Background Press Call by Senior Administration Officials on Russia Ukraine Economic Deterrence Measures
8:41 A.M. EST
MODERATOR: Thanks, everyone, for joining us this morning. Just a quick intro at the top, and then I'll turn it over to our speakers.
So, the call today is about our ongoing efforts to answer questions on the severe economic costs the U.S. will impose on Russia with allies and partners if it further invades Ukraine.
Some of you have been asking about the contingency planning and impact, so we'll use this call to address that and answer any questions that you might have.
As a reminder, the call is on background, attributable to "senior administration officials," and all contents of the call are embargoed until the conclusion of the call.
For your awareness but not for reporting, the speakers today are [senior administration official] and [senior administration official].
With that, I'll turn it over to [senior administration official] to kick us off with some opening remarks.
SENIOR ADMINISTRATION OFFICIAL: Yeah, thanks. Good morning, everybody.
You've no doubt heard us talk about how the United States, alongside allies and partners, continues to prepare a range of severe economic measures to impose on Russia if it further invades Ukraine. And, to repeat, we are prepared to implement sanctions with massive consequences that were not considered in 2014.
That means the gradualism of the past is out, and this time we'll start at the top of the escalation ladder and stay there. We've made efforts to signal this intention very clearly. And I would say the deepening selloff in Russian markets, its borrowing costs, the value of its currency, market-implied default risk reflect the severity of the economic consequences we can and will impose on the Russian economy in the event of a further invasion.
In addition to financial sanctions, which have immediate and visible effect on the day they're implemented, we're also prepared to impose novel export controls that would deal Putin a weak strategic hand over the medium term.
And I want to take a minute to talk through these controls because there hasn't been as much attention paid to them, even though they're incredibly potent.
So, much like financial sanctions which restrict foreign capital, export controls deny something to Russia that it needs and can't easily replace from anywhere else.
In the case of export controls, what we're talking about are sophisticated technologies that we design and produce that are essential inputs to Russia's strategic ambitions.
So, you can think of these export controls as trade restrictions in the service of broader U.S. national security interests. We use them to prohibit the export of products from the U.S. to Russia and, potentially, certain foreign-made products that fall under U.S. export regulations.
And given -- the reason they work is: If you step back and look at the global dominance of U.S.-origin software, technology, and tooling, the export control options we're considering alongside our allies and partners would hit Putin's strategic ambitions to industrialize his economy quite hard. And it would impair areas that are of importance to him, whether it's in artificial intelligence or quantum computing, or defense, or aerospace, or other key sectors.
Now, that's not an exhaustive list that I just mentioned. All options are very much on the table, and we're united with Allies and partners to decisively impose severe consequences on Russia if it further invades Ukraine.
And as we've said, while our actions and the EU's actions may not be identical, we are unified in our intention to impose massive consequences that would deliver a severe and immediate blow to Russia and over time make its economy even more brittle and undercut Putin's aspirations to exert influence on the world stage.
Now, shifting gears, as we prepare these measures to maximize pressure on Russia's leadership, we're equally focused on minimizing unwanted spillovers. And we know many of you have questions about the potential impact of a conflict in Ukraine on energy supplies.
Before I turn it over to [senior administration official] to talk about those efforts, I want to make one key point that I've seen missing in the coverage. So, if Russia decides to weaponize its supply of natural gas or crude oil, it wouldn't be without consequences to the Russian economy.
Remember, this is a one-dimensional economy, and that means it needs oil and gas revenues at least as much as Europe needs its energy supply.
So remember, oil and gas export revenues are two thirds of the total in Russia and about half of Russia's federal budget revenues. So this is not an asymmetric advantage for Putin; it's an interdependency.
And with that, let me turn it over to my colleague.
SENIOR ADMINISTRATION OFFICIAL: Thank you, [senior administration official]. And good morning, everybody.
For the last several weeks, as you've seen in some of the reports, we've been collaborating with our European allies to identify areas where Russia could use energy as a weapon in its aggressive strategy against Ukraine. These include, for us, contingency planning in the event of a Russian invasion as they attempt to upend the world order, to damage infrastructure, or withholding supplies from markets in a retaliation for sanctions or other countermeasures by the United States and our allies.
We're working with countries and companies around the world to ensure the security of supply and to mitigate against price shocks affecting both the American people and the global economy.
A disruption in the physical energy supplies transiting Ukraine would, clearly, most acutely affect natural gas markets in Europe. And so we're engaging our European allies to coordinate our response planning, including talking to them how they deploy their existing energy stockpiles, which are, obviously, at significantly low levels this year due to the reduced Russian supplies over the last several months.
We've been working to identify additional volumes of non-Russian natural gas from various areas of the world -- from North Africa and the Middle East to Asia and the United States.
Correspondingly, we're in discussions with major natural gas producers around the globe to understand their capacity and willingness to temporarily surge natural gas output and to allocate these volumes to European buyers.
Russia normally supplies about 40 bcm of gas per year to Europe through Ukraine. That is the contract that was signed in 2019. Russia has already cut those supplies through this route by half. To ensure Europe is able to make it through the winter and spring, we expect to be prepared to ensure alternative supplies covering a significant majority of the potential shortfall.
We're also preparing to mitigate against more extreme and, I should add, less likely scenarios where Russia would cut off energy supplies through other European routes.
We're also engaging with major buyers and suppliers of LNG to ensure flexibility in their existing contracts and storage -- and how they manage their storage to enable the diversion to Europe if necessary.
We've analyzed the impacts of potential disruptions, and we're going to work to ensure Europe has alternative energy supplies under the most likely energy scenarios.
And we are working very closely with several European countries and with the European Commission, as well as with suppliers around the world. And I should add, this is an area that is complex, because Europe is not -- we talk a lot about the total volume and total supply and -- in storage in Europe, but the story of Europe is making sure that you have the access to the right locations in Europe that would be most affected by Russian cut-off of supplies and where storage is lower than other places in Europe.
And with that, [senior administration official], I'll turn it over to you.
MODERATOR: Thanks, [senior administration official]. Operator, could you please cue up the directions again to ask a question, please?
Q: Hi, guys. Thank you so much for doing this call. I have a question on each of these different strategies. The first is a question on energy. How soon could we see some of these rerouted deliveries of natural gas arrive in Europe and start to have an effect on the market?
And second, on the export controls: How would this impact the global supply chain? And how do you enforce something that is fairly complicated when you have a lot of goods who -- that include U.S. parts but are made in other countries? Could you get China on board to stop exporting things that are made in China but use some of the sophisticated U.S. technology that you're targeting?
SENIOR ADMINISTRATION OFFICIAL: [Senior administration official], do you want to take the first? And I'll take the second.
SENIOR ADMINISTRATION OFFICIAL: Sure. So, I think it's a good question. I think that there is two elements here. The first is that we are -- we've already seen a number of diverted cargoes of LNG from Asia to Europe over the first couple of weeks -- two, three weeks of January -- where, due to both market forces as well as some of the atmospherics and discussions that we're having, the price differential between -- so European prices went up compared to Asia, and Asian buyers were willing to forego some of their cargoes and resell them in the market towards -- and those went to Europe, which already had a significant impact on the resilience of the energy supply in Europe.
The second stage: These are really contingency plans to see what happens between Russia and Ukraine. If Russia does not invade Ukraine and it comes back to its senses and avoids the conflict that we are all discussing, then our mitigation efforts will look very, very different in looking towards ensuring that there are enough supplies over the spring and summer, as we would normally do, to ensure a more robust and secure winter next year.
If the efforts that we are undergoing now -- those are "if, when necessary," so that we are prepared in that scenario of conflict where supplies are being curtailed, either due to damage of infrastructure or by design, we will be able to have these suppliers standing ready to increase their supply into Europe. And then that would take, obviously, a number of days to -- to a week or two -- to reroute those supplies.
So, knowing that there is still natural gas in storage in Europe, but just not enough, we would be able to draw on storage for the first couple of weeks as these supplies come in and supply the rest. That's the contingency effort that we're putting in now to cut down that effort from months to just days and weeks, and to be able to have a seamless continuation of winter supplies and into the spring.
SENIOR ADMINISTRATION OFFICIAL: And on the -- on the second question, Kayla, on export control impact on supply chains: These measures would have minimal impact on global supply chains, because we're talking about denying to Russia downstream products that are critical to its own ambitions to develop high-tech capabilities in aerospace and defense, lasers and sensors, maritime, AI, robotics, quantum, et cetera.
And in each of these supply chains, we and/or our allies and partners design and produce the technology. And the export control would deny to Russia a sophisticated input that it can't replace through domestic production or alternate supplies.
And so, as we build this effort with our allies and partners, we're willing to work with any country in order to deny Russia an input that it needs to diversify its economy.
And, you know, when we pick these sectors, the ones that I mentioned, it's quite deliberate. These are sectors that Putin himself has championed as the way forward for Russia to diversify its economy beyond oil and gas.
And, in many instances, if Russia wants to develop these sectors, it needs to import technologies and products that only we and our allies and partners produce. And so that would lead to an atrophying of Russia's productive capacity over time. It would deny Russia the ability to diversify its economy. And, for us, from our perspective, that gives them a very weak strategic hand over the medium term.
Q: Hi, thanks for doing this. I was wondering if you could give us a sense: Are you -- on the sanctions front, are you any closer to a, sort of, united response than you were, say, a week or 10 days ago? And are you concerned that, say, you know, Vladimir Putin was meeting with Italian business leaders today? Does that, sort of, undercut some of your effort?
And could you be a little bit more specific on the energy front about which gas producers around the world you're talking to about diverting some of the supply to Europe? We know, Qatar, for sure. But are there any others as well?
SENIOR ADMINISTRATION OFFICIAL: So, I'll start. And, James, you know, I would say, we are -- the convergence between the U.S. and the EU on financial sanctions -- I mean, I was -- I was around doing this in 2014, and the convergence I'm seeing is remarkable. And it's not just my opinion, it's what the EU is saying in public. They've said what we've said, which is that they're ready to take unprecedented measures with massive consequences if Russia shows further aggression in Ukraine.
Now, look, the situation in 2014 was very different than what you have now. The European banking sector is in much better shape. The ECB has far more robust tools than it -- now than it did then.
And, you know, I think if you talk to Europeans, what they're -- what they're weighing is not just the cost of imposing sanctions, but they're also weighing those costs against the counterfactual of an invasion in the heart of Europe, and the uncertainties that would cause, and the impact that would have to their business environment and their economic conditions more broadly.
So, we're -- they know that we're talking about the counterfactual of unchecked Russian aggression. And they understand that if we're going to change Putin's calculus, we have to be ready together to impose massive consequences.
And I see that very much in the specific measures they're willing to take on the financial sanctions front -- and we could talk more about that if you'd like -- but also on the export controls that I described.
SENIOR ADMINISTRATION OFFICIAL: Yeah, thanks. And I want to preface this with: I think you can all appreciate that there are two reasons why we don't want to go into too many details on the nature of the discussions and with whom.
And that is, one, not looking to telegraph and inform Putin of what we're what we're able to do and what we're negotiating with our -- with our friends and partners around the world.
And second, these are very sensitive discussions because they involve market participants. And as a result, there's a sensitivity to -- as you can imagine, to discussing names of companies and countries.
But let me just give a little bit more detail than what I did before. What we're looking at is to make sure that there are some suppliers that are able to bring on volumes into Europe through pipelines and by increasing their production. And that is where we are -- that is a primary focus to look at areas that -- companies that have capacity to surge their actual output of production of gas that they would not normally do under current -- under their longer-term planning and planning for 2022, but, as a result of the current conditions, have conducted reviews of their own capabilities and fields and -- to see how much they can increase that output on a relatively temporary basis. So, for a number of months, while we're in a crisis -- potentially in a crisis mode.
That review has already been done so we have a better understanding of what the levels are and to save time, in case we get to the point where we want to draw -- press this trigger.
The second is looking at the global flow of LNG, whether it's from the United States or from Australia or from other places. And I know there's been a lot of discussion about our conversations with -- you know, with Qatar and others. I want to say that we -- the conversation is really broad with a lot of companies and countries around the world. It's not centered about one or two suppliers.
And they're -- by doing that, you don't need to ask anyone to -- any one individual company or country to surge exports by significant volumes but, rather, smaller volumes from a multitude of sources.
This is both to ease the capability, but also because, at these prices, you can imagine, after several months of historic prices in the gas market in Asia and in Europe, that a lot of capacity is constrained and is running at flat-out max capacity.
So, what we're able to do is look at the ability to increase by a few cargoes -- different suppliers increasing by a few cargoes each. And that would make a significant impact, together with the surge of output by pipeline gas.
So whether it's in North Africa or Middle East or Central Asia, all the way to the United States and Asia itself, by combining this broader picture, we're able to bring enough gas to supply the amount that we need.
And again, there's been a lot of reports about the 40 bcm that goes through Ukraine. A reminder that it's currently only flowing at significantly lower levels and it is at roughly half. So, normally, it's over 100 mcm a day through Ukraine, and currently it's in -- is in the 50 range.
So, we don't need to replace all of that for the remainder of the winter because there's still gas and storage, but only the portion that is necessary to get through the winter and the spring.
Q: Thanks for doing this, guys. I think this is for [senior administration official], but, [senior administration official], if you want to jump in, too.
My questions are about Putin's threshold for pain. It seems to me gas prices are well above what Russia needs them to be to balance the budget. Putin recently increased Russian economic reserves to be able to withstand any immediate shock to its economy. So why do you think your penalties have the capacity to truly change behavior?
And similarly, while obviously there's a desire for some American tech, there is an alternative out there. China is and has developed and is continuing to develop some of its own versions of this technology. So does not Putin have an out -- another place to go for some of what he's been looking for?
SENIOR ADMINISTRATION OFFICIAL: Yeah. Thanks for the question. So, let me -- let me start with financial sanctions, and then I'll talk about export controls.
Look, these -- these measures can be incredibly potent in ways that would affect Putin's calculus. And, again, that's not -- that's not conjecture. We can go back to 2014 and look at the statements made by the Russian leadership in terms of the effect it had on their calculus.
Remember, in 2014, when we imposed sanctions that are far less severe than we're contemplating now, the restriction of foreign capital to Russia caused record amounts of capital outflows. That caused the currency to depreciate up to 50 percent and for the Russian Central Bank to have to deploy 25 percent of its foreign reserves to defend the ruble. It then gave up on defending the ruble. Inflation spiked to the mid-teens. Interest rates were hiked on an emergency basis to the mid-teens. That collapsed real purchasing power. That collapsed real consumption and investment. And Russia ended up with a meaningful recession.
Now, of course, oil prices at the time were collapsing, and so there was a contribution from that -- from that shock, as well as the sanctions.
But the reality is the combined effect that we saw in late 2014, if you go back and look at the statements made by the Russian leadership back then, there were many comments made about the appreciable impact -- the pain that was being felt by financial sanctions.
And look, we'll never know the counterfactual: what would have happened if we didn't apply these sanctions on the Russian economy back then. But, you know, by the statements made by the Russian leadership and from a lot of folks who are watching this very closely, many people felt as though he would have marched much further into Ukraine at that time had it not been for the cost that he was facing.
And I would say more generally, you know, ultimately, any leader, no matter how rogue they are or whether they're an autocrat or not, they have to care about popularity, at least as a method of social control. And when you have inflation in the mid-teens and you have a recession, you know, that doesn't win hearts and minds.
So his tolerance for economic pain, it may be higher than other leaders, but there is a threshold of pain above which we think his calculus can be influenced.
And to your point on oil and gas, you know, I mentioned the dependency of the Russian economy on those export revenues and -- in terms of their budget. And over time, if Putin weaponizes the supply of energy supply, he is creating a major incentive for Europe to accelerate the diversification of their energy supplies away from Russia. And that would further remove an opportunity for Russia to earn revenues on the export side and on the budget.
And if they have to resort only to China, in terms of purchasing oil and gas or to supplying technology, we believe that's going to make the Russian economy far more brittle.
If you look at where the inputs to the major foundational technologies of the world come from, they still come from the West. Yes -- yes, China is competing in many of these areas, but if you deny yourself the ability to import from the West -- from Europe, from the U.S., from our allies and partners -- you are going to significantly degrade your productive capacity and your innovative potential.
And we think Putin knows that. And we know that he knows it would be a real -- a real hit to his ability to deliver on the ambitions he set in many of the sectors that I listed.
The last thing I just want to say -- I mean, you all have asked about why I say we're getting more aligned with Europe on the financial sanctions. And I would just give you a little bit more color as to the specifics.
I mean, if you -- as I talk and we talked to our counterparts in Europe on the measures that we're contemplating and they're contemplating -- the size of the financial institutions and state-owned enterprises that we're willing to target, the severity of the measures that we're contemplating, the immediacy of the effect of sanctions that we're preparing, and the extent to which the prohibitions would affect existing (inaudible) in addition to new flows of financing -- those are all really important dimensions of how the sanctions work.
And it's on that basis that I say we're seeing really (inaudible) in terms of what we're prepared to do and what the EU has put on the table.
So, thanks. Thanks, everyone. And thanks, [senior administration official].
MODERATOR: Great. Thanks, everyone. Thank you for joining us today.
As a reminder, this call was on background, attributable to "senior administration officials," and the contents are embargoed until the conclusion of the call.
If you did not get a chance to ask a question, please feel free to reach out to me and we'll make sure to get back to you.
9:08 A.M. EST
Joseph R. Biden, Background Press Call by Senior Administration Officials on Russia Ukraine Economic Deterrence Measures Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/354239