Wonkbook: The economics of the new Russia sanctions

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(AP Photo/RIA-Novosti, Mikhail Klimentyev, Presidential Press Service)

Wonkbook’s Number of the Day: $78 billion. That's the debt paydown by the U.S. Treasury this quarter, the largest such paydown in seven years.

Wonkbook’s Chart of the Day: Our dull economic recovery.

Wonkbook's Top 5 Stories: (1) Russia sanctions bark but don't bite; (2) the Fed's ho-hum meeting; (3) D.C.'s eyes are on the Pfizer-AstraZeneca deal; (4) cell phone privacy and the law; and (5) cracking down on college sexual assaults.

1. Top story: The problem with the Russia sanctions

Why the new sanctions against Russia probably won't work. "Do economic sanctions work?...In Russia, maybe not. Russia is sitting on roughly half a trillion dollars in foreign exchange, and it exports about 9 million barrels a day of crude oil bringing in about $330 billion a year -- not including its sales of natural gas. It has will as well as means. Russian President Vladi­mir Putin seems content to suffer some economic damage for the sake of correcting what he sees as an historical wrong and bringing Crimea and perhaps more of Ukraine back into the Russian fold." Steven Mufson in The Washington Post.

U.S. imposes new sanctions on Russia. "The Obama administration on Monday ratcheted up its punishment of Russia...even as it acknowledged that a new round of economic sanctions is unlikely to bring an immediate change in Russian behavior. The new measures froze the assets of seven Russian individuals and 17 companies associated with them, and prohibited any U.S. dealings with them. All were identified as closely linked to Russian President Vladimir Putin. The administration also announced new restrictions on Russia’s import of U.S. goods deemed to contribute to its 'military capabilities.' The European Union said it would expand its sanctions list to include 15 more individuals." Karen DeYoung and Michael Birnbaum in The Washington Post.

Primary source: The sanctions announcement.


13 times that economic sanctions really worked. Adam Taylor in The Washington Post.

What does the latest round of U.S. sanctions on Russia mean? Julia Ioffe in The New Republic.

Why the energy sector? "The Obama administration on Monday took aim at Mr. Sechin, the president and chairman of the management board for Rosneft, Russia’s state-owned oil giant. He is the most prominent businessman targeted to date....The energy sector has been a particular priority: The latest American sanctions cover 17 companies largely clustered in oil and gas construction and financing, as well as Mr. Sechin and six other people. While the financial implications for large multinationals have so far not been significant, the list is creating headaches for compliance departments of Western companies." Andrew E. Kramer in The New York Times.

Sechin is Russia's version of Darth Vader. "Mr. Sechin runs the largest oil company in Russia. He is a very close associate of Vladimir Putin. The reason he adopted the nickname Darth Vader is he's a scary looking guy. He isn't someone you'd want to run into in a dark alley one day." NPR.

The administration's strategy: Gradually increase the pain. "The U.S. doesn’t expect immediate change in Russian policy toward Ukraine. The strategy is to steadily ratchet up sanctions that would impose more economic pain and political isolation for Russia." Jonathan Stearns, Roger Runningen and Volodymyr Verbyany in Bloomberg.

But is the pain enough? Moscow breathes sign of relief again. "When the US announced its latest wave of sanctions against Russia on Monday, there was an almost audible sigh of relief in Moscow. While the seven individuals targeted are among the country’s most powerful and most trusted and relied upon by president Vladimir Putin, the list appears unlikely to have much, if any, new direct economic impact." Kathrin Hille, Courtney Weaver and Geoff Dyer in The Financial Times.

The concern: Moving too quickly will cripple Europe's economy. "While the new sanctions don’t target Russia’s energy sector -- Obama said that step would be taken if Russian troops crossed the border into Ukraine -- they take aim at individuals whose wealth comes largely from Russia’s vast oil and natural gas industry. The reluctance to impose broad sanctions on Russian sales of oil and natural gas reflects concerns that such a step would cripple Europe’s economic recovery -- the European Union is deeply dependent on Russian energy -- and likely drive up global oil prices, which would hurt U.S. consumers and slow the U.S. economy ahead of hotly contested midterm elections in November." Kevin G. Hall in McClatchy Newspapers.

Republicans prepare legislation with tougher sanctions. "Senior Republican lawmakers said on Monday the latest sanctions imposed on Russian individuals and companies are too mild to deter Moscow from further action in Ukraine and promised to offer legislation as soon as this week to pressure the Obama administration to take stronger action." Patricia Zengerle in Reuters.

Russian energy, transportation giants' debt ratings cut. "Ratings for natural gas producer OAO Gazprom, oil explorer OAO Rosneft (ROSN), pipeline operator OAO Transneft, power transmitter Federal Grid Co. and OAO Russian Railways and its JSC Federal Passenger subsidiary were lowered today, three days after the New York-based credit-rating service downgraded Russian Federation sovereign debt to its lowest investment grade." Joe Carroll in Bloomberg.

This action by the Russians won't make the administration happy. "The Obama administration’s strategy of punishing Russia with economic sanctions over the Ukraine crisis encountered a new complication on Monday with word that the Russians are negotiating an $8 billion to $10 billion energy deal with Iran, another country ostracized by American-led sanctions, which partly depend on Moscow’s cooperation to be effective." Rick Gladstone in The New York Times.

U.S. employing novel sanctions tactic against Putin ally. "One name comes up again and again: Gennady Timchenko....Taking advantage of financial-tracking techniques that have become available only in the past few years...the U.S. government is able to 'name individuals who have extensive cross-holdings,' in an effort to 'make them and their companies radioactive.' Another possible explanation for the tactic: The U.S. may have evidence that Putin has entrusted his personal wealth to Timchenko." Carol Matlack in Bloomberg Businessweek.

Visa, MasterCard feeling sanctions' impact on banks. "A new round of penalties announced Monday is forcing the card networks to shut down service with at least two more Russian banks....The stronger sanctions come at a time when the card companies already are seeing a slowdown in the region's travel activity and are bracing for a potentially big change in Russia's payment system....Visa and MasterCard on Monday said they will stop servicing SMP Bank and InvestCapitalBank, adding to restrictions that were put in place last month on Bank Rossiya and Sobinbank." Robin Sidel in The Wall Street Journal.

The euro is benefiting from the crisis. "'Since the onset of the Ukraine crisis the euro has benefited. We expect that pattern to continue,' said Michael Woolfolk, global markets strategist at BNY Mellon in New York. Woolfolk said even if sanctions impact Russia's main trading partners, the euro will still find demand due to safe-haven capital flight." Herbert Lash in Reuters.

BERSHIDSKY: Putin has little to fear. "President Barack Obama said the idea was to change Putin's 'calculus with respect to how the current actions that he's engaging in could have an adverse impact on the Russian economy over the long haul.' Actually, Putin's worst-case calculus has just gotten more attractive: If this is the best the U.S. can do even though it stands to lose much less than Europe does, what does he have to fear?" Leonid Bershidsky in Bloomberg View.

THE WALL STREET JOURNAL: Obama's Russia rally. "The U.S. and European Union imposed more sanctions on Russia Monday, and both the ruble and Moscow stock index rallied, the latter up 1.5%. The markets didn't take this response to the Kremlin's war on Ukraine seriously, and neither will Vladimir Putin." Editorial Board.

THE WASHINGTON POST: Obama's half-measures. "Vladimir Putin's assault on Ukraine has been relentless and increasingly reckless: Forces working with Russian personnel in eastern Ukraine are torturing and murdering opponents and holding international observers hostage. In contrast, President Obama’s response has been slow and excruciatingly measured." Editorial Board.

KAPLAN: A wiser move than most, but it still won't do much. "Obama’s sanctions against Putin are smarter than most. Rather than punishing a country’s entire population, like the Bush-Clinton sanctions against Saddam Hussein’s Iraq, Obama...is aiming at the Russian officials who help make Ukraine policy, and at the Russian institutions that profit from it.... However, it’s illusory to think that these or any other sanctions will have more than a marginal impact on Putin’s behavior, especially when it comes to Ukraine, which has been integral to Russia -- as a market, a supplier, and a security buffer -- for centuries." Fred Kaplan in Slate.

Top opinion

SPERLING: Fixing America's broken housing market. "Now that we are out of the financial storm, this is the time to fix our broken housing finance system. If we don’t, we will be no better prepared for the damage that will rain down when the next tempest comes. Fortunately, we have an opportunity to begin the effort in earnest when the Senate Banking Committee takes up the bipartisan Johnson-Crapo bill to reform our broken housing finance system. The goal is clear: to at last end the perverse 'heads you win, tails the taxpayer loses' model that sent Fannie Mae and Freddie Mac into conservatorship, and replace it with a housing finance structure that is sustainable and effective." Gene B. Sperling in Politico Magazine.

McARDLE: Poor people have carbon footprints, too. "Other people in other countries emit much less. But most of those people are poor -- not picturesquely poor, but inconveniently, coldly and tiredly and hungrily and boredly poor. They too would like fresh fruit and vegetables and animal protein every day, heat and air conditioning in their homes, a room to themselves, and the sort of jobs that require air travel rather than, say, sitting by a roadside all day with a small pile of vegetables or prodding an ox through a field. All of this will, as far as we know now, require massive amounts of fossil fuel." Megan McArdle in Bloomberg View.

BROOKS: The amazing Piketty cultural phenomenon. "Politically, the global wealth tax is utopian, as even Piketty understands. If the left takes it up, they are marching onto a bridge to nowhere. But, in the current mania, it is being embraced....The reaction to Piketty is an amazing cultural phenomenon. But it says more about class rivalry within the educated classes than it does about how to really expand opportunity. Of course, this perspective could just be my own prejudice. When it comes to cultural analysis, I, like Piketty, am quasi-Marxist." David Brooks in The New York Times.

DOMENECH: What the right should learn about inequality. "For decades, the GOP economic agenda has amounted to 'lower taxes' -- but for many Americans, high taxes are less of a concern than anti-growth economic policies. Those on the right should be prepared to make the case that the warped relationship between Wall Street and Washington needs to be fixed, that socialized risks and privatized profits are fundamentally unfair, and that Mr. Piketty’s equality-focused policy solutions, and those of the left, would hurt income mobility and systematically destroy wealth and growth." Benjamin Domenech in The Wall Street Journal.

THIESSEN: Sorry, Democrats; Obamacare is still electoral kryptonite. "As Thomas Mills, a Democratic consultant in North Carolina, recently put it 'Democrats need to start making the case for Obamacare. They all voted for it, they all own it, so they can’t get away from it. So they’d better start defending it.' That advice calls to mind one of my favorite Far Side cartoons: A cat peers into a clothes dryer marked with a sign that reads 'CAT FUD -->' while a dog hides beside the machine thinking, 'Oh please, oh please....' So will Democrats take the bait, and decide it’s safe to start defending Obamacare? The GOP is thinking: Oh please, oh please...." Marc A. Thiessen in The Washington Post.

MILBANK: Immigration advocates are turning the tables on Obama. "It’s a shame President Obama was in the Philippines on Monday, because the former Chicago community organizer missed the chance to see his White House being picketed -- by a Chicago-based group of community organizers. Obama met with immigration activists last month, urging them not to protest his record level of deportations but to focus instead on House Republicans, who are blocking immigration reform. On Monday, activists let him know what they thought of that advice." Dana Milbank in The Washington Post.

Traveling animal interlude: 3-pound dog and his luggage.

2. The Fed's meeting should be a yawner — and that matters

Not much to see here, folks — and that's a good thing. "The outcome of this week’s gathering of Federal Reserve officials in Washington is expected to be a yawner -- and that’s a good thing. The central bank will likely vote to do the same thing it did at its last meeting -- and the one before that, and the one before that: Reduce the amount of money it is pumping into the economy by another $10 billion. The Fed’s purchases of long-term bonds, known as quantitative easing, are widely expected to end in the fourth quarter of this year. The steady phase-out has become so routine and predictable that QE has virtually vanished from the conversation on Wall Street and among Fed watchers." Ylan Q. Mui in The Washington Post.

Explainer: What to expect from the Fed. Mohamed A. El-Erian in Bloomberg View.

There is some behind-the-scenes suspense, though. "The board will be down to three members (Janet Yellen, Dan Tarullo and Jay Powell) when Jeremy Stein leaves at the end of May to return to Harvard -- unless the Senate acts soon on pending nominations of prominent international economist Stan Fischer and former Treasury official Lael Brainard. So what? One, this influences the balance of power inside the FOMC, and the market-moving statements it makes about its plans at the end of each meeting....Two, this prolonged confirmation process is giving potentially good nominees reason to turn down presidential nominations." David Wessel in The Wall Street Journal.

One bright spot in housing: Pending home sales jump, end losing streak. "Contracts to buy previously owned U.S. homes rose in March for the first time in nine months, a sign the housing market could be stabilizing after suffering a setback from a rise in interest rates and a severe winter....Sales stumbled last summer after that the U.S. Federal Reserve signaled it would soon reduce its economic stimulus efforts, pushing interest rates higher. A harsh winter also helped keep potential buyers out of the market." Reuters.

Housing's drag on good-paying jobs. "The situation is a bit chicken-and-egg. Homebuilders, for example, have been slow to pick up the pace of construction, which in turn is squeezing the housing market. And without good job growth among the young, middle-class workers who would be first-time buyers, builders are focusing largely on the smaller market of higher-end properties. With interest rates on the rise, it will be hard to break out of this cycle and see a fuller rebound in middle-class jobs." Karen Weise in Bloomberg Businessweek.

Is the evidence for a low-wage recovery really there? "Data on employment growth by industry provide a poor proxy. There are many highly paid managers working in the low-paid retail trade sector, just as there are many low-paid janitors working in the high-paid professional services sector. The industry of a job tells you something about the type of building you walk into when you go to work, and not much about the type of work you do, or how well you are paid. Figuring out whether the recovery is creating 'good jobs' or 'bad jobs' requires looking deeply into skill levels and job responsibilities -- something this research group didn’t quite do." Justin Wolfers in The New York Times.

Why Senate Democrats are planning a minimum-wage vote they know will fail. "A failed procedural vote might pay political dividends for Democrats by creating a contrast with the GOP -- but it doesn’t get low-paid workers any closer to a pay bump. The $10.10 proposal has broad opposition among the GOP and there is little appetite among Republicans to even debate the bill, despite outliers like Sen. Bob Corker (R-Tenn.)." Burgess Everett in Politico.

Other economic/financial reads:

Obama team pushes Freddie-Fannie overhaul endgame. Nick Timiraos in The Wall Street Journal.

Tech support interlude: Internet lag in real life.

3. Why the Treasury is watching the Pfizer-AstraZeneca deal

Why is Pfizer going after AstraZeneca? One word: Taxes. "Neither company's research labs have covered themselves in glory lately, though there are a few hopeful signs. So why would Pfizer be willing to pay so much for AstraZeneca? One reason would be to get a comfy new tax home. Pfizer, founded in Brooklyn in 1849, would become a British company by combining with AstraZeneca, lowering the new company's tax rate dramatically. There's even a euphemism for this kind of move. It's called a tax inversion in the trade. Pfizer's tax rate was about 27 percent last year. In the U.K. the corporate tax rate stands at 21 percent and will fall to 20 percent in 2015." Scott Hensley in NPR.

Could the move breathe life into tax reform? "Pfizer’s disclosure that as part of the deal it would move its tax domicile to the UK faces political headwinds in Washington, where President Barack Obama’s administration has raised alarm over what has become a trend among US multinationals. Dave Camp, the senior Republican tax writer on Capitol Hill, said: 'It is a real problem when the tax code provides an incentive for US-based companies to move overseas, often times taking good jobs with them.'...Pfizer’s proposed change in tax domicile revived calls for reform of the US tax system from members of Congress who say it is harming the American economy." Andrew Ward, Vanessa Houlder and Barney Jopson in The Financial Times.

Why the move is sort of like a tax shelter. "Pfizer’s (PFE) $98.7 billion offer for AstraZeneca (AZN) is hostile on multiple fronts: The London-based target has spurned the offer as too low, while the cost to the U.S. Treasury is potentially high....the potential combined company, based in London, would have to pay U.K. taxes on profit earned only inside the U.K. itself, unlike companies domiciled in the U.S., which are taxed on their worldwide income. That difference could yield a windfall for Pfizer, if it brings some of the $69 billion of earnings it has stashed in overseas tax havens to London." Peter Waldman in Bloomberg Businessweek.

As labor picture improves, Treasury enjoys biggest debt paydown in 7 years. "The drop in net marketable debt will be $78 billion in the April-June period, $38 billion more than the paydown projected three months ago, with an end-of-June cash balance of $130 billion, the Treasury said today in Washington. The improvement will be short lived -- net borrowing of $169 billion is projected next quarter, with $130 billion in cash Sept. 30. A faster pace of hiring and soaring corporate profits are lifting tax receipts while spending increases at a slower pace. That’s helping shrink a budget deficit projected this year to be the smallest as a share of the economy since 2007." Kasia Klimasinska in Bloomberg.

Bad weather interlude: High winds lead to runaway port-a-potty.

4. How private is your cell phone?

The Supreme Court is about to decide on the future of cell phone privacy. "Do police have the right to hunt through your iPhone's treasure trove of text messages, photos, and call history during an arrest? The Supreme Court will attempt to answer that question Tuesday as it hears two related cases that consider the privacy protections of personal data in cell phones. At issue in both cases is whether -- and to what extent -- law-enforcement officials have the right to warrantlessly search phones during or shortly after an arrest. Potentially far-reaching decisions are expected in June." Dustin Volz in National Journal.

How one distinction between the two cases could shape the outcome. "Factual distinctions between the two cases before the high court suggest the justices might be interested in setting different rules depending on whether the phone is in active use during the investigation." Jess Bravin in The Wall Street Journal.

Scalia will play a surprisingly key role in the case. "In the past, defense lawyers did not look first to the conservative Scalia as an ally. But in recent years, he has insisted on forbidding the kinds of "unreasonable searches" that he says would have troubled the framers of the Constitution....With an eye toward Scalia, lawyers in the cellphone case have carefully quoted the Fourth Amendment, which protects the 'right of the people to be secure in their persons, houses, papers and effects.' In the 21st century, they say, many people store their 'papers and effects' on a mobile device." David G. Savage in the Los Angeles Times.

Free speech at issue in case involving fired public employee. "In a case important to millions of public employees, the justices considered whether the First Amendment protects Lane from retaliation when he testifies in court about the misconduct he has observed. What seems like it might be an easy question is complicated, though, when government acts as employer. In previous rulings, the court has said that public employees have free-speech rights when they are acting as citizens, not when they are testifying to what they learned in their jobs or are required to speak about because of their specific duties. The justices clearly seemed sympathetic to Lane." Robert Barnes in The Washington Post.

Can clergy take advantage of tax-free cash for housing? "Rabbis, evangelicals and other religious groups agree on at least one thing: the sanctity of a tax break. A hodgepodge of religious organizations are siding with the IRS in a case likely to make its way to the Supreme Court over whether ministers and other clergy can take advantage of tax-free cash to cover housing....The IRS won the backing of more than a dozen groups as it defended the exemption before a federal appeals court this month. The appellate court review is expected to take months, but legal experts say the case could find its way to a Supreme Court appeal as early as this year." Kelsey Snell in Politico.

Other legal reads:

U.S. Justice Department to collect, study arrest data for racial bias. Julia Edwards in Reuters.

U.S. justices agree to hear homeowner case against bank. Lawrence Hurley in Reuters.

Food interlude:Watch this man cut watermelon.

5. How to address rape on college campuses?

Administration to press colleges to do more to address rape. "Reacting to a series of highly publicized rapes on college campuses, the White House on Monday released guidelines that increase the pressure on universities to more aggressively combat sexual assaults on campus....Many advocates for such a crackdown may see the proposals as an inadequate response to a crisis, but the White House is hamstrung about what it can do without congressional action and has just begun its own attack on the issue." Jennifer Steinhauer in The New York Times.

Primary source: "Not Alone," a White House report.

What will the guidelines do? "Among other recommendations, the task force calls on colleges to: Conduct 'climate surveys' beginning next year to gauge the prevalence of sexual assault and learn more about students’ attitudes toward it. Train campus officials on how to respond to victims of sexual assault. Amend their existing policies to provide victims with greater options to speak confidentially with certain campus officials. Adapt their campus disciplinary processes to abide by new directives from the Department of Education. The report also makes clear that the federal government will take a harder line on enforcing Title IX...and provide much more information about it." Libby Sander in The Chronicle of Higher Education.

Other education reads:

Indiana approves Common Core replacement standards. Summer Ballentine in the Associated Press.

Education a defining issue for the 2016 GOP class. Thomas Beaumont in the Associated Press.

Brandishing budget power, state lawmakers pressure public universities. Adrienne Lu in Stateline.

Musical performance interlude: "The Star-Spangled Banner," sung in a minor key.

Wonkblog roundup

Congressional Republicans have more Facebook fans, but Democrats are more energized. Christopher Ingraham.

U.S. job growth is coming in all the wrong places. Emily Badger.

An $84,000 hepatitis drug is giving states and insurers a major headache. Jason Millman.

Trucking used to be a ticket to the middle class. Now it’s just another low-wage job. Lydia DePillis.

Why housing reform could make your mortgage more expensive. Dina ElBoghdady.

What you need to know about the Fed’s meeting this week. Ylan Q. Mui.

Et Cetera

U.S. infrastructure: A broken system. Robert Wright in The Financial Times.

How Congress is actually holding down Medicare spending. Austin Frakt in The New York Times.

Doctors get millions from Medicare after losing their licenses. David Armstrong and Caroline Chen in Bloomberg.

Global swaps regulators said to hold talks with industry. Silla Brush and Jim Brunsden in Bloomberg.

Federal Sandy help drying up. Heather Haddon in The Wall Street Journal.

Patients are paying more up front. David Markiewicz in The Atlanta Journal-Constitution.

Got tips, additions, or comments? E-mail us.

Wonkbook is produced with help from Michelle Williams and Ryan McCarthy.



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