Creon Butler
Great, well, hello, everyone. My name is Creon Butler. I’m the Director of the Global Economy and Finance Programme at Chatham House. And I’m really delighted to welcome you all today, both those in the room here, but also those online, to this morning’s breakfast session, one of the first we’ve been doing since the post COVID era, on the future of economic statecraft, with Wally Adeyemo, US Treasury Deputy Secretary.
The unprecedented economic and financial sanctions deployed by the West, in response to Russia’s unprovoked attack on the Ukraine, are clearly having an enormous economic effect on the Russian economy, and clearly play also a central role in the West’s response to Russian aggression. They illustrate very clearly the continuing importance of economic statecraft in international affairs, and very significant role that financial, regulatory and economic tools can play in the pursuit of foreign policy.
And our guest today has been at the centre of US policymaking, in this area, for some time, and we’re extremely grateful, Wally, for you for sparing the time to be with us this morning, and to give us your perspectives on this issue. Wally Adeyemo was sworn in as US Deputy Treasury Secretary in March of 2021, where he serves as US Treasury Department’s number two, and Chief Operating Officer, and he has taken the leading role in the Treasury’s national security, economic inequality and pandemic related economic recovery work. And of course he also supports the US Treasury Secretary, Janet Yellen, in the department’s overall goals of promoting economic growth and ensuring the financial security of the United States.
Now prior to his current stint at the US Treasury, Wally had a very distinguished career in US economic policymaking, both domestic and international. And I actually first met him when he served as President Obama’s Sherpa in the G7 and G20 for the period 2015 to 2017, and at that time he was Deputy National Security Advisor for International Economics, and Deputy Director of the National Economic Council.
But prior to that, he had been Deputy Chief of Staff and Senior Advisor to both Tim Geithner and Jack Lew, and outside government he has held a number of key posts. He was the first President of the Obama Foundation, has been a Senior Advisor at the Center for Strategic and International Studies, and has also been an Advisor at Black Rock, and he’s also been a member of the Aspen Strategy Group.
Now before I ask Wally to make his opening remarks, I’d just like make a few quick housekeeping points. First of all, this event is on the record, we have an hour in total and we’ll have to stick to that time, because I think Wally has a train to catch, and after he has spoken, I will put a few questions to him, and then we will open it up to the audience, both here and online. If you here in Chatham House, and you have a question, please put your hand up, and when I ask you to speak, a colleague of mine will come with a mic on a boom, and you’ll have the opportunity to put your question, but please stay seated, otherwise it all goes terribly wrong.
And if you are online, you can put your questions in at any time, through the Q&A chat function, and depending on the time, I may ask you to put your question directly or I may read it out. Please do put your questions in but please do also try and keep them as short and to the point as possible. Excellent, right, Wally, over to you.
Wally Adeyemo
Well, thank you so much for hosting me today. It’s so great to be here at Chatham House, to have some of you in the room, and some of you also online with us, and I want to thank Chatham House for hosting me and also the US Embassy for helping to organise this event.
Being at Chatham House, I found to be the right place to give this speech, because this institution had played such a key role in helping to develop ideas that contributed to the institutions that formed the bedrock of the post-World War Two international economic system, from John Maynard Keynes’ study on gold in 1930, that later helped shape the Bretton Woods System, to research that influenced the creation of the International Bank for Reconstruction and Development, now a part of the World Bank. Chatham House left an indelible imprint on the arc of the 20th century, helping to lay the intellectual foundations for the rules, norms and values that underpin the international economy and the decades of growth and poverty reduction it has fostered.
After World War Two, leaders like Keynes, Treasury Secretary, Henry Morgenthau and others set out to create an international economic system that would promote economic integration, help rebuild war-torn regions, and engender shared global prosperity. A key part of this vision was the hope that greater economic integration would reduce the likelihood of war in the future.
In addition to the foundation built on these shared principles, the system included the creation of new institutions; The International Monetary Fund, the World Bank, and the GATT, which would eventually become the World Trade Organization. These institutions reflected not only a vision of market-based economics exchange, but also a commitment to the principles that make this economic system possible; freedom, fairness and the rule of law.
