Tighter Sanctions Can Help End the Russia-Ukraine War

Edward Fishman is a senior research scholar at Columbia University’s Center on Global Energy Policy.

This Ukraine Policy Brief is part of the Council Special Initiative on Securing Ukraine's Future and the Wachenheim Program on Peace and Security.

On the campaign trail, President-elect Donald Trump vowed to broker a peace deal to end the Russia-Ukraine war, promising, “I’ll have that done in 24 hours.” Since his victory in November, Trump has moved quickly to lay the groundwork for negotiations. He has spoken with both Ukrainian President Volodymyr Zelenskyy and Russian President Vladimir Putin and named retired three-star U.S. Army General Keith Kellogg as special envoy for Ukraine and Russia.

Zelenskyy has little choice but to take Trump’s peace initiative seriously. Without U.S. assistance, the Ukrainian military would face grim prospects against Russia’s war machine, now augmented by thousands of North Korean troops. Putin, by contrast, probably assesses that time is on his side. Despite heavy casualties, the Russian military continues to make incremental gains in Ukraine’s east, and Putin has shown no compunction about sending waves of conscripts to fight for small amounts of territory. His determination to reduce Ukraine to a Russian vassal appears unchanged.

For the United States to have any hope at brokering a just peace, the first step is to give Putin a stronger incentive to end the war on terms that fall short of his maximalist aims. The most effective way to do this is by altering his perception that time is working in his favor—by tightening sanctions and accelerating the timeline of Russia’s economic reckoning.

State of Play

After Russia launched its full-scale invasion of Ukraine in February 2022, the United States and its Group of Seven (G7) allies levied a massive wave of sanctions on Russia’s banking system and military-industrial complex. At first, the effects were dramatic: as the ruble plunged to a record low against the dollar, Russians lined up at banks and ATMs to convert their savings into dollars and euros. The Central Bank of Russia hiked its benchmark interest rate to 20 percent, and the Moscow Exchange shuttered for a whole month. Imports dried up, causing severe shortages of industrial components.

But then, Russia’s economy stabilized, thanks largely to advance planning and emergency measures orchestrated by Elvira Nabiullina, governor of the Central Bank of Russia. She exploited a key loophole in Western sanctions, which allowed continued payments for energy exports—Russia’s primary source of hard currency. While the G7 immobilized Russia’s sovereign reserves, it did not stop the flow of fresh hard currency into the Kremlin’s coffers. As oil and gas prices spiked, Russia collected record energy-export earnings in 2022. The new money accumulated on the balance sheets of state-owned enterprises instead of the central bank, but these shadow reserves served much the same function as traditional foreign exchange reserves. Russia’s economy contracted by around 2 percent in 2022, far less than the 10 percent or more that many forecasted.

As the war extended into a second and third year, Russia transitioned into a war economy, channeling all the state’s resources into military production and warfighting. The result has been a tight labor market, high inflation, and robust economic growth. In a strange twist, Russia’s heavily sanctioned economy has been running hot, leading many to deem the sanctions a failure.

The reality is more complicated. The distortions of the war economy mask deep systemic dysfunction. With roughly 40 percent of Russia’s federal budget now devoted to military and security spending, the military-industrial complex is crowding out the civilian economy. Severed from Western capital and technology—and with interest rates now at an eye-popping 21 percent—Russia’s economy is starved of productive investment. Coupled with a bearish outlook for energy prices and the collapse of the vital Russia-Europe natural gas trade, these factors suggest that Russia’s war boom could soon end. The ruble has fallen back to where it was in the immediate aftermath of the invasion, and the Central Bank of Russia recently revised its 2025 forecast for gross domestic product (GDP) growth down to 0.5–1.5 percent. The Russian economy looks headed for stagflation, if not a recession.

How long Russia’s economy can persist under such circumstances is a matter of guesswork. The safest assumption is that Moscow can continue funding the war effort for at least a few more years, if Putin so chooses. But there is no doubt that Russia’s economy is brittle—highly vulnerable to external shocks, such as a steep decline in commodities prices, and operating with a narrow margin for error. For Western policy, the upshot is clear: if Putin’s territorial ambitions can be contained—and sanctions are tightened—Russia’s economy will eventually face a reckoning, presenting a window for serious diplomacy.

Time to Change Course

Russia’s resilience to sanctions is partly the result of Moscow’s crisis-response measures, but Western policy is also to blame. Whereas early G7 sanctions on Russia’s Central Bank and largest commercial banks surprised most analysts in their intensity, sanctions since the spring of 2022 have been underwhelming. Indeed, the flaws in the sanctions campaign mirror those of the West’s efforts to arm the Ukrainian military: they have been hampered by incrementalism and an excess of caution about the risk of escalation. Most significantly, the United States has proved reluctant to close the energy loophole for fear of spiking oil prices and worsening inflation.

Those concerns could have been well founded in early 2022, when energy prices were soaring and there was uncertainty about Russia’s ability to sustain its oil exports, but it has long been clear that Russia will find buyers for its oil regardless of sanctions. Now the only question is whether the United States has the will to use financial sanctions to limit Russian oil revenues, as it has done so effectively against Iran. So far, the answer has been no.

In the coming months, the United States should change course. With inflation now under control and energy markets well supplied, macroeconomic conditions are more favorable for aggressive sanctions on Russia’s oil revenues. Tightening sanctions now, starting in the lame-duck period and continuing into the opening months of Trump’s second term, can give the United States critical leverage over Russia at the negotiating table—and make a just peace between Moscow and Kyiv a more realistic possibility.

How to Tighten Sanctions

Sanctions on Russia are not yet comprehensive. Outside of the defense sector, few large Russian companies are under blocking sanctions—the harshest economic penalty, which amounts to a full cutoff from the U.S. financial system. While the biggest Russian banks are under blocking sanctions, a general license provides a broad exemption for payments related to energy. Claims that Russia has become the world’s most sanctioned country confuse the sheer quantity of sanctions with their true scope—like an overly complex tax code, a highly complicated sanctions regime tends to be one ridden with loopholes. In reality, sanctions on Russia remain far less potent than those against Iran.

The United States thus has many options for tightening sanctions. To maximize leverage at the negotiating table, three stand out as most important: closing gaps that allow Moscow to access hard currency, wielding secondary sanctions to sequester Russia’s oil revenues, and giving Congress a vote over any future sanctions relief.

Closing gaps that allow Moscow to access hard currency. Financial sanctions have been the centerpiece of the West’s economic pressure campaign. In the first week of the war, the G7 immobilized Russia’s central bank reserves and imposed sanctions on Sberbank and VTB, the country’s two largest banks. It also barred a handful of Russian banks from the SWIFT financial messaging system. But Russia is not yet under a full financial embargo. Some Russian banks remain free from blocking sanctions, which means they retain access to payments in dollars, euros, and other hard currencies. This has allowed Russia to shift foreign asset accumulation from large, sanctioned banks to small, unsanctioned ones. As a result, Russia continues to amass hard currency and use it to buy imports.

The United States tightened financial sanctions in late November when it imposed blocking sanctions on Gazprombank, Russia’s third-largest bank and a key conduit for the energy trade. Yet the sanctions regime is still focused on individual Russian banks instead of the banking system as a whole. It is only a matter of time before other banks emerge to fill the void left behind by Gazprombank. Indeed, to facilitate this process, Putin lifted a requirement that foreign buyers pay for Russian gas directly via Gazprombank.

The United States should end this game of whack-a-mole and impose a full financial embargo on Russia, barring all the country’s banks from access to the U.S. financial system. It should also impose blocking sanctions on Russia’s biggest exporters, including state-owned energy giants Rosneft and Gazprom. Such steps would significantly complicate Russia’s ability to accumulate foreign currency. In addition to putting a financial strain on the Russian state, it would make it much harder for Russia to pay for imports for its war machine. Export controls have fallen short of expectations, as the G7 has struggled to stop firms from buying Western technology and then reexporting it to Russia. A full financial embargo would put a damper on such smuggling and transshipment by preventing the middlemen from getting paid.   

After imposing a financial embargo, the United States should rescind General License 8, the broad carveout for energy-related transactions. A straight repeal would be the simplest option. It would not prevent Russia from selling oil and gas, but it would make it difficult, if not impossible, for importers to pay Russia in dollars and other hard currencies. Russia would be forced to accept payments in renminbi, rupees, and other denominations, which are far less useful for supplying a war machine that still depends on Western technology. Russia could possibly retaliate by cutting oil exports, a move that would tighten supply and temporarily spike prices. But like Putin’s nuclear saber-rattling, this threat is unlikely to come to fruition, as it would do grave damage to Moscow’s finances and anger countries Russia relies on such as China and India.

Wielding secondary sanctions to sequester Russia’s oil revenues. Oil is the lifeblood of Russia’s economy. Together with natural gas, oil proceeds contribute between one-third and one-half of Russia’s federal budget. With a few minor exceptions, the G7 countries have imposed embargoes on Russian oil. But instead of curtailing Russia’s exports, the result has been a reshuffling of the oil market, as Russia has compensated for the loss of its Western customers by selling more to China, Turkey, and, above all, India. The G7 has done little to impede those new trade relationships, fearing that aggressive measures could cause a supply crunch and spike oil prices.

Instead, since December 2022, the G7 has relied on a price cap, which permits Western maritime insurers, shipping firms, and other service providers to participate in Russian oil transactions only if the oil is sold for under $60 per barrel. Importantly, the Joe Biden administration decided not to back up the price cap with the threat of secondary sanctions. In other words, if an Emirati trader or Indian refinery buys a cargo of Russian oil for over $60 per barrel, they face no risk of sanctions. The only firms responsible for compliance are Western service providers. Consequently, by its very design, the price cap incentivized Russia to build its own end-to-end supply chain for oil exports. It took Russia about six months to adjust, during which its oil proceeds were suppressed, but it eventually succeeded by acquiring a large “shadow fleet” of tankers (largely from Western companies) and creating state-backed insurance schemes. Ever since, Russia has sold virtually all its oil for prices above the cap.

It is time for the United States to take a new approach. To impose significant pressure on Russia, the United States should use secondary sanctions to crack down on Russian oil revenues. The most straightforward way to do this is to leverage secondary sanctions as the main enforcement mechanism of the price cap—in other words, threatening secondary sanctions on anyone that buys Russian oil for a price that exceeds the cap. In such a scenario, the United States would threaten sanctions on Emirati traders and Indian and Chinese refineries unless their purchases comply with the cap. While this approach is viable, it is not optimal; it still requires the G7 to align on a specific price, and it is unlikely that there would be consensus for a threshold much lower than $60 per barrel. As a result, it would take time to bite—and time is not a luxury Ukraine enjoys.

A better approach is to use the threat of secondary sanctions to sequester Russian oil revenues in restricted overseas accounts. Under such a regime, foreign firms would be allowed to pay Russia for its oil only if such payments were made into a bank account in their home country. The bank, in turn, would be permitted to release the funds only to finance unsanctioned bilateral trade. Any violation of those terms would risk secondary sanctions. Such a scheme was deployed against Iran in 2012, leading to over $100 billion in Iran’s oil revenues trapped in restricted overseas accounts.

This approach is optimal for use against Russia for several reasons. It would impose no restrictions on the volume of Russia’s oil sales, so it would be unlikely to affect oil prices. But it would immediately limit the way Russia could use its oil earnings. It could thus be expected to curtail Russia’s procurement of technology and components for its war machine. Moreover, it would give the United States an additional pool of frozen Russian funds that it could leverage in future peace negotiations. This is important, as the most sizable pool of frozen Russian assets—the central bank reserves—is already earmarked for rebuilding Ukraine, which will cost upward of $450 billion.

Giving Congress a vote over any future sanctions relief. In July 2017, Congress passed the Countering America’s Adversaries Through Sanctions Act (CAATSA) with a veto-proof majority. Among other provisions, CAATSA requires the president to submit a report to Congress before lifting sanctions on Russia. Upon submission of such a report, a review period of thirty days begins, during which Congress can vote down the president’s decision to lift sanctions.

Under CAATSA, a mandatory congressional review process is triggered by

• terminating any executive orders sanctioning Russia that were codified by CAATSA—which includes all Barack Obama–era Russia sanctions authorities;
• removing sanctions on any individual or entity that was designated under the authorities codified by CAATSA; or
• implementing a licensing action that significantly alters U.S. foreign policy toward Russia.

However, CAATSA does not apply to executive orders issued after the law was enacted. As a result, any future U.S. president could terminate the Biden-era executive orders sanctioning Russia without triggering a mandatory congressional review. This loophole undercuts the West’s negotiating position vis-à-vis Russia.

The Biden administration can take steps before leaving office to ensure Congress gets a vote on any future decision to lift sanctions. One of the Obama-era executive orders that was codified by CAATSA, E.O. 13662, contains broad enough authorities to cover most—if not all—the Biden-era sanctions on Russia. As a result, the U.S. Treasury and State Departments can reissue the sanctions they have imposed on Russia over the past four years under E.O. 13662. While this move will require legal legwork and coordination, it is achievable with strong leadership from Treasury and State to ensure the Office of Foreign Assets Control and other relevant offices prioritize this work.

To be clear, this action would not impose any new sanctions on Russia. It would simply migrate existing sanctions that were imposed under E.O. 14024 and other Biden-era authorities to E.O. 13662. But it would carry considerable significance: it would codify the post-2022 Russia sanctions and ensure that Congress gets to vote on any future decision to lift them. Most importantly, it would greatly enhance U.S. negotiating leverage with Russia, as the incoming Trump administration would only be able to agree to a deal that could pass muster in Congress.

Historically, administrations of both parties have been reluctant to give Congress a say over lifting sanctions for fear of limiting their diplomatic flexibility. But in this case, the downsides of such constraints are far outweighed by the upside of increasing U.S. leverage and credibility at the negotiating table with Russia. It would clarify for Putin that nothing short of a just peace agreement to end the war in Ukraine will be enough to obtain sanctions relief.

Sanctions and Peace

After three years of war, sanctions against Russia seem like a disappointment. They failed to deter Putin from launching the initial invasion, and they have not halted his war machine in the years since. Russia’s economy has even managed to grow at a faster pace than most Western economies.

But sanctions are a marathon, not a sprint. And the bleak macroeconomic news out of Russia of late suggests that the West may well be performing better than first meets the eye. The ultimate test of the sanctions, however, is whether they can help accelerate the timeline of a just peace between Russia and Ukraine. Over the coming months, President-elect Trump will try to secure such a peace. Whether he succeeds or fails depends largely on whether the West can give Putin a reason to negotiate in good faith—by mustering the will to tighten sanctions.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy