Biden officials weighing Russia sanctions options after warnings about economic fallout, heightened cyber risk for US and allies

By Natasha Bertrand and Sean Lyngaas, CNN

The Biden administration is still weighing exactly how it would penalize Russia if the country invades Ukraine, as US diplomats are just days away from high-stakes meetings with Kremlin officials.

Some Biden administration officials are warning of collateral economic damage from harsh sanctions and the risk of retaliatory Russian cyberattacks should the US follow through with President Joe Biden’s promised “severe consequences” on the Russian economy if Russian President Vladimir Putin orders a full-scale invasion of Ukraine.

At least two analyses done in recent weeks by the Treasury and State departments found that the sanctions that would be most crippling for Russia — like penalties on the Russian energy giant Gazprom or its Central Bank — could also damage economies throughout the rest of the world by potentially spiking gas prices or hampering European trade and investment with Russia at a particularly delicate moment for the bloc.

One concern is that those negative effects could boomerang back onto the US during an election year, sources told CNN. But others in the administration believe the tough sanctions being weighed would have a manageable impact on the US, and would be worth it to impose severe penalties on Russia.

The extent of the blowback would depend largely on the parameters of the sanctions and how much Europe would suffer, said Jeff Schott, a senior fellow at the Peterson Institute for International Economics who focuses on international trade policy and economic sanctions.

“The problem with discussing these countermeasures is that if you take a strong sanctions action that has a big impact on the European economy, that will in turn rebound to the US economy,” he said.

The administration has been considering options including targeting major Russian commercial banks, sanctioning Russia’s energy sector, blocking Russia’s access to bond markets, cutting Russia off from the SWIFT international payment system, and tightening export control measures.

Among the most “realistic” economic penalties that the US and its allies could impose would be to kill the Russia-to-Germany gas pipeline project Nord Stream 2, Schott said, which — when operational — will account for about 10-15% of European Union gas consumption but will bypass Ukraine and be a major boon to Russia.

US officials have been lobbying Germany to commit to killing the pipeline if Russia invades Ukraine, according to a senior US official, and Germany’s Foreign Minister Annalena Baerbock said last month that “in the event of further escalation” against Ukraine, “this gas pipeline could not come into service.”

Officials are also mindful of the possibility of Russian retaliation in cyberspace against US and European critical infrastructure.

The potential for such spillover is weighing on how the US responds to any Russian incursion and will also affect how allies react, as the US works to coordinate a response for maximum effect.

A senior administration official told CNN that “any costs that we would bear will pale in comparison to the impact we generate on the Russian economy and financial system.”

“Whatever we decide, in concert with our allies and partners, is the right course for our collective interests and security, we are prepared to deliver severe costs to the Russian economy while minimizing unwanted spillover,” the senior administration official told CNN.

A State Department spokesperson echoed that sentiment, telling CNN that while the department does “not preview potential sanctions actions,” the US and its allies have been consulting on “specific packages of severe consequences for Russia should they go forward with military escalation In Ukraine.”

“As Secretary Blinken said, if Russia chooses to escalate, we will respond swiftly,” the spokesperson said.

Cyber risks

Another scenario top of mind for US and European officials is if Russia moves to retaliate against any sanctions with hacking activity against western critical infrastructure.

Recent National Security Council meetings have included discussions of potential Russian cyber activity should tensions with the US escalate further over Ukraine, a senior administration official told CNN. Meanwhile, the White House has overseen federal agencies’ outreach to US companies encouraging them to maintain strong cybersecurity protections, the official said.

“While there are not currently any specific credible threats to the U.S. homeland, we are mindful of the potential for Russia to consider escalating its destabilizing actions in ways that may impact others outside of Ukraine,” the senior Biden administration official told CNN.

The Energy Department in mid-December held an unclassified briefing with America’s biggest electric utilities, natural gas and oil companies on Russia’s history of disruptive cyber operations in Ukraine and other parts of the world, two people who listened to the briefing told CNN.

While not tied to any specific threat, the Energy Department briefing covered the technical details of previous Russian cyberattacks that cut power in parts of Ukraine in 2015 and 2016, along with more recent Russian cyber activity such as the 2020 espionage campaign that exploited SolarWinds software, said one of the people who attended the briefing, who spoke on the condition of anonymity to describe a private call.

The message from US officials to electric utilities and energy operators on the call was to be vigilant and to “have heightened awareness, as you monitor these geopolitical activities, that there could be spillover” in cyberspace, the source told CNN.

Jim Linn, executive director of DNG-ISAC, a cyberthreat sharing center for the downstream natural gas industry, told CNN: “Escalating tensions abroad, especially in Eastern Europe, has the potential to alter the cybersecurity landscape.”

Linn’s threat-sharing center, he added, “is constantly tracking threats posted by members, government and law enforcement as well as sharing information and mitigation techniques.”

A recent classified briefing for key US financial institutions — conducted by Treasury Department and US intelligence officials and part of their regular cyberthreat briefings for banks — featured information on Russian cyber capabilities and the possibility of Russian retaliation in cyberspace if things escalate in Ukraine, a cybersecurity executive at a major US bank familiar with the briefings told CNN.

‘We are not backing down”

With all of the risks to consider, and with Russia showing no signs of withdrawing its forces from the Ukraine border, intensive discussions have been underway in recent days and weeks about how the US and its allies can mitigate the potential collateral damage, sources said.

“We are not backing down from our willingness to impose these kinds of harsh sanctions if Russia moves to invade,” said one official. “But we still have to figure out how to do them in a way that is smart. How do you craft them in a way that they hit the intended party more than your allies?”

Sanctioning members of Putin’s inner circle is still a top option, the first official said, and likely a given if Russia invades because of the more limited impact it would have on the international financial system.

The White House and senior officials are also discussing potential export control measures that could halt Russia’s ability to import smartphones, key aircraft and automobile components, and materials from many other sectors, threatening major impacts on Russian consumers, industrial operations, and employment, sources familiar with the discussions said.

Secretary of State Antony Blinken reiterated in a press conference on Wednesday that if Russia does not commit to “diplomacy and de-escalation” during talks next week and instead renews its aggression against Ukraine, the Kremlin will incur “massive consequences” from the US and its allies.

Biden conveyed much the same message to Putin in a phone call last week, telling the Russian leader that the costs of an invasion would include economic penalties as well as “adjustments and augmentations of NATO force posture in Allied countries” and “additional assistance to Ukraine to enable it to further defend itself and its territory,” another senior administration official told reporters.

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