From its start, the system had its challenges, which successive generations have worked to address, through continued investment in its ongoing evolution. Still, it’s remarkable to consider its success. These rules, norms and values created an economic framework that has allowed workers, businesses and governments to dramatically increase world trade, develop an international financial system that has expanded financial access to billions of people around the world, and build global supply chains that dramatically reduce the cost of goods for consumers.
These developments led to the greatest reduction in poverty and amongst the fastest economic expansions in human history. From 1955 to 2001, the global extreme poverty rate fell from about 50% to 25%, and as of 2018, it stood at roughly 10%. And during the immediate post war period, the countries most central to this principle-based approach to economics, members of the OECD, enjoyed historic economic expansion, with annual economic growth of 4 to 5% on average, in the 1950s and ‘60s.
In the subsequent decades, nearly every country in the world has sought to join the institutions that form the core of the economic systems our allies and partners created. Yet today, the relative peace and prosperity we have enjoyed since World War Two are under threat from another revisionist power. Russia’s brutal and unprovoked attacks of Ukraine is, at its fundamental level, a rejection of the principles that undergird the post war system we collectively built.
The idea that you can violate the sovereignty of another country and enjoy the privileges of integration into the global economy is one our allies and partners will not tolerate, a position reflected in our swift and decisive actions to counter Russia’s aggression. Over the course of the last month, the United States and our allies and partners have implemented a set of unprecedented measures to severely restrict Russia’s access to the international financial system in the most robust co-ordinated response to a collective threat since the attacks of September 11, 2001.
Our multilateral response demonstrates that the international financial system and economic marketplace are not open to those that fail to respect the core principles of territorial integrity and self-determination. At the start of the Biden administration, Secretary Yellen asked me to conduct a review of the use of sanctions since the terrorist attack of September 11, 2001. The review included detailed conversations with our allies and partners about what has worked over the 20 years period, and what more is needed to collectively improve the usefulness of this essential tool of foreign economic policy.
One of the most important lessons we learned from the review was the value of taking actions multilaterally, whenever possible. When it comes to using economic tools to advance our national security, collective action significantly increases the cost we impose on our adversary, while providing opportunities to limit the collateral impact on our allies and partners. The economic crisis the Kremlin faces is a direct result of the multilateral approach President Biden has taken to using sanctions and export controls to limit Russia’s ability to project power.
The United States, the United Kingdom, European Union and Canada for example, account for nearly 50% of Russia’s international trade, and when it comes to technology, the key components of the most advance semiconductors critical to Russia’s military industrialised complex are only made by a select few countries, including Taiwan, Japan, South Korea and the United States. The broad coalition we have built in response to Russia’s actions has enabled us to inflict significant and immediate damage on Russia’s economy.
Over the long-term, it will put us in a position to degrade Russia’s ability to project power by forcing the Kremlin to choose between spending its dwindling resources on propping up its domestic economy or continuing to finance the invasion of Ukraine and other destabilising activity. The Russian economy is forecast to contract at its fastest pace since the Kremlin defaulted on its debt in 1998, because of our collective actions. Today, Russian officials are attempting to manage a financial crisis, implementing draconian capital controls to prevent foreign investors from taking money out of the country, and limiting the amount of foreign currency ordinary Russians can take out of their bank accounts.
This is because anyone that can take money out of Russia is doing so as quickly as possible, and in order to stabilise the financial system, the Russian Central Bank was forced to more than double its interest rates, from 9.5% to 20%, which will dramatically slow economic activity in the country. In response to our actions, President Putin has said the Russian economy must fundamentally transform. What he didn’t say, the truth is that this transformation will weaken Russia’s economy, while leaving the Kremlin with fewer resources to pursue its aggressive and autocratic agenda in the future.
And I want to be clear, our allies and partners are committed to taking additional significant steps to constrain Russia’s economy for as long as Russia’s invasion continues. I’m here in Europe this week to advance our collective efforts to limit the financial resources available to the Kremlin to pursue this war, stamp out avenues for evasion of our sanctions, and collectively target key sectors of Russia’s economy that are critical to the Kremlin’s ability to sustain the invasion of Ukraine and project power in the future.
