?
A.1. As a general matter, Congress should prescribe what
activity ought to be exposed, deterred, and/or targeted by
sanctions, while the Administration must maintain the
flexibility to select individuals or entities to target with
designations. This will facilitate an appropriate balance
between the use of sanctions and other tools of statecraft and
ensure that the Administration can keep the sanctions list
appropriately updated.
Q.2. The Director of National Intelligence is tasked with
investigating and reviewing election meddling from almost any
foreign source, should that review culminate in assessment of
foreign interference, in your opinion, should sanctions be
automatically imposed on that assessment, or should there be a
further finding of materiality by the Attorney General and
Secretary of Homeland Security?
A.2. A determination of interference should not automatically
lead to the imposition of sanctions. The Administration must
have discretion to determine thresholds of significance or
materiality, and the appropriate target. This will help to
facilitate greatest utility and advancement of U.S. policy
interests. If, for various reasons, sanctions designations are
not the most appropriate or effective next step after a
determination of interference, the Administration should
nevertheless take some form of action to address this activity
and deter any future such activity.
Q.3. In other words, would it be good policy, in your opinion
to have the intelligence community making sanctions
determinations, itself?
A.3. As is the case at present, the policy community should
make the decision to impose sanctions, based on intelligence
and publicly available information, as appropriate. It would be
inappropriate for the intelligence community to take on the
role of sanctions implementer, regulator, or enforcer.
Q.4. The Executive Order and the DETER Act, each contemplate
sanctions against any foreign actor, but the specific types of
sanctions and their targets are only specified with regard to
Russian interference.
In your opinion, should the types of sanctions and their
targets be any different for other foreign actors who interfere
in U.S. elections?
A.4. Sanctions authorities related to interference in U.S.
elections, as well as the posture for implementation and
enforcement of these authorities, should apply equally to
individuals or entities of any nationality.
Q.5. Other Tools. The Committee has held two hearings, before
today, and a number of Senators, and witnesses alike, have
advocated for harsher restrictions, moving forward.
How much more can the U.S. amplify sanctions against an
economic and political target like Russia, before contagions
and spill-overs make their use unacceptable to the United
States?
A.5. The United States can impose additional sanctions on
Russia that will have meaningful effects on Russian targets and
limited spill-over effects for non-Russian entities, including
the United States. This may include sanctions on primary
issuance of sovereign debt, or on nonsystemically significant
Russian financial institutions. Harsher financial sanctions
that target financial institutions central to the Russian
economy, or that target current Russian oil production, are
likely to produce spillover effects that many in the United
States may find unacceptable either for the economic spillover
effects or the tension they cause in relationships with allies
and partners.
Q.6. What other tools or policies, beyond sanctions, might
encourage Russia to reverse course in Ukraine, or cease its
information warfare operations against the democratic processes
of the United States and European Union?
A.6. Beyond sanctions, continued public awareness-raising about
the specific methods Russia and other actors use in information
warfare operations would provide benefits to the international
community in identifying red flags and typologies of election
interference. The more information that can be incorporated in
risk assessments and countermeasures, the less effective Russia
will be in the future. Forms of force projection by NATO or by
the United States directly may also serve to discourage Russia
from its territorial aggression.
Q.7. In your opinion, which tools in the U.S. toolbox would
Putin fear more than sanctions?
A.7. The strongest U.S. tool is multilateral security alliances
and the potential that the United States and its transatlantic
partners could mobilize an array of capabilities, from defense,
economic, information, and cybermeasures, to push back on
Russian malign activity.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM ELIZABETH ROSENBERG
Q.1. It is clear that economic sanctions are most effective
when implemented with the cooperation of the international
community. Unlike in the U.S., EU sanctions must be renewed by
member States on a unanimous basis, generally every 6 months.
What efforts should be made to deepen our coordination with
our partners to enforce sanctions?
A.1. The U.S. Administration should reopen the State
Department's Sanctions Coordination Office, in much the same
format and structure as what is called for in the newest
version of the Defending American Security from Kremlin
Aggression Act. The United States needs a high-level,
institutionalized diplomatic effort to keep lines of
communication open with European partners.
Q.2. Are there specific steps that the Administration should
take that it has not already taken with respect to coordinating
with our partners?
A.2. Along with reopening the State Department's Sanctions
Coordination Office, the Administration should also report to
Congress on its strategy to ensure greater coordination with
European partners and how it plans to navigate widening
differences in the U.S. and EU sanctions regimes going forward.
Q.3. What are the risks that Russia is able to pick off a
Nation within the EU and prevent an extension of sanctions by
the Europeans?
A.3. There are EU member States that lean towards weakening
sanctions pressure against Russia, and Russia has cultivated
its ties to these countries. It remains incredibly likely that,
as a result, the EU will not be able to add more significant
sectoral sanctions targeting Russia to existing authorities. At
best, the EU can be expected to list more individuals
implicated in malign activities.
Q.4. What additional authorities (if any) do you think are
needed to increase cooperation with our allies?
A.4. Congress should help to institutionalize the presence of
the Sanctions Coordination Office in the State Department to
steer the diplomacy on these efforts. Congress should also
provide further support to Treasury's Office of Foreign Assets
Control to help manage the heavy burden of sanctions
implementation and enforcement.
Q.5. Russia has responded to Western sanctions with heated
rhetoric and by placing a retaliatory ban on certain imports,
among other measures. It is likely to respond with hostility to
additional sanctions.
What actions do you expect the Russian Government to take
in response to a new round of sanctions? Please provide what
you believe to be Russia's most likely response to an
additional round of sanctions.
A.5. In response to a new round of sanctions the Russian
Government is most likely to respond similarly to how it has
responded to past rounds of sanctions, such as with CAATSA. It
might expel additional U.S. diplomats or otherwise force the
United States to downsize its diplomatic mission in Russia. The
Russian Government might also respond with additional sanctions
of its own against U.S. persons and products, although this may
have as great an effect (or greater) on Russian entities as it
is likely to have on U.S. businesses and consumers.
Q.6. How likely is it that increased sanctions lead to a
response by Russia in another domain or in some form of other
aggression?
A.6. Russia may respond to additional sanctions measures with
cyberintrusions similar to those it carried out to interfere in
U.S. and European elections. However, those activities are
likely to continue with or without additional U.S. sanctions
against Russia. It is unlikely that Russia would respond to
additional sanctions with direct military action in Ukraine or
elsewhere.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM ELIZABETH ROSENBERG
Q.1. Money Laundering. Ms. Rosenberg, in your written
testimony, you mention that the U.S. financial system has a
``wide open back door for our adversaries to march through, set
up shop, and wage an enormous and well-funded influence
campaign, laundering money and paying for attacks on our
democracy.'' As you suggest, one avenue to stop this would be
to provide U.S. law enforcement with increased access to
beneficial ownership information.
What actions would you recommend Congress take in order to
allow U.S. law enforcement agencies further access to
beneficial ownership information?
A.1. I strongly recommend that Congress pass legislation
requiring the collection of beneficial ownership information
and the disclosure of that information to the Financial Crimes
Enforcement Network (FinCEN) in order to form a beneficial
ownership registry. I would also recommend appropriating
additional resources to FinCEN so that it can better work with
other law enforcement bodies to share and utilize beneficial
ownership information.
Q.2. Russian Spying. We know from public reporting that Russian
efforts to obtain information on valuable, sensitive, or even
dual-use technologies in Silicon Valley has been going on for
years. From public reporting, it has also been made clear that
Russia's espionage activities have in part been financed by
Russian companies or venture-capital firms based in and around
Silicon Valley.
In your estimation, who is providing resources to Russian
venture capital firms in Silicon Valley in order to acquire
sensitive national security-applicable technology? For what
purposes?
A.2. Some venture capital and investment organizations, like
the Skolkovo Foundation and Rusnano, are directly backed or
owned by the Russian Government. \1\ Others are backed by or
related to major Russian financial institutions like Sberbank
and VTB. There are also major investors like Yuri Milner, whose
venture capital firm DST Global has major Russian financial
institutions as investors. \2\ Russian venture capital firms
have made a wide range of investments in Silicon Valley; the
investments tied to sensitive national-security applicable
technology appear to have been in biotechnology and
nanotechnology. \3\
---------------------------------------------------------------------------
\1\ Zach Dorfman, ``How Silicon Valley Became a Den of Spies'',
Politico, July 27, 2018, https://www.politico.com/magazine/story/2018/
07/27/silicon-valley-spies-china-russia-219071.
\2\ Julia Ioffe, ``Russian Money in Silicon Valley'', The
Atlantic, November 9, 2017, https://www.theatlantic.com/international/
archive/2017/11/yuri-milner-paradise-papers/545483/.
\3\ Joanna Glasner, ``These Are the U.S. Startups That Russian
Investors Are Backing'', TechCrunch, November 11, 2017, https://
techcrunch.com/2017/11/11/these-are-the-us-startups-that-russian-
investors-are-backing/.
Q.3. Do there currently exist anti- money-laundering
requirements to prevent Russian oligarchs close to Putin from
---------------------------------------------------------------------------
investing in these venture capital firms?
A.3. While FinCEN has proposed expanding anti- money-laundering
requirements to all registered investment advisers, including
venture capital firms, there are currently no anti- money-
laundering requirements placed on these venture capital firms
that might prevent investments from Russian oligarchs.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
FROM DALEEP SINGH
Q.1. Discretion and Penalties. In your discussion of the
President's recent Executive Order ``Imposing Certain Sanctions
in the Event of Foreign Interference in a United States
Election'', issued on September 12, 2018, you each raised some
concern over the amount of discretion the Administration
retained in the process of coming to a sanctions determination.
In your opinion, what is the optimum amount of discretion
for this or any future Administration to retain in this
particular case, or sanctions determinations more generally?
A.1. Generally speaking, my belief is the executive branch
should retain substantial discretion to determine the design
and execution of sanctions. Sanctions are most effective when
used as leverage for diplomatic negotiation. To the extent that
the executive branch retains primary authority to conduct U.S.
foreign policy, it should also retain the ability to calibrate
sanctions to maximize the likelihood of diplomatic success.
Splitting the responsibility for sanctions across branches of
Government runs the risk of sending mixed messages, thereby
reducing the potency of sanctions to change behavior--the
ultimate goal.
With respect to Russia, however, I worry that the executive
branch has not exercised its sanctions authority in an optimal
manner. The outperformance of Russian markets makes this clear:
investors do not believe the executive branch is serious about
holding Russia accountable. Faced with this circumstance, I
don't think Congress has any choice but to take the lead on the
design and execution of Russia sanctions. This is not optimal,
and it may create an unhelpful precedent over the long-term,
but it's still better than the alternative of doing nothing.
Q.2. The Director of National Intelligence is tasked with
investigating and reviewing election meddling from almost any
foreign source, should that review culminate in assessment of
foreign interference, in your opinion, should sanctions be
automatically imposed on that assessment, or should there be a
further finding of materiality by the Attorney General and
Secretary of Homeland Security? In other words, would it be
good policy, in your opinion to have the intelligence community
making sanctions determinations, itself?
A.2. This is well outside my area of expertise, but my view is
that a finding of foreign interference by the Director of
National Intelligence (DNI) should be sufficient to warrant
sanctions. Ideally, the DNI could provide context on the
materiality of the interference, both relative to history and
across countries--in consultation with other relevant
Government authorities. If the violation is material, the
executive branch should take the lead role on designing and
executing the appropriate response via sanctions or other tools
of foreign policy. As described above, Congress should act as a
check on the executive branch's actions, filling the void if
sufficient action is not taken.
Q.3. The Executive Order and the DETER Act, each contemplate
sanctions against any foreign actor, but the specific types of
sanctions and their targets are only specified with regard to
Russian interference.
In your opinion, should the types of sanctions and their
targets be any different for other foreign actors who interfere
in U.S. elections?
A.3. I recognize the distinction between the degree of
specificity on sanctions against Russia compared to lack of
detail on consequences for other foreign actors. In this case,
however, I believe it's appropriate. The violations of U.S.
sovereignty committed by Russia are not abstract or
prospective; according to our most senior intelligence
officials, they have already occurred--and repeatedly. To my
knowledge, malign behavior of this kind by other foreign actors
has not been substantiated. Specifying the precise sanctions
that would be appropriate for a prospective foreign belligerent
would be premature and perhaps misguided without any context.
Q.4. Other Tools. The Committee has held two hearings, before
today, and a number of Senators, and witnesses alike, have
advocated for harsher restrictions, moving forward.
How much more can the U.S. amplify sanctions against an
economic and political target like Russia, before contagions
and spill-overs make their use unacceptable to the United
States?
A.4. Russia's economy is far better able to absorb a hit from
U.S. sanctions than in 2014 or 2015. The economy is out of
recession. Inflation recently touched an all-time low. Oil
prices have tripled from their trough. Foreign reserves have
been replenished to presanctions levels. The Government's
deficit and debt profiles remain sound. In my judgment, the key
areas of spillover risk are from the Russian banking system and
energy production. So long as our sanctions are not designed to
cause widespread default within the Russian banking system,
panic within the Russian financial system, and/or the export of
Russian energy production, we are unlikely to see major
spillovers or contagion.
Q.5. What other tools or policies, beyond sanctions, might
encourage Russia to reverse course in Ukraine, or cease its
information warfare operations against the democratic processes
of the United States and European Union? In your opinion, which
tools in the U.S. toolbox would Putin fear more than sanctions?
A.5. I agree with the premise of your question--sanctions alone
are unlikely to change Putin's behavior. My suggestions are
three-fold:
First, costs should be broadened to include the very
highest levels of the Russian Government. At a minimum,
Treasury and other authorities should conduct a study that
attempts to identify the location, holdings, and financial
intermediaries that manage and benefit from Putin's wealth.
Even in the unlikely scenario that this effort has no effect on
Putin's geopolitical calculus, it will signal to the Russian
people that our quarrel is not with them, and it might provide
a measure of transparency on his fortunes held abroad.
Second, a comprehensive package to counter Russian
aggression requires an offensive economic strategy in its near
abroad, not only to Ukraine but also to Georgia, the Baltics,
Moldova, and possibly central Asia. Possible steps could
include conditions-based financial support to reinforce long-
standing IMF priorities in the region to improve the rule of
law, battle corruption, and implement market-oriented reforms.
The overarching purpose is to create successful alternatives to
Russian-style autocracy. This is what Putin fears most.
Finally, I would strongly encourage a robust campaign to
improve transparency within Russia. Shining a light on
verifiable evidence of corruption, and the dependence of the
current regime on kleptocracy, would help to counter the
Government's disinformation campaigns and its control of the
media. Working with the IMF and other multilateral institutions
could also shine a light on the basic challenges of doing
business in Russia--enforcing contracts, protecting
intellectual property, and defending property rights.
Q.6. In your testimony you tout the many virtues of the
sanctions architecture put into place in 2014, and for that
matter, Congress enhanced later in 2017 with CAATSA. Yet,
despite this web of sanctions, most economic indicators are now
up, in Russia. What are the possible contagions and spill-over
effects of possibly over-correcting through the use of more
restrictive sovereign debt measures? What financial or economic
defenses has Russia been working on to blunt such measures?
A.6. Sanctioning sovereign debt is a serious escalation.
Government bonds are the ``risk-free'' asset that underpin the
valuation of virtually all other assets in the country, as well
as the national currency. Pension funds and insurance companies
often hold large amounts of sovereign debt to meet obligations
to their customers. Banks and other companies use sovereign
debt as collateral in borrowing arrangements, both domestically
and abroad. Derivative contracts also involve sovereign debt in
their valuation and collateral arrangements, often in ways that
are complex and difficult to understand in advance. Index funds
that trade widely in Western markets include Russian sovereign
debt as a key component.
If sanctions are restricted to primary issuance, however,
many of these risks are contained. And as mentioned earlier,
Russia is far better able to absorb a hit to its sovereign debt
market, considering the favorable background conditions for
Russia and its efforts to improve its debt profile. Western
investors have had years to reduce exposures to the Russian
sovereign. More to the point, I can think of no credible
argument why U.S. public pension funds and savings vehicles
should indirectly fund the Russian Government while the latter
continues to sponsor violations of U.S. sovereignty.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM DALEEP SINGH
Q.1. It is clear that economic sanctions are most effective
when implemented with the cooperation of the international
community. Unlike in the U.S., EU sanctions must be renewed by
member States on a unanimous basis, generally every 6 months.
What efforts should be made to deepen our coordination with
our partners to enforce sanctions?
Are there specific steps that the Administration should
take that it has not already taken with respect to coordinating
with our partners?
What are the risks that Russia is able to pick off a Nation
within the EU and prevent an extension of sanctions by the
Europeans?
What additional authorities (if any) do you think are
needed to increase cooperation with our allies?
A.1. I am in full agreement. Multilateral cooperation is a
force multiplier in terms of the direct effects of sanctions
(excluding Russia from European and U.S. capital markets is 70-
90 percent of the global total), the potency of the signal (the
U.S. is not acting arbitrarily), and the avoidance of putting
U.S. firms at competitive disadvantage. The first step that
should be taken is to restore the role of U.S. sanctions
coordinator at the State Department. Daniel Fried served with
distinction in this role, and his efforts to coordinate
sanctions with the EU were instrumental. Second, the Treasury
Department should step up efforts--both formally and
informally--to develop working relationships with sanctions
counterparts from finance ministries in the EU and elsewhere.
Lastly, U.S. political leaders should make it clear that
participation in the international community is reserved for
countries that respect U.S. and international norms of
sovereignty and territorial integrity.
With regard to the risk of Russia picking off a single
nation within the EU to prevent sanctions extension, this is a
serious danger that France and Germany have managed well in
recent years. Any fracture in the commitment by these two
anchor countries to stand united against Russian aggression, in
coordination with the United States, would be cause for alarm.
Q.2. Russia has responded to Western sanctions with heated
rhetoric and by placing a retaliatory ban on certain imports,
among other measures. It is likely to respond with hostility to
additional sanctions.
What actions do you expect the Russian Government to take
in response to a new round of sanctions? Please provide what
you believe to be Russia's most likely response to an
additional round of sanctions.
How likely is it that increased sanctions lead to a
response by Russia in another domain or in some form of other
aggression?
A.2. Russia's economy matters far less to the United States
than the American economy matters to Russia. The food sanctions
to which you refer were largely counterproductive for Russia;
they raised import inflation, contributed to the rise of
interest rates in Russia, and reduced consumer purchasing
power. The only area in which Russia is of global systemic
importance is the energy sector, but Russia's economy would not
function--nor would its Government get financed--without
receipts from oil and gas. Taken together--and viewed through
an economic lens--I do not see good options for Russia to
impose harm on the U.S. without hurting itself even more. For
that reason, my belief is that Russia's response would likely
be in the geopolitical realm. Meddling in the non-NATO, near-
abroad (e.g., Moldova, Ukraine, Georgia) seems quite plausible.
| MEMBERNAME | BIOGUIDEID | GPOID | CHAMBER | PARTY | ROLE | STATE | CONGRESS | AUTHORITYID |
|---|---|---|---|---|---|---|---|---|
| Shelby, Richard C. | S000320 | 8277 | S | R | COMMMEMBER | AL | 115 | 1049 |
| Brown, Sherrod | B000944 | 8309 | S | D | COMMMEMBER | OH | 115 | 136 |
| Moran, Jerry | M000934 | 8307 | S | R | COMMMEMBER | KS | 115 | 1507 |
| Toomey, Pat | T000461 | S | R | COMMMEMBER | PA | 115 | 1594 | |
| Van Hollen, Chris | V000128 | 7983 | S | D | COMMMEMBER | MD | 115 | 1729 |
| Corker, Bob | C001071 | 8294 | S | R | COMMMEMBER | TN | 115 | 1825 |
| Tester, Jon | T000464 | 8258 | S | D | COMMMEMBER | MT | 115 | 1829 |
| Donnelly, Joe | D000607 | 7941 | S | D | COMMMEMBER | IN | 115 | 1850 |
| Heller, Dean | H001041 | 8060 | S | R | COMMMEMBER | NV | 115 | 1863 |
| Warner, Mark R. | W000805 | 8269 | S | D | COMMMEMBER | VA | 115 | 1897 |
| Scott, Tim | S001184 | 8141 | S | R | COMMMEMBER | SC | 115 | 2056 |
| Cotton, Tom | C001095 | S | R | COMMMEMBER | AR | 115 | 2098 | |
| Schatz, Brian | S001194 | S | D | COMMMEMBER | HI | 115 | 2173 | |
| Heitkamp, Heidi | H001069 | S | D | COMMMEMBER | ND | 115 | 2174 | |
| Warren, Elizabeth | W000817 | S | D | COMMMEMBER | MA | 115 | 2182 | |
| Perdue, David | P000612 | S | R | COMMMEMBER | GA | 115 | 2286 | |
| Rounds, Mike | R000605 | S | R | COMMMEMBER | SD | 115 | 2288 | |
| Sasse, Ben | S001197 | S | R | COMMMEMBER | NE | 115 | 2289 | |
| Tillis, Thom | T000476 | S | R | COMMMEMBER | NC | 115 | 2291 | |
| Cortez Masto, Catherine | C001113 | S | D | COMMMEMBER | NV | 115 | 2299 | |
| Kennedy, John | K000393 | S | R | COMMMEMBER | LA | 115 | 2303 | |
| Jones, Doug | J000300 | S | D | COMMMEMBER | AL | 115 | 2364 | |
| Crapo, Mike | C000880 | 8289 | S | R | COMMMEMBER | ID | 115 | 250 |
| Menendez, Robert | M000639 | 8239 | S | D | COMMMEMBER | NJ | 115 | 791 |
| Reed, Jack | R000122 | 8272 | S | D | COMMMEMBER | RI | 115 | 949 |
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