Safeguarding US elections by sanctioning Russian sovereign debt

Since October of 2016, the intelligence community has repeatedly issued public warnings that the government of Russia is actively interfering in U.S. elections. In the past three months, the Office of the Director of National Intelligence (ODNI), director of the FBI, and Treasury Department have each publicly confirmed that Russia is working to influence the 2020 U.S. election.

What has the Trump administration done to hold Russia accountable for these attacks on our democracy? Very little. Of the limited actions the administration has a taken to respond to Russian’s malign activity, few of them have imposed any meaningful new penalties directly on the Russian government or Russian President Vladimir Putin.

For example, on Sept. 30, 2019, the Treasury announced new sanctions in response to Russian interference in the 2018 U.S. midterm election. However, rather than targeting Russian officials or the government itself, these sanctions targeted the Internet Research Agency, a private company with ties to the Kremlin, and individuals involved with the company. More recently, on Sept. 10, 2020, Treasury issued sanctions targeting Andrii Derkach, a member of the Ukrainian Parliament and “Russian agent,” for his efforts to influence the 2020 U.S. election. Again, the administration failed to directly punish the Russian government or any actual Russian officials. The private company and individuals who were “sanctioned” have no known desire to visit the U.S. nor has the administration presented evidence of them having assets here, making the “sanction” largely meaningless.

In the face of this inaction, Financial Services Committee Chairwoman Maxine Waters (D-Calif.) and I, along with Oversight and Reform Committee Chairwoman Carolyn Maloney, Financial Services Oversight and investigations Subcommittee Chairman Al Green and Financial Services Vice Chairman Michael San Nicolas, have introduced the SECURE Act, legislation which would block the Russian government from accessing the U.S. capital markets for future government borrowing activity until it ceases its interference in U.S. elections. The SECURE Act closely mirrors an amendment to the Fiscal Year 2020 National Defense Authorization Act, which Chairwoman Waters and I led, and which was passed unanimously by the House.

While these sanctions would place significant economic pressure on the Russian government, they also represent a measured response which ensures that the costs do not outweigh the benefits. Among European countries, Russia has, in recent years, maintained a relatively low level of debt to GDP and holds the world’s fourth-largest gold and foreign currency reserves. However, the Russian economy has faced significant strain due to the pandemic and a more than 75 percent decline in oil prices earlier this year.

As a result of its response to the crisis, Russian debt to GDP has increased from 12.3 percent to 19 percent over the course of the year, with new government borrowing expected to rise to over $65 billion in 2020, a 15-year high. The Russian government also appears poised to cut military spending by 5 percent in 2021. This would mark the first time since 2014 that Russian defense spending fell below the amount spent on state-backed industries.

Meanwhile foreign investment in Russian sovereign debt has remained relatively stable through the crisis, showing a decline in foreign holdings of less than 0.5 percent in Russian government OFZ bonds over the last 12 months. Many have attributed this continued investor appetite for Russian government debt to repeated failures by the U.S. and others to impose meaningful penalties on Russia for its election interference and other malign activity around the world.

No doubt investor demand has also been bolstered by announcements earlier this year by credit ratings agencies Moody’s and S&P that, despite the economic downturn, both would maintain their investment grade ratings for Russian government debt. However, Moody’s also noted in its report that one factor which could lead to a credit rating downgrade would be the imposition of sanctions affecting Russia’s ability to service or refinance its debt. A separate analysis by the Russian credit rating firm ACRA also suggests that a sovereign debt sanction could increase the Russian government’s cost of borrowing by 0.5 to 0.8 percent.

Blocking Russia from relying on U.S. investors for new government borrowing activity is unlikely to cripple the Russian economy. But it will impose significant economic pressure directly on the Russian government, increasing its cost of borrowing likely by hundreds of millions of dollars and potentially requiring additional cuts in federal spending and tax increases. It will also further isolate Russia from the international economy and make the country’s economy even more directly dependent on the health of increasingly volatile global oil markets. Furthermore, a sovereign debt sanction will ensure that American investors are not indirectly financing these foreign efforts to undermine our democracy.

Until we deliver a clear message to Vladimir Putin that there will be meaningful consequences for his government violating our sovereignty through election interference, Russia will not stop. Cutting the Russian government off from access to U.S. capital markets is the first and most critical step the United States can take towards doing that.

Sherman is a member of the House Financial Services Committee.