Two weeks ago, the US Department of Treasury and the US Department of Justice launched a multilateral taskforce in co-ordination with our partners from the United Kingdom, the European Commission, Germany, Italy, France, Australia, Canada and Japan, to identify and go after the assets of key Russian individuals complicit in Russia’s bellicose foreign policy. This taskforce, called REPO, which is short for Russian Elites, Proxys and Oligarchs, is led by Finance Ministers, justice or home ministries of each member jurisdiction, helping them to share information and intelligence, and to facilitate the enforcement of our sanctions, namely to freeze and seize the assets of sanctioned individuals.
Many of these individuals are attempting to move assets in order to avoid accountability. To those considering assisting the elites in hiding their ill-gotten wealth, we will find you. Now let me be clear, we are prepared to sanction those providing material support to sanctioned Russian elites, and will hold them accountable for their role in enabling this unjustified war of choice. Now that our actions have blunted Russia’s ability to use its central bank, and we went after its elites’ assets to prop up its economy and fund Putin’s brutal war, we’re going to increasingly focus our efforts on going after industries that are critical to Russia’s ability to project power, purchase the military equipment necessary to continue the war effort, and invest in other tools of repression that are part of the Kremlin’s playbook.
As we continue to provide Ukraine with equipment to defend their country, we will focus on using sanctions and export controls to frustrate the Kremlin’s ability to build military equipment. Last week, we took actions against a number of firms tied to Russia’s military industrialised complex. We are also going after the front companies and proxies the Kremlin is using to support the invasion of Ukraine.
Now we are planning to target additional sectors that are critical to the Kremlin’s ability to operate its war machine, where a loss of access will ultimately undermine Russia’s ability to build and maintain the tools of war that rely on these inputs. In addition to sanctioning companies and sectors that enable the Kremlin’s malign activity, we also plan to take actions to disrupt their critical supply chains. These are the actions we will take in co-ordination with more than 30 partners and allies that have joined our coalition in response to Russia’s invasion of Ukraine.
But our ability to effectively use economic tools to hold Russia accountable is the result of the collective investment we made in building an international economic system after World War Two, through the construction of financial payments and trading systems to support free market exchange and widespread economic prosperity, and through economic isolation of actors that failed to respect our shared principles.
In the aftermath of the Second World War, the United States and our allies across the Atlantic, made unprecedented investments in new systems of international institutions and rules, something that had never been previously attempted on so grand a scale. To rebuild the economic capacity of nations committed to the principles the allies defended during the war, the United States undertook the Marshall Plan, an investment of more than $115 billion in today’s dollars in the reconstruction of Western Europe’s economy. This monumental effort was about more than just economic recovery. It was an example of what economic diplomacy can accomplish, the empowerment of like-minded allies and partners through economic means.
As General Marshall put it in his 1947 speech, his idea was a plan against hunger, poverty, desperation, and chaos. Its purpose should be the revival of the working economy in the world, so as to permit the emergence of political and social conditions in which free institutions can exist. The ideas developed at Chatham House nearly a century ago are reflected in the present shape of the international economy. Most critically, the Bretton Woods Agreement represented the first attempt in world history, to create an international monetary system, with rules to facilitate international exchange and promote economic prosperity. The institutions it created remained relevant today because of the credibility and principles they represent.
The impact of our collective actions in Russia is a testament to the enduring strength of this international economic architecture and the international corporation needed to sustain it. Let me be clear, our ability to so swiftly curtail the Kremlin’s ability to fund its priorities and degrade its ability to project power is a direct result of our cooperation and collective investment in the international economic system. It is because our governments worked together during the 20th century to build an integrated and comprehensive international financial architecture that the exclusion [inaudible – 23:06] system is so costly today.
A country like Russia will struggle to operate its economy without access to this system, despite Moscow’s best efforts to disentangle from it and build up defences for this very scenario, because of the power of the system we have collectively built. That cooperation is something to revere, and it’s something we should seek to build upon in the coming decades, as the international economy continues to evolve.
A key element needed to sustain our collective action against Russia, as well as ensure that these tools are available in the future, is ongoing investment in strengthening global economic system. While the international economic system today is strong and central enough to inflict this kind of damage on rogue actors like Russia, now is the time to take the steps needed to ensure it remains so tomorrow. We must act with the same foresight that Keynes and others did in forging the foundations of a system that would underwrite decades of shared prosperity. This starts by taking practical steps to demonstrate to our citizens the ability of the system and institutions we have built to address problems that cannot be resolved within our borders alone. I see at least four concrete areas where we need to act today.
First, we must work together to address the challenge of food insecurity arising out of Russia’s aggression. Much of the world is unable to get access to wheat and other products coming out of the Ukraine due to the invasion, and Russia’s interference with shipping in the Black Sea is making the transportation of commodities difficult. In addition to a lack of concern for the lives of the Ukrainian people, the Kremlin has shown a disregard for the pain and suffering its invasion will cause to those that lack access to food and other vital agricultural products. We must work collectively to address this challenge, using the tools that exist at the international organisations we helped to create.
Second, we must finalise the international agreement on global minimum tax the Finance Ministers helped to reach at the OECD last fall. As Secretary Yellen has said, this deal will remake the global economy into a more prosperous place. Rather than competing on our ability to offer lower rates, America will now compete on the skills of our people, our ideas and our capacity to innovate. This is the most significant global tax agreement in more than 100 years, with 137 countries joining the agreement, demonstrating the world’s capable of working together to address critical economic issues. We’re working with Congress at home to take the steps we need to complete this agreement, and we encourage others around the world to do the same.
Third, we must continue working together to provide the financial resources needed to fight the pandemic, in our respective countries and around the world. The pandemic, like so many of the other challenges we face, does not respect boundaries or borders. None of us can beat this on our own. Today, the United States have provided more than 500 million COVID-19 vaccine doses to more than 110 countries and economies around the world, and made available nearly $20 billion in assistance to fight the virus. These actions are part of the broader set of G7 commitments since the start of the pandemic to provide two billion vaccine doses around the world. We must build on these efforts to keep our citizens around the world safe and healthy, as well as demonstrate the importance of our collective actions.
Finally, we must work together to hone the use of economic sanctions and preserve the effectiveness of this tool. Many of the steps to do so, that we identified during our sanctions review last fall, match the lessons we’ve seen in Russia. In particular, that multilateral sanctions are more likely to succeed than those we undertake alone, but sanctions should be rooted in rigorous economic analysis, to determine appropriate targets and inflict damage on our adversaries, while minimising unintended spillovers, and that sanctions should be tied to clearly communicated discrete policy objectives, and designed to be easily reversable when those objectives are met.
This moment has reinforced just how important joint action is in upholding our most fundamental commitments. As we move forward, both in continuing to combat Russia’s aggression and preparing our tools to take on the next threat, we should continue to work to align our authorities and maximise opportunities for cooperation. I know this is a priority for the Biden administration, and we look forward to continuing to collaborate closely with our allies and partners around the world on it.
The last few months have been challenging, to say the least. We’ve had to watch an unspeakable and utterly unnecessary tragedy occur on a global stage. I know many of my counterparts in this country’s government and others worldwide have worked around the clock, to take actions needed to confront this unprovoked and unjustified attack on Ukraine.
But to close on an optimistic note, from where I sit in the finance ministry, I have also been heartened by how the world has responded to this crisis. We’ve come together quickly and brought to bear the full force of our economic tools. We have shown Russia that the international financial system has no place for rogue, belligerent actors, and we have remained connected, connected with our allies in Europe, Asia and elsewhere to make sure that essentially, we’ll work together to fundamentally keep the system working.
We have far further to go to fully address this threat, and restore justice for the people of Ukraine, but what I have seen so far gives me hope that we will continue to do so together. Thank you again for taking the time to join me, and I look forward to taking your questions.
Creon Butler
Wally, thank you very much. There’s an awful lot there, I have to say, absolutely fascinating. I mean, you talked both about the immediate near-term direction in which sanctions are going to go, but I think also, in a very interesting way, you placed it in the context of both the history of our international economic architecture and how that will evolve. And I think that’s the point I’d like to start on, because if you go back to the global financial crisis, when we also had a major shock, and it was all about how we rebuild the economic architecture, how we strengthen it, we saw that very much in the context of the G20, the premier economic forum.
Now today, some of the members of the G20 are going to look at what is happening now, and they’re going to say, actually, just as you have said, it’s that architecture that exposes us, that weakens us. We’re not going to cooperate or collaborate in the further developments of that architecture, and yet if those other really big economies, China and others, are not involved, then the architecture’s not going to work in the way we need to do it. So what is your response to that? I mean, in a sense, haven’t we – I mean, we absolutely had to do what we’ve done, but haven’t we, to some extent, undermined our ability to strengthen and build the economic architecture in the future?
Wally Adeyemo
So, I fundamentally disagree that we have undermined that ability, because I think what we have actually done is that we’ve made very clear that you can enjoy the privilege – some of the privileges and reject others, and I think that fundamentally strengthens it by telling those people who benefit from the architecture, which is every country in the world, that in order to be a part of this, you need to be all in, and you need to be fully participating, both in the rules to your benefit, but also to ensuring that the system remains stable.
And what Russia has done, invading Ukraine, is a demonstratable violation of the principles underlying not only the economic architecture, but the values, rules and norms that have been established since World War Two. So the actions that we’ve taken against Russia, I think, demonstrate to our members that we will use the – that we will apply these rules fairly and that we are committed to making sure that we strengthen them over time.
My view is that we’re in a position where more than 30 countries, representing the majority of the global economy, have taken actions to send a clear message to Russia. That clear message could only be sent because of the strength of the global architecture, and my view is that those countries remain committed, and many more are also committed to the idea of further strengthening the economic architecture going forward.
Creon Butler
Thank you. One other feature of the current campaign, I mean, you’ve set out very clearly the official sanctions and the role that official sanctions, and there are some – I mean, never before have the assets of a central bank for such a large economy been frozen, and there were, you know, a whole range of things that basically we had not seen before. But one of the features of what we’ve seen is the way the private sector has responded to the official sanctions, and to some extent that’s, you know, their fear of the US Treasury, of, you know, not complying in some way with the US Treasury and other finance ministry requirements, but is there also another element in this, perhaps related to the ESG movement, and if so, how – do you think that’s the case? And if so, how important do you think that is, in the way sanctions now operate?
Wally Adeyemo
So, my view is that part of what is happening here is you’re seeing companies and our citizens react to what they’re – the horrific events they’re seeing unfold, and part of my job is speaking to CEOs of companies, both in my country, the United States, but around the world. And many of them have taken the steps that they have, to exit their businesses in Russia, or to stop doing business altogether with Russian entities, out of a moral sense of this being the right thing to do, because their stakeholders and their company have demanded that they take these actions.
While our sanctions have had a significant impact on the Russian economy, the actions of these CEOs, these companies, which also believe deeply in this international system, have also had a profound impact that will be long-lasting on the Russian economy going forward.
Creon Butler
And I guess, I mean, your view is that that will be lasting, because in a way, something we don’t – from the official side, one doesn’t control, it’s a decision they’ve taken now, I think you were saying that actually many of these decisions are taken in a permanent way, is that – that would be the case? It’s not something that would sort of erode gradually, as events develop?
Wally Adeyemo
So, it depends, so if you’re making a major capital investment in Russia, and you decide to pull away from that, you’re going to think twice before you go back and you put a great deal of capital back into the Russian economy. You’re going to want to make sure that you see that there’s stability. Fundamentally, the thing that companies care deeply about is making sure that they have a clear sense as to the rules of the road, that they are working in a jurisdiction where they feel like they have the ability to make decisions.
But today, if you’re an international investor who’s invested in the Russian Stock Exchange, what the Russian government has said is that you can’t sell your shares. They put on significant capital controls, they’re making it hard for you to do business. It becomes hard for a CEO or a company or a board to make a decision that they’re going to invest more money into a country that’s wanting to do something like that going forward.
Creon Butler
Thank you very much. Well, one further question before we move to the audience. One of the very striking features of the last few weeks has been the way in which the European Union has responded to Russia’s attack on Ukraine, by fundamentally changing its energy policy, at least the key members have changed their energy policy. And there is a plan to essentially wean Europe off gas, and obviously one can see – off Russian gas, and one can see this aligns with longer term European priorities in relation to achieving net zero.
But there are a number of governments, both – I mean, one – including the UK, but also in Europe, that have responded to the immediate crisis, by reducing taxes on hydrocarbons, and yet, from at least an economic point of view, the argument would be you should use all your resources to try and accelerate the transition, rather than, in a sense, incentivise use of hydrocarbons. And I know this is an area you obviously work with when we don’t have this kind of a crisis, but I wonder what your perspective on that is? Do you think it’s something that’s defendable, or do you think actually one should, indeed, try and put all one’s effort into accelerating the transition now?
Wally Adeyemo
So, we face an immediate crisis with regard to energy, because we are so dependent on fossil fuels at the moment, and we, amongst G7, amongst our allies, are all committed to the transition. But in the immediate term, one of the things that I know President Biden, the Prime Minister here, and our allies, are all committed to is doing everything we can to mitigate the pain and suffering of our people, due to President Putin’s illegitimate invasion of Ukraine.
And that will mean that we make a number of tactical decisions, including investing in increasing supply in our country, for example, and making sure that we’re in a position where we can help provide LNG and other energy commodities to our allies and partners around the world, to help reduce the cost of those things to the people in our economies going forward. This is both the way to reduce the pain that we’re feeling, but also by reducing the price, we’re reducing the amount of money that the Kremlin is making off of selling this good.
But it doesn’t take away from our long-term objective of moving to the clean energy transition, for two reasons. One is the obvious one, that climate change demands it, but the thing that we have to all recognise is that this is also a national security priority for all of us, getting to a place where we’re not dependent on fossil fuel markets that are usually defined globally, rather than defined by our individual countries.
So, tactically, at the moment, we’re going to have to increase the supply in order to ensure that we provide – make sure that the market is well supplied going forward, and we’re doing things like using our Strategic Petroleum Reserve in the United States to do that. The President’s committed to releasing 90 million barrels through this fiscal year, and is working with our allies and partners to do that, but we all accept that our long-term goal needs to be to move to a – the clean energy transition as quickly as possible.
Creon Butler
Well, I mean, I think the use of the reserve is, you know, exactly the right thing, because in a way, you know, that doesn’t lock in any long-term use of hydrocarbons, but some of the proposals for building LNG plants and so on, one is talking about investment time horizons that could go well beyond actually when we will need that fuel. And obviously the market will have to decide whether they’re going to build these things, with that in mind, but I guess, I mean, is that something that you are comfortable with, let the market decide, in a way?
Wally Adeyemo
So, I talked about the idea of – in the speech, of the fact that we are – we built a system that allows markets to drive things. The key is to make sure that governments are creating the right regulatory environment and the right price signals for those markets, and I think that ultimately, we continue to be very clear about the fact that we know that in the near term, we’re going to need more hydrocarbons to ensure that the markets are well supplied.
But our long-term ambition is to get to a clean energy future as soon as possible, and those are the places where we’re also going to be making a great deal of investments, both for – because of climate change demands it, but also because we know that, from the standpoint of our national security, it’s the best way to ensure that our countries are not tied to regimes like Russia going forward.
Creon Butler
Thank you. Great, well what I’d like to do is take some questions. We’ve got some great question coming online, and we’ve got some in the audience, so let’s start with the gentleman here, if you wait for the boom, and stay seated. I know who you are, but if you could just say who you are, that would be very good.
Mark Malloch Brown
Mark Malloch Brown, President of the Open Society Foundations. Just thank you for still remembering COVID and the importance of funding the response to the pandemic, and just an observation that obviously Congress knocked out your COVID supplemental two weeks ago, and I hope you can tell us that you’ll find a way of restoring it.
But the bigger question is, and I completely agree with you, Deputy Secretary, that there has been, you know, tremendous international support for the steps and the economic statecraft you’ve led on this crisis, there surely must be two longer term risks. When you have a system which, as you described, the West made the rules, and now applies them against Russia, it must create an incentive for China and Russia to look at an alternative system, and we’ve seen China sort of playing at that for quite a while.
There is a second more political risk, possibly, which is that, you know, we’re starting to see amongst African and Asian countries more talk of sort of a reasserted non-aligned movement than in the past, a reaction to the fear of getting sort of drawn in to an old European and old Atlanticist conflict. So do you think the international financial system you’ve praised this morning can hold up against those two threats of political non-alignment, and of an alternative Chinese/Russian economic system?
Wally Adeyemo
I think the reason of that is because the benefits of this system are greater than any alternative to it, and that benefit or benefits that countries throughout the world have enjoyed, and while we may have created the system, the system has adapted and moulded to members as they’ve come along to create huge reductions in poverty, and not just western countries but in countries like China and South Korea, and these countries have benefited a great deal from the system, as have countries in Africa.
The first issue that I spoke to was the idea of food security. Food security is a major issue that African countries and Middle Eastern countries are going to face, due to this – the conflict that Russia has started, and many of these countries are heavily reliant on grain from Ukraine. Some of them have already started to go to the IMF, to ask for assistance. Ultimately, it’s going to be the institutions that we helped build that are going to help these countries get through these dire situations, and that’s why I think, ultimately, they are going to remain part of this system, because the benefits of the system far outweigh the risks.
And that fundamentally, countries around the world see the value of the system, and the thing that they also recognise is that none of these countries, if you look in Africa or the Middle East, is interested in a bigger country that is their neighbour violating their sovereignty. Regardless of their views, they want to ensure that the rules that protected them from having their sovereignty violated remain in place, and they also want to benefit from the economic system that helps provide them with resources when they face challenges like food insecurity.
Creon Butler
Thank you. What I’d like to do is take a couple of questions over here, and then we’ll go online, and perhaps we could start with Renata, and then this gentleman here. So go to Renata first, we’ll take two questions, if that’s okay Wally, and then…
Renata Dwan
Thank you very much, Deputy Secretary. Renata Dwan here at Chatham House, Deputy Director, and it’s great to have you here with us this morning. I want to, in a way, build on the previous question by Mark, if I can. This Ukraine crisis is coming at a time where countries, also the same countries you’ve just mentioned in the global south, are grappling with an international economic system that did not meet their needs in the context of COVID, where we had protectionism, where we had economic nationalism, and where we had vaccine nationalism. So it’s already grappling to respond to a system that does not look like huge benefits. We’ve seen huge rises in extreme poverty, and a reversal of what was a historical trend, over the past two years.
I was really struck, as Creon was, by your very nice historical positioning of this economic diplomacy aligning with marshal diplomacy. But as you pointed out, marshal diplomacy was a positive contribution of funds, so could I press you a bit on the food insecurity, concretely what sort of vehicles are we going to be looking at to tackle food insecurity, what sort of funds are we talking about, and can we turn that mitigation narrative into a more positive support for countries that were already in food crisis before the Ukraine war?
Creon Butler
We’ll just – if you could just hold your – I’ll just take the other gentleman’s question, and then just to try and – I think we have an enormous number, and it’s…
David Walker
Terrific, thank you Deputy Secretary. David Walker from Citibank, thank you very much for your comments here this morning. Two quick questions from me, if I may. REPO, that you referred to, I just wonder, do we really have the tools and the focus, you know, to work on the problem of beneficial earners’ transparency of all those capital and flows around the world, and targeting the enablers, you know, of some of this activity?
And if you’ll permit me, a second question, slightly off topic, but you are one of the most prominent Nigerian/Americans and indeed, prominent Nigerians, I wonder if you might just make a comment or two about the outlook for Nigeria, and what is the US policy on support for what is going to be, what is, and what will be Africa’s largest economy?
Wally Adeyemo
So let me take the question about food security, but start with COVID actually, and I think you are right that the initial reaction to COVID was to pull back and to pull inwardly, but we realised that that didn’t work. It didn’t not only work for African countries, it didn’t work for the global economy, because ultimately, when you look at the variance, the variance came from around the world and got to your country, and it was proof specific of the importance of the system, that ultimately you couldn’t solve these problems within your borders.
This was why the G7 has now committed to providing more than 2 billion doses of the vaccine to countries around the world. And that we need to do more and we’re invested in doing more, using not only the ability to provide vaccines, but also financial support, working through institutions like the World Bank and the IMF. The SDR allocation that went through last year was a major provision of support to these countries in Africa and around the world that they have needed.
We’re working now to reallocate SDRs from the wealthy countries. The G7 is committed to $100 billion worth of SDRs being recycled, so I do think that the history of what we’ve done in COVID has not been fully written. We’re still living in the pandemic, and the thing that we have to realise in advanced economies, where COVID has gotten better, is that until we’ve solved this problem globally, we haven’t solved it anywhere, and that we’ve got to continue to work at that, and we’re committed to doing it.
In the same way food insecurity doesn’t only exist in the countries that you’ve mentioned, it exists around the world. Poor and working-class people in the UK, and in the United States and around the world are also going to see the increases in prices hurt them, not in the same way that it may hurt people in Africa and in the Middle East, and I think the key for us is going to be that we use institutions that we’ve built, like the World Bank and the IMF, again, to provide support, and that we continue to push all of us to ensure that we don’t do what we did in the early days of COVID, which is hoard and close our borders.
The last thing we want at the moment is for our countries to build up storehouses of things like wheat, that they don’t need, but rather we have to be in a place where we are willing to provide support to countries that need support, and to be in a place where we can make sure that we’re producing the resources that are needed, not only in our own countries, but around the world. We have the ability to do this, using these international institutions.
And what I would say is that policymaking is about alternatives. There is no better alternative than the system that we’ve built at the moment, to address the challenges that we face around the world. That’s why countries that currently are facing food insecurity or budget pressures, because of COVID 19, are coming to institutions like the World Bank and the multilateral development banks. The thing that we need to do is we need to continue investing in these institutions, so the benefits continue to outweigh any concerns that people have going forward.
To the question about Nigeria, I think it is a critically important economy, not only in Africa, but around the world. Nigeria is both going to be Africa’s largest economy, but it’s also the most populous country there. It’s a place where I know the President’s committed to continuing to engage, and I know it’s also a place where the G7 cares deeply about it, but fundamentally, our goal has to be to ensure that Nigeria has the resources to invest in its people. As part of the diaspora, I care deeply about the country, but I think when you think more about – when you think broadly about the country, and about the continent, it’s a place where there is a great deal of talent, and the key has got to be to make sure that you’re able to make investments to create opportunity for that talent to be realised going forward.
Your first question is one that I have unfortunately forgotten.
David Walker
REPO and beneficial ownership and neighbours of those comments.
Wally Adeyemo
So the reality is that for too long, Russian elites have been able to use trusts and complicated systems to try and prevent us from being able to find their assets. What this moment has allowed us to do is to build an international coalition that is going to go after those resources, and what we have seen is that these elites, knowing that we’re coming for them, have been moving their assets around the world, trying to move them into jurisdictions where they’re harder to find.
And the – by forming this coalition with several countries, we’re ensuring that we have the tools to meet that moment. You’re right, the beneficial ownership is one of the key issues that we have to address. In the United States, our Congress provided us with authorities just last year that allow us to build out a more robust beneficial ownership system, to do exactly this, go after and find these assets, and freeze them and seize them. I know here in the UK, Her Majesty’s Government has also taken steps to build out their beneficial ownership framework.
And part of my conversations when I go to Continental Europe is to talk to them about the laws as they exist today. But I think the thing that this moment demands of all of us is to think through what authorities additionally do we need to help make sure that we’re able to eliminate illicit finance within our economies? And how can we do this, not just as individual countries, because the global elites are able to use the global financial system, but how do we do it as an international community, in order to make sure that the system that we have built to help bring countries out of poverty is not used by elites to hide their ill-gotten wealth going forward?
Creon Butler
Thank you very much, and of course, that change will have much longer-term benefits, not just in relation to the immediate crisis. So I have two questions online, from Cristina Gallardo from Politico, and I want to link it to a question from our Director, Robert Niblett, which is about sanctions. So Cristina asks – well, she refers to President Biden’s discussion of a new organisation to ensure compliