C. Peter McColough Series on International Economics With Wally Adeyemo

As the one-year mark of the Russian invasion of Ukraine approaches, U.S. Deputy Treasury Secretary Wally Adeyemo discusses the U.S. coalition’s sanctions strategy, its effectiveness, and the challenges that remain.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

ZARATE: Good morning, everybody. Welcome to today’s Council on Foreign Relations meeting with Deputy Secretary Wally Adeyemo.

I’m Juan Zarate, global comanaging partner at K2 Integrity and chairman of the Center on Economic and Financial Power. I’m very pleased and honored to be presiding over today’s discussion.

This meeting is part of the C. Peter McColough Series on International Economics. It will be on the record and it’s a hybrid meeting. So we have many distinguished members here with us but many more attending virtually.

We are incredibly lucky to have the deputy secretary here with us today for a timely and important discussion. The secretary has led the Treasury Department’s efforts on national security and has been a leading member of the Economic Security Team.

He has been the leading voice on the use of sanctions against Russia and this, of course, is a timely discussion, given the one-year anniversary of the Russian invasion of Ukraine and the president’s visit to Kyiv.

One comment on the deputy secretary. He’s a longtime veteran of the Treasury Department, from the Obama administration as well now the Biden administration. Also was the deputy national security adviser for international economics and the deputy director of the National Economic Council, and I will tell you that everyone who encounters the deputy secretary knows he is a brilliant public servant and a real gentleman.

So with that, I invite the deputy secretary to the podium for his remarks. Thank you. (Applause.)

ADEYEMO: Let me just thank Juan for his kind introduction but also for his leadership on the topic that I’m about to discuss.

Many of the tools that we use today at the Treasury Department and the U.S. government were tools that he and his colleagues decades ago helped to sharpen and to develop. So I’m extremely grateful to him.

But I’m also grateful to all of you and thank you, again, for joining me here today.

A little less than a year ago, Russia invaded Ukraine with the objective of unseating the democratically-elected government. The Kremlin expected to take Kyiv within days and to be in control with Ukraine within weeks.

But today, due to the bravery of the Ukrainian people and the support of the United States and our allies, Kyiv still stands. Ukraine’s democratically-elected government remains in place and the people of Ukraine continue to valiantly resist Russia’s illegitimate war.

The Kremlin’s war of choice has caused extraordinary death and suffering in Ukraine and around the world. Since February of last year, at least 7,000 Ukrainian civilians have died, in addition to tens of thousands of military casualties on both sides.

Moreover, Russia’s actions, including blocking grain and food exports from Ukraine, have exacerbated energy and food shortages worldwide, putting millions at risk of starvation in some of the world’s poorest countries.

The war has already taken an unprecedented toll and we and our allies and partner(s) will continue to do all we can to bring this war to an end.

Since last February President Biden laid out a comprehensive strategy to support Ukraine, which includes making use of the full range of economic tools.

The first prong of our economic strategy is to deny the Kremlin’s ability to use the money they have to buy the weapons they need, and the second is to reduce the revenues that President Putin can use to fund his war of choice and prop up the Russian economy.

At the same time, President Biden has underscored our commitment to ensure that the cost of our actions fall more heavily on Russia than on the United States and our allies and partners.

One year on our economic tools are constraining the Kremlin. Our sanctions and export controls, implemented in partnership with the Department of Commerce, have degraded Russia’s ability to replace more than 9,000 pieces of military equipment lost since the start of the war, forced production shutdowns at key defense facilities, and caused shortages of essential materials and components for tanks and aircraft production.

Russia is also running out of ammunition and has lost as much as 50 percent of its tanks. At the same time, our coalition has provided Ukraine with state-of-the-art military equipment, helping them to run faster as we force Russia to go slower, and Russia today is forced to turn to mothballed Soviet-era weapons to fight its war of aggression.

Going forward, our export controls and sanctions will continue to prevent Russia from accessing the equipment it needs to make up for these losses and our sanctions will make it harder for the Kremlin to use the remaining resources Russia can access to pay for the weapons they need.

While Russia’s economic data appears to be better than many expected, our actions are forcing the Kremlin to use its limited resources to prop up its economy at a time where they would rather be investing every dollar in their war machine.

Some of our first actions you’ll recall—mobilizing Russia’s central bank reserves as well as sanctions and de-SWIFTing of some of its largest banks—sent the ruble into a 50 percent decline, creating a run on the Russian economy as capital and foreign companies left the country as quickly as possible.

The Kremlin stemmed the bleeding by putting in place a set of draconian capital controls that prevented money from leaving the country. The Kremlin also provided capital from the central bank to prop up their financial sector, and they used the remaining assets of the Kremlin’s sovereign wealth fund to prop up their economy.

But despite the Kremlin’s best efforts the Russian economy continues to deteriorate. A report by Bloomberg Economics estimates that Russia’s economy is on track to lose a hundred and ninety billion dollars in GDP by 2026 because of the actions that we have taken. A good example of this decline is last year, rather than the budget surplus that many predicted and forecasted, Russia suffered a budget deficit of $47 billion. This was the second worst deficit in the country’s histories since the Soviet Union.

The best educated, most productive Russians are leaving the country in droves and this will dramatically reduce the economic capacity of the country. Industrial production has declined in Russia for nine straight months and we are planning to take additional steps to further decimate the Kremlin’s industrial base.

As we all know, Russia’s main source of revenues comes from selling energy. Perversely, the Kremlin’s invasion of Ukraine raised global oil prices, hurting oil-importing countries and increasing Russia’s oil earnings. Under the president and Secretary Yellen’s leadership, the price cap our coalition has implemented is already dramatically reducing Russia’s revenues from energy.

Last month, Russia’s monthly budget revenues from oil and gas fell to its lowest level since 2020, forty-six below where they were a year ago. The Russian finance ministry has been forced to nearly triple its daily foreign currency sales to make up for this shortfall.

Put simply, we’re making the Kremlin’s choice between funding its illegitimate war and propping up its economy harder each day. The Kremlin’s choice to spend the country’s savings can hide the damage for now but our actions are forcing Russia to mortgage its economic future to save face today.

Of course, we have more work to do and we will continue to do more until Russia ceases its baseless and illegal invasion. But one year into the conflict Russia’s economy looks more like Iran and Venezuela’s than a member of the G-20.

From the outset our response to Russia has been rooted in multilateralism. Our coalition of more than thirty nations representing 50 percent of the global economy came together within three weeks of Russia’s invasion of Ukraine and we have been in lockstep with the G-7 and EU at every point along the way.

This multilateral approach is what enabled us to successfully mobilize the majority of Russians’ sovereign wealth and central bank assets. It is what has made our export controls on defense inputs so potent.

The members of our coalition are the dominant producers of key inputs needed for modern warfare, such as the most advanced semiconductors, transistors, and software. Russia has been cut off from these critical inputs and its military performance has suffered as a result.

Looking to China is not a solution for Russia’s challenges. While we are concerned about Russia’s deepening ties with China, Beijing cannot give the Kremlin what it does not have because China does not produce advanced semiconductors Russia needs and nearly 40 percent of the less advanced microchips Russia is receiving from China are defective.

The economic size of our coalition has also been critical in enabling our actions to go after the oligarchs and elites that enable Putin’s regime through multilateral fora like the REPO Task Force. As of today, the REPO Task Force has frozen or blocked tens of billions of dollars in ill-gotten gains.

Going forward, the breadth of this coalition is what will enable us to continue to isolate Russia. We will force those that fail to implement our sanctions and export controls to choose between their economic ties with a coalition of countries that represent 50 percent of GDP or providing material support to Russia, an economy that is becoming more isolated every day.

Under the president and Secretary Yellen’s leadership we have paired multilateralism with new tools and approaches to degrade Russia’s economy and war machine. Mobilizing Russia’s central bank reserves and imposing price caps on its oil were decisions not everyone believed would succeed.

But the evidence to date shows these approaches are working. Take the price cap, for example, which operates by setting a ceiling on how much Russia can charge for its crude and refined oil products if they are traded using services from a country that is a member of our coalition.

This both limits Russia’s oil revenues directly and gives negotiating leverage to those who buy Russia’s oil without using these services, further driving down prices, and it forces Russia to choose between spending money on weapons and spending money to build its own ecosystem of services to get around the price cap.

Already the impact of these actions is clear. According to Russia’s ministry of finance, the country’s oil revenues in January of 2023 were nearly 60 percent lower than in March of 2022. In essence, Russia can no longer reap windfall profits caused by the conflict it started. At the same time, our actions have averted a sharp spike in global oil prices by keeping Russian oil on the market.

Our efforts must continue and we will continue to provide Ukraine the assistance they need to defend their country, building on the tens of billions in economic aid and comprehensive security assistance we’ve already

provided, and we will take further actions to set back the Kremlin’s ability to build its war machine and earn revenues.

In addition, we and our allies are planning to launch a renewed effort to rigorously enforce the sanctions and export controls we’ve already put in place. We know the Kremlin’s activities is actively seeking ways to circumvent these sanctions, to find those that do not share our values and are willing to put the people of Ukraine at risk to turn a quick profit.

In fact, one of the ways we know our sanctions are working is the Kremlin has tasked its intelligence services to find ways to get around them. Our approach to countering evasion will focus on three elements.

The first, consistent with our overall approach, will be to work closely with our allies and partners, especially in the G-7 and EU. We’ll use all of our economic tools to give countries, companies, and individuals a choice—to do business with a coalition representing half of the global economy or to provide material support to Russia.

We will use sanctions, export controls, and other tools to prevent the Kremlin from using the money they have to purchase the weapons and goods they need to fight this war of choice.

To strengthen this effort we will improve information sharing and coordination among our allies as well as share additional information with businesses in our countries to garner their assistance in preventing countries, companies, and individuals from providing material support to Russia.

The second element of this effort is to identify and shut down the specific channels through which Russia attempts to equip and fund its military. For example, in response to our export controls that have disrupted Russia’s military industrialized supply chain and weapons procurement the Kremlin has sought to backfill lost inputs by repurposing goods like chips that come from nonmilitary electronics like refrigerators and retooling manufacturing facilities to produce the goods it needs to support its war effort.

Our counter evasion efforts will deny Russia access to the dual-use goods being used for the war and cut off these repurposed manufacturing facilities from the inputs they need to fill Russia’s production gaps.

Similarly, we know Russia is working to get around the price cap through shadowy intermediaries. In addition to reducing the price Russia can charge for energy shipped with G-7 and EU services, the price cap was designed to force Russia to pay higher costs to ship oil outside the cap.

Russia has been forced to divert its funds from its war on Ukraine to pay for insurance, shipping, and other services to support its oil trade. For example, Russia’s central bank has been forced to use billions of dollars to backstop Russia’s national insurance company in order to support the shipping of energy products. This is significantly reducing the Kremlin’s profits, which it needs to fund its war.

We will continue to identify and act against intermediaries that permit Russia to use G-7 and EU services to be enriched by its oil trade, and we will look for additional ways to drive up the cost the Kremlin must pay to set up an alternative ecosystem to sell oil without the price capped coalition services.

The final element of our approach will be to put pressure on companies and jurisdictions we know are allowing or facilitating evasion. We all know that Russia’s invasion of Ukraine is unconscionable. But even some of the countries who have publicly agreed with this sentiment are falling short of their obligations to enforce the sanctions we and our coalition have imposed in response.

We have seen troubling patterns in several countries, including several of Russia’s neighbors, where the Kremlin has deepened its financial ties and trade flows as other markets have been closed off. We are providing intelligence and actionable information to enable countries to stamp out sanctions evasion in these jurisdictions,

and if they fail to do so we and our partners are prepared to use the various economic tools at our disposal to act on our own.

Officials from the U.S. and the governments of our coalition partners are also engaging with companies and banks in these jurisdictions to tell them directly that if they choose to not enforce our sanctions and export controls we will cut them off from access to our markets and financial systems.

The cost of doing business with Russia in violation of our policies is a steep one, and companies and financial institutions should not wait for their governments to make the decisions for them.

As I conclude, let me take a step back and say that while we have far more to do, we’re succeeding in reversing the course of Russia’s budget and undercutting its military industrialized complex. The battlefield situation Russia faces has fallen far short of Putin’s expectations and Russia continues to face daunting obstacles in the form of dwindling supplies and flagging morale amongst its troops.

At the same time, we have been able to keep global energy markets well supplied and avoid damaging price spikes even as we’ve limited Russia’s ability to profit from its energy exports.

Going forward, we’re committed to continuing to support the people of Ukraine and to redouble our efforts to hold Russia accountable, especially by countering efforts to evade our sanctions, and at the heart of this are the talented people who work on these policies throughout our government—talented career civil servants who have worked at the Treasury Department, the State Department, and the Commerce Department, who are working every day to try and hold Russia accountable—and my thanks goes to each one of them, the people who wake up every day thinking about how they protect our national security.

One of those people, of course, was Juan Zarate, and I want to say thank you to all of you for taking the time to listen to my remarks and I look forward to my conversation with him. (Applause.)

ZARATE: Mr. Secretary, thank you for those great remarks and I really appreciate what you said about me. Thank you so much. (Laughs.)

We’re going to have a little discussion here. Then we’ll open it up to questions. So get your questions ready. We’ll do both the in-person and virtual questions. I’ll try to manage that as well as possible.

Mr. Secretary, when we were in government—the Treasury Department—we were looking at rogues like terrorist groups, Iran, North Korea. The balancing act you have to now engage with is the fact that Russia is a major G-20 economy, an energy giant, a member of the Security Council permanent members.

How have you thought about the balance of needing to attack the economy the way you described, the need to attack their war-making efforts and budget, while also not cutting them off completely, including sale of oil and gas?

How do you think about that balance? Because that’s a very difficult challenge.

ADEYEMO: Yeah, and I think that one of the things that we’ve been fortunate about from the very beginning is that we built a multilateral coalition, and while that was important from a political standpoint of demonstrating Russia’s political isolation as they violated the sovereignty of a country like Ukraine, it was also important from an economic standpoint because it gave us more levers to use against Russia.

A great example was one of the early actions we took, which was immobilizing their central bank reserves. That would have been impossible if we’d done it on our own because after Russia invaded Crimea and we put in place sanctions Russia moved their central bank assets out of the United States and moved them into Europe, into Japan, into the U.K., and to other countries.

What they didn’t expect was that those countries would join a coalition, led by the United States, and freeze their assets. So you’re right that the balancing act with a country like Russia, which is interconnected, is harder than with some of these rogue states.

But by building a broader multilateral coalition it’s put us in a place where we can take these actions in a way that makes it harder for Russia to be able to prop up its economy and to build its military industrialized complex while limiting the spillovers to our economy and the economies of our allies and partners.

But the reality is that the largest spillovers we’re facing are actually from Russia’s invasion. When you look at what’s happened to energy prices and food prices because Russia, for example, has blocked ports in Ukraine, that’s where we’ve seen spillovers come from, which is—and we know that those spillovers that have been caused by this war won’t end until Russia’s invasion ends.

ZARATE: Now, the Russians view all of this—the sanctions you’re putting in place, the attack on evasion—as part of the war. I mean, they talk about this. Back in 2014 when the threat was put in front of the Russians of having their banks de-SWIFTed they talked about that as an act of war.

And so, in that regard, have you and others in the administration thought of what you’re doing—the sanctions, the economic and financial measures, the export controls—as a part of hybrid warfare, as a part of the ongoing war effort to contain and to counteract what Russia is doing in Ukraine?

ADEYEMO: I think the president has been very clear about the fact that we are not engaged in the war effort but what we are engaged in is making clear to every country that you can’t violate the sovereignty of another country and then reap the benefits of being connected to the international economic system.

You can’t both be a member of the global order and also violate the rights of a sovereign country, and that’s why we’ve taken decisive actions to cut off Russians’ access to huge swathes of the global economy.

Fundamentally, we are all parts of the global economy and that is part of the rules-based order that was created after World War II. Russia has violated the sovereignty of another country and, therefore, they should not be able to reap the benefits of being part of the international system that allows their economy to grow.

ZARATE: You talked very convincingly and powerfully about the coalition that has been established, major economies, major banking centers that are a part of the effort to isolate the Russians. Of course, there are those that have not joined the coalition and, in some ways, there’s a financial alliance of rogues emerging, if you will, especially with Russian dependence on Iran and North Korea for weapons.

How do you think about those financial rogues and the others that are aligned on the other side and even those that have tried to remain neutral or have pretended to play neutral, as in the case of China, perhaps?

ADEYEMO: Our view is that it is a sign of weakness, not strength, that Russia today is forced to rely on Iran and North Korea for their military arms. If you think about it, before the invasion Russia was one of the major arms suppliers in the world.

Today, Russia can’t produce enough arms to meet their basic needs, let alone be a supplier to the countries that have relied on them in the past. And in my conversations with foreign countries when I go to talk to them about their plans to continue to participate in buying arms from Russia, they all are skeptical because they both don’t think that Russia can produce enough arms and they’ve also seen how Russian arms have performed on the battlefield.

So I think part of the reality of the situation is that Russia is relying on countries that have already, largely, been cut off from the international financial system and what we’re doing here is that we’re taking the lessons that have been learned from the sanctions we’ve implemented on Russia and using them to go after those countries

as well, for example, UAV production in Iran, where we have taken actions to go after the supply chain that is critical to the production of those UAVs.

But we’re not doing it alone. The European Union is preparing to take actions as well which will make it harder for Iran and for Russia to get access to those things, and our message to those countries that are not already sanctioned by the international community, countries that may be playing a role in transshipment, is a simple one—do you think that your country’s economic interests are better furthered by having a relationship with Russia, which is a relatively—economy that is relatively small in comparison to the economies of our coalition, because, fundamentally, the choice we’re going to give you is that you can do—you can provide material support to Russia or you can continue to do business with our economies.

You can’t continue to do both and, fundamentally, that’s a choice that we think companies in these countries are going to see as an easy one and, that’s, frankly, why we think that we haven’t—we’ve seen limited support from countries like China and other countries where their companies are very interested in remaining connected to the global economy because that’s where they see their future over time.

ZARATE: I want to come back to the China question. But your point about the private sector is a critical one because as you were putting in place sanctions you had the private sector on its own de-risking and divesting in some impactful ways.

Can you speak to what the private sector has been doing, maybe even what they’ve been saying to you in terms of their sense of the risk of doing business with or through Russia and how that forms part of your calculus?

ADEYEMO: And you know this better than most, Juan, because you’ve done this work, but the reality is that many of our sanctions and export controls are enforced primarily by the private sector, by financial institutions, by firms that have very strong due diligence programs to prevent the type of evasion that we’re going after.

Part of our goal in our stepped-up enforcement strategy is to provide the private sector in the United States, in the EU, and the U.K. and Japan with better information for them to act on things that they’re seeing coming across their systems but also to have direct conversations with their customers and with their purchasers in these countries, making very clear that if they don’t take actions to stop transshipment, if they don’t take actions to prevent Russia from evading sanctions using their companies and their individuals, they will face the challenge of American companies, of American firms, of EU companies and firms, having to pull away from doing business with them.

ZARATE: Right. With respect to China, we’ve seen some Chinese businesses sort of adhering to sanctions. We’ve, certainly, seen it from the private sector Chinese companies operating in the West or operating in other markets having to adhere to sanctions or wanting to.

How have you thought about the Chinese equation? And let me ask two questions in particular. One is, how have the Chinese reacted to the way that the sanctions have taken effect? Have they started to respond in different ways, perhaps, to shield their own economy or to adhere to the sanctions?

And, secondly, how have you thought about the challenge of China more systemically in terms of the role of the dollar, the role of U.S.-driven payment systems? How is that all challenged by a China that may not be fully aligned with the U.S.?

ADEYEMO: So my sense here is this comes back to the importance of the multilateral coalition the president has built because, ultimately, this is not about the United States and China. It is really about the coalition and our interest in making sure that Russia’s invasion of Ukraine ends, and, fundamentally, for China, for the companies in China, for the individuals in China, the economic relationship with the EU, the United States, with Japan, is more important than the economic relationship with Russia.

Right now, what we’re seeing is that China is taking advantage of Russia’s challenge by buying relatively cheap energy from Russia, and where we’ve seen attempts at sanctions evasion that flow through China we’ve acted. The satellite company that was providing imagery to the Wagner Group we sanctioned them.

And our view is that Chinese companies have been wary about what they’ve done. But, as you know, once sanctions are put in place over time what tends to happen is people try and look for ways to evade them. And what we’re doing now is we’re warning China and companies within China that attempts to use China to evade our financial sanctions or export controls will be met with actions not only by our country but by the European Union as well and other economies that they care deeply about.

Fundamentally, we think that, like any other jurisdiction, China has to make choices about what they are willing to do and whether they want to be part of the global system that represents 50 percent of the global economy or whether they want to strengthen their ties with Russia.

ZARATE: Do you think that the coalition you’ve created, the pressure with sanctions, the economic isolation that is affecting Russia, is impacting the way China is thinking about its own posture vis-à-vis Taiwan, aggressive moves in the South China Sea, and its general foreign policy?

ADEYEMO: So I can’t—I’m not going to hypothetically speak about how China views the sanctions that we put in place. But I think that what—one of the benefits, I think, of the approach the president took with Russia was that it demonstrated the importance of the ruled-based system and the fact that the majority of countries that represent the majority of the global economy are willing to take actions to preserve that system.

Ultimately the violators of that rules-based order are Russia, and one of the things that we know that President Putin expected was this coalition wouldn’t stand strong; that it wouldn’t last. But fundamentally the thing that he miscalculated—because today I would say that the coalition that we built is stronger than it has ever been. The alliance between the U.S., the EU, and the G-7 is stronger than it has ever been, and we’re willing to take additional actions when it comes to Russia.

I think that speaks to the importance of this system and the fact that the vast majority of countries in the world have reaped a great deal of benefits from it. You talked about countries that some would say have not picked a side, but ultimately, in my conversations with finance ministers in Latin America, in Africa, in Asia—all of them are concerned about the increased cost they are paying for energy and the increased cost they are paying for food. And they know that Russia is responsible for it. That speaks to the logic of the price cap, which ultimately, the reason that it is working is because it places the economic interest—not just of the countries that are implementing it but to the countries that are purchasing energy, who are making very clear to us that in their conversations with Russia they are making clear that they want to buy the energy for less.

Ultimately, the key to the system holding together is that the benefits outweigh the detractions, and right now that is why Russia is struggling within its economy.

ZARATE: And much of this depends on the ability to enforce the sanctions, of course, and you’ve described the efforts underway, and that you will undertake further on sanctions evasion. A big part of that is sanctions with respect to the maritime industry. A lot of the oil price cap regime depends on the shipping sector to comply.

How have you thought about kind of the longer term sustainability of these efforts—because they are complicated? You’re asking the banks to do a lot, you’re asking shipping companies to do a lot. You are asking a lot of the system. How do you think about the sustainability of these measures?

ADEYEMO: I think it’s a great question, Juan, and I think part of that is because, while traditionally sanctions have worked through banks and the financial industry, this is the first time we’ve implemented anything like this that has touched on P&I insurance.

And the most important thing we did in developing the price cap was our engagement with industry, both to help them understand what we were trying to accomplish; for them to help us understand how best to do it. And the most important lesson from this is that as we rely more on the private sector, a key part for us is going to be the ongoing dialogue we have with them in terms of how best to design our tools in a way that makes it easy for them to participate in helping us to enforce them.

What we know is that, in order for Russia to get around these sanctions, they are trying to build their alternative ecosystem. From our standpoint, Russia investing money in capital expenditures, in building an alternative ecosystem is a benefit to us because it means that the money and time that they are spending on that is money and time they are not spending on building their war machine. And fundamentally our goal is going to be to make that—to drive up their costs in doing this because we know it’s the major source of revenue for their economy. But in order to do that, we need to have the active participation of those in this alternative ecosystem, the ecosystem that is far bigger, and broader, and stronger, to put more pressure on them and to increase those costs. The only way for that to happen is if we are working in partnership with the private sector, and they feel as if we’re sharing information with them so that they are best positioned to continue to meet their business objectives while also enforcing our sanctions.

ZARATE: You mentioned the Russians trying to create alternate ecosystems. Do you worry at all about the Russians, the Chinese, other economies trying to link their economies, or payment channels, or commercial systems in ways that really do present a parallel economy that allows not just sanctions evasion, but just an alternate way of interacting outside of the U.S.-based system; outside of dollar clearing, outside of the reliance of Western markets? Are you worried about that—2014 saw the Chinese and Russians trying to create an alternate to SWIFT in each case and, you know, with marginal success?

But how do you think about that alternate system that may be emerging?

ADEYEMO: So the way I think about this is fundamentally the thing that is going to drive whether an alternate system exists and whether it thrives is less what we do with sanctions than what we do in terms of investing in the United States and investing in our Western economies because the reason the dollar remains dominant in the world is because we have the deepest, most liquid capital markets. We have an open economy that is thriving, and what we have to do is make sure that we’re taking every step we can to maintain that.

In addition to doing that, we have to be a responsible actor when it comes to economic tools that are used like sanctions, and this gets back to my point about why it was so important for us to build a multilateral coalition. The truth is that if you are an actor of any kind in the global economy, you want to have access to convertible currencies, and the holders of the world’s most important convertible currencies are part of our coalition.

Ultimately China—for the Chinese, they are interested in control, and that means that they have very tight capital controls, and they make it extremely difficult for you to get in and outside of their economy. As long as that is the case, and as long as they don’t present an alternative that has deep, liquid capital markets and the ability for people to easily get in and outside of them, I am less worried about them taking on a dominant role there. The thing I worry more about it about us making sure we make the investments in the United States.

And while it’s off topic, I think one of the most important things we can do is make sure that we get the basics right, and we don’t create manufactured crises like the debt limit. At the—when you look at the world today, coming out of COVID, the United States is well-positioned to succeed, and that’s why you see our economy doing so well. I think that’s the most important thing that we can do going forward.

ZARATE: Let me take the lens back, and then I’ll ask two quick questions, and then we’ll open it up to the members.

When you entered government in this latest administration, you and the Biden administration had a review of sanctions. And I think much of the concern—as expressed in academia, in policy circles—was that sanctions 

were being overused. Sanctions were kind of the first and only tool of choice; that we weren’t looking at the externalities and all the things that come with their use.

We’re now at a point where we’re relying heavily on sanctions. How do you think about where we are with the use of sanctions in light of what you were thinking coming into the administration, and given the realities of their necessity in the Russian conflict?

ADEYEMO: Yeah, and I appreciate you mentioning this review that Secretary Yellen asked me to undertake when I came into office. And it was quite useful because part of the review was I talked to people like you, and I also talked to people like my foreign counterparts about what worked and what hadn’t worked.

Fundamentally that review ended in the fall of 2021. Two months later, as we started to see the intelligence evolve about Ukraine, Russia building up troops at the border of Ukraine, I went back to those same counterparts and said, we need to start planning for this contingency. And we took what we learned from that review and applied it here. And one of the most important lessons was that the best way to protect against not only the overuse, but not using them in a targeted way, was to do it in a multilateral fashion. That’s why we worked so closely with our allies and partners.

But in addition to that, a big piece of this was to make sure the sanctions were part of a foreign policy strategy. And I tried to outline clearly what that has been for us, and it has really been two key prongs. One is using sanctions to deny Russia’s ability to use the money they have to buy the weapons they need, and that has been a very targeted effort to go after their supply chain. And the second one has been to go after their revenues in a way that’s different than we’ve done previously, immobilizing their foreign reserve assets rather than just blocking their central bank, creating a price cap rather than just blocking their ability to sell energy. These are all tools that were created because we took that time to be—to figure out what our objective was and to tie them together.

But ultimately one of the things that we are also focused on is investing in the infrastructure that allows us to use these tools. Part of coming out of that review is investing in the talented people at Treasury who are doing this work and building up that function and that tool set. We’re bringing in the chief economists to do this work. We’re looking to also make sure that we’re not doing it alone. One of the things that we’ve also started to do is we’re doing exchanges between staff at the U.S. Treasury and His Majesty’s Treasury in the U.K. We’re planning to do the same thing with the EU in order to make that amongst our allies and partners we’re better able to utilize these tools when needed going forward.

ZARATE: That’s smart.

Final question from me: you, of course, are looking at and have also looked at the broader economic landscape. And national economic security is more than just sanctions, of course. Anti-money-laundering controls anti-bribery, corruption issues, export controls.

CFIUS, the Committee on Foreign Investment in the U.S., which you help oversee; Development Finance—there’s a whole range of economic tools and arenas that now form part of not just competition but even conflict. How are you thinking about that broad spectrum, and are you organized at the Treasury Department to look at this more broadly than just one tool or one arena at a time?

ADEYEMO: I think that the Russian invasion of Ukraine has forced us to look across the entire toolkit—not just the Treasury Department but across the U.S. government—to think through what we can do to meet our economic strategy objectives when it comes to Russia. And by focusing the mind, it’s also allowed us to see—to ask questions about where we need additional tools and additional resources.

I mentioned some devoted to sanctions, but in addition to that, looking also at what we do in terms of outbound investment out of the United States. If we’re concerned about the ability of adversaries to build up things like

quantum computing, or to make investments that help them accelerate their defense production, we should ensure that our companies here are not assisting them in doing that. So a big piece of what we’ve been doing, not only at Treasury, but across the U.S. government, is thinking through what additional tools that we need in the toolkit.

But one of the most important things we can do, from my perspective, is make sure that we draw clear lines between what is competition and what is national security because, fundamentally, my view is that the United States does well when we’re competing on a level playing field with any country in the world, and we want to be able to do that going forward because I think it’s in our economic interest.

But we also want, in the narrow spaces where we see national security risk, be able to use the tools at our disposal to protect the national security of the United States of America. And that’s exactly what we’re trying to do. And those lines are sometimes hard to define, but it’s important for us to define them, and then as we define them, making sure that they are lines that are agreed to, not just here in the United States, but with our allies and partners.

Fundamentally, I think one of the most important things that we’ve learned from Russia’s invasion of Ukraine is a lesson that we have known since World War II, which is that one of the key strengths of the United States is the fact that we have a deep history of working closely with our allies and partners to accomplish not just our national security objectives, but our economic objectives as well. And I think that in thinking about both the national security tools and the economic perspective, but also competition, we need to think about how we work with our allies and partners going forward.

ZARATE: That’s wonderful.

Let’s open this up now. Wait for the microphone, please identify yourself, and then ask a quick question so we can get as many questions as possible.

This lady right here, please.

Q: Thank you very much. Barbara Slavin from the Stimson Center.

I wanted to switch focus, if I may, to the sanctions on Iran. We’ve seen an enormous number of new sanctions being put on the government of Iran for a variety of reasons in recent months. Have you been monitoring the efforts to lift or soften sanctions when it comes to the provision of technology to ordinary Iranians who are trying to remain connected to the Internet and get their information and their stories out to the rest of the world? Thank you.

ZARATE: Thank you, Barbara.

ADEYEMO: Yeah, it’s a great question. I think one of the things that we have done is given targeted sanctions relief in order to make sure that the Iranian people have the ability to both share information with each other, but share information with the rest of the world. But as you would expect, the Iranian regime is attempting to limit that as much as possible, which speaks to the basic human rights violations that are happening in Iran.

And fundamentally the Iranian regime has a choice to make. Today their economy is struggling. They are facing a number of challenges that are being caused by their destabilizing activity in the region, but also due to their failure to return to the JCPOA.

We’re going to continue to take steps to make sure that we can do everything we can to empower the Iranian people at the same time that we continue to maintain our sanctions in a way that forces them to make choices between ending that destabilizing activity and making the choice to return to the JCPOA, or continuing to see their economy become smaller and face the challenges that come with their behavior.

ZARATE: We have a question from the virtual membership. Let’s open the mic for the question, please.

OPERATOR: We will take our next question from Mohesh Kotecha.

Q: Thank you very much, Mr. Secretary and the presider.

My question is related to, really, some sense in the markets—Dow Jones and the Wall Street Journal reported that the amount of decline in Russian GDP is actually lower than was hoped for or expected. Fifteen percent was the number that was expected by some. It’s down maybe in low single digits.

How—and by the way, Putin seems to have just announced cancellation of the nuclear pact, the New START, I guess, treaty with the U.S. But that, perhaps is something you might want to comment on.

But my question really is how does one assess the degree to which Russia remains resilient to the sanctions regime that has been put together with the coalition partners? Notwithstanding the effectiveness that you have described, it seems that the bite seems to be less than we had hoped. Thank you.

ADEYEMO: So I’ll let some of my other colleagues speak to what I believe was an announcement of suspension of activity when it came to New START, but I will address your question with regard to Russia’s economy.

I think the most important thing is to remember that at the very beginning of Russia’s invasion of Ukraine, we took a number of steps that caught Russia by surprise; for example, immobilizing their central bank assets. And nearly immediately you saw a run on the Russian economy with anyone that could get their assets out moving them out as quickly as possible.

In response, Russia put in place a set of draconian capital controls. They forced their energy companies to take any foreign currency earning and turn them from dollars and euros into rubles, which has in lots of ways created a false sense that the Russian economy is doing well. But the Russian economy you see today is nothing like the Russian economy that existed before the invasion. If any of you were an investor in 2021, Russia would have been a part of any basket you had in emerging markets. Today Russian has almost no foreign direct investment from the West because if you put money into Russia, you can’t get that money out.

What Russia is doing at the moment is using their assets to prop up their economy, and we know that this is going to be a game that is going to be harder for them to continue to play going forward because last year, rather than having a surplus, they had a deficit of $47 billion, which was the second largest deficit they’ve had since the end of the Soviet era. And fundamentally Russia’s economy is going to continue to be decimated, not only because of our sanctions and export controls, but because the smartest, most educated Russians are speaking with their feet and leaving the country.

So ultimately, while the data has held up stronger than was expected in the beginning because Russia is using the assets they have to prop up the economy, underneath the hood, Russia’s economy is getting smaller, and becoming less flexible, and looks less like a G-20 economy going forward. And they can only for so long use the money to prop up their economy before you start to see the—you start to see some of the damage internally coming in a way that will leave Russia in a position where they are going to continue to have to make the choice between propping up that economy and continuing to invest in the things for the war in Ukraine.

Our goal is to make that choice harder every day going forward, and we think that signs like the nine straight months of decline in their industrial production is a sign that demonstrates that their industrial base is being decimated in ways that will make it harder for them to rebuild not only their military industrialized complex, but their economy going forward.

ZARATE: Mr. Secretary, if you wouldn’t mind, just a quick editorial. When I was at the Treasury our mantra in terms of the use of sanctions and economic isolation was to make it harder, costlier, and riskier for America’s enemies to raise and move money around the world, and I think you’ve described that aptly in the Russian context.

A question right here, back in the audience.

Q: Thank you. Alan Raul from Sidley Austin.

Last week in Munich, Vice President Harris assessed Russia’s actions in Ukraine as crimes against humanity. What are the consequences that spring for that, including any implications for the future of the Russian economy, and maybe even Putin’s personal wealth?

ADEYEMO: Our goal and what we’re doing when it comes to the use of economic tools is going after the cronies and the elites that help hold Vladimir Putin’s individual wealth. Vladimir Putin does not have a checking account. The Russian economy is his checking account. And by going after the economy and by constraining that and constraining the elites that are around him, we think that we are going to go after his wealth.

Going forward, part of our strategy is to constrain Russia’s ability to continue to commit those crimes that the vice president outlined by going after their military industrialized complex, by going after the Wagner Group. Fundamentally the key thing to remember is that economic tools like sanctions and export controls are part of our broader foreign policy strategy. Part of this will be to hold Russia accountable, using those tools, but we’ll use other tools, as well, working with our allies and partners to hold Russia accountable for the crimes against humanity that they’ve committed in Ukraine.

ZARATE: Let’s go to a virtual member for another question, please.

OPERATOR: We will take our next question from Barry Krantz (sp).

Q: Yes, thank you very much, both of you. This is fantastic.

My question specifically, Mr. Secretary—there have been obvious sanctions on Russian oil, gas, coal, I believe. What is happening in terms of nuclear fuel or uranium imports to the U.S. from Russia?

ADEYEMO: So I’m not going to preview any sanctions today, but as the president said in his statement, we plan to announce additional sanctions that will look to meet our two objectives, which are to go after the military industrialized complex that Russia has, and also to cut off their sources of revenue going forward.

A big piece of what we are going to do using sanctions is also go after the networks that are helping to facilitate evasion. So in the coming days you will see additional actions that we’ll take, not just here in the United States, but to my larger point, in collaboration and coordination with our allies and partners around the world who are part of this coalition.

ZARATE: In the back, please.

Q: Thank you very much, Mr. Secretary. (Off mic.)

If I could turn briefly to China and, first of all, congratulate you and your colleagues for the extraordinarily successful work, in my experience, (building an international coalition ?). It’s extremely important in this environment—(off mic).

Regarding China, however, you mentioned chips. And China’s—(comes on mic)—oh, sorry. Thank you. China’s providing non-lethal aid. However, there are certainly reports about China’s willingness to provide perhaps lethal aid—maybe not the highest technology, but simply ammunition or basic materiel.

Secretary Blinken—in Munich—recently met with Wang Yi, the Chinese foreign minister, and said that there would be consequences in this regard. And I’m wondering if you could outline some of these consequences as you would proceed—for example, SDN designation versus anti-ballistic designations—and further, how would you anticipate this affecting the multilateral coordination efforts—for example, Germany may not be as willing to support these multilateral efforts as other countries.

ADEYEMO: Well, let me start with the premise at the end of your question, which is Germany’s willingness to support efforts to go after countries that violate our sanctions. And I think that speaks to a premise that I think underlies President Putin’s strategy that has been wrong to date.

All the members of our coalition have been willing to take steps that have had an impact on their economy in order to hold Russia accountable, including Germany and the European Union, where it has come at a cost to them—when you look at, for example, energy—to hold Russia accountable, but they’ve done it. And at every step along the way when people thought the coalition would be unwilling to do something, we have always acted.

And what I know to be true is that, for European countries, they see actions that would undermine these sanctions or their export controls as actions that not only violate—helped Russia’s efforts to violate the sovereignty of Ukraine, but also undercuts their economic interests. So my expectation is that the European Union, the United States, the rest of the G-7 will act together to hold accountable any country, any company, any individual that provides material support to Russia going forward.

We’ve already used—and the tools we would use are the same tools we would use in any jurisdiction, which includes sanctions, which we’ve already demonstrated a willingness to use, but also furthering our export controls. One of the things that I outlined in my speech that’s important here is that we’re seeing Russia increasingly use dual-use goods to further their military industrialized complex, tearing out semiconductors from everything from fridges to microwaves in order to put them into military equipment.

What we’re going to do is further tighten our export controls and sanctions to go after some of these dual-use goods that we know are furthering their war effort. It’s not only an action we’re going to take here in the United States, but it’s an action we know that the European Union is committed to taking alongside us. And fundamentally, for any jurisdiction—be it China, be it the UAE, be it a country that is neighboring—that is neighboring Russia, the choice they are going to have to make is not only with regard to their economic relationship with the U.S., but their economic relationship with the other members of our coalition, who also feel strongly about the fact that the most important thing that we can do is help Ukraine end this war as quickly as possible.

So my sense now, when it comes to China—like any other jurisdiction—because their companies and their financial sector are going to have to make the choice between providing material support to Russia in a meaningful way or being in a position where those companies and individuals no longer have access to our markets and our financial system.

ZARATE: One more question from the virtual membership, please.

OPERATOR: We will take our next question from Dante Disparte.

Q: Thank you, Juan Zarate and Secretary Adeyemo, for a very timely conversation.

I just wanted to ask one question which is related to parallel payment systems, and oftentimes the rise and use of digital currency and the crypto currencies is labeled as an innovation designed to circumvent sanctions. As an operating company in the sector with Circle and USDC, we’ve actually seen a bit of a counter-narrative there, that digital assets and blockchain-based finance are increasingly hard places to hide illicit activity.

So I was just curious, from the lens of the Treasury Department and this new regime of sanctions coming into place with Russia, how you see the role of these parallel innovations in financial services and whether or not there is any efficacy there in circumventing rules?

ADEYEMO: I think that my view is that fundamentally any new innovation is a place where illicit actors try and find an angle and try and find a way to use it to further their illicit behavior. But we know that illicit actors look to use cash, look to use any payment method they can to further their activity.

The key for us is that, be it cryptocurrency, be it the traditional financial system, that they put in place a set of rules and regulations that make it hard for those actors to use their systems to further their illicit purposes. Fundamentally we’ve taken actions against those in the blockchain ecosystem that we feel are not taking those appropriate steps to protect the system from illicit actors, and we’re committed to continuing to do so.

But to your point, we think that there are responsible actors within the system who are building systems that help to protect against these types of illicit activity going forward, and we look forward to continuing to work with them to make sure that, just like the traditional financial system, the crypto ecosystem is not one that can be abused by nation-states or cybercriminal actors going forward.

ZARATE: Unfortunately, that’s all we have time for. This has been an incredible hour that we’ve had with the deputy secretary. I want to thank you for the generosity of your time, your leadership, your service to the country.

Please join me in thanking Deputy Secretary Adeyemo. (Applause.)

(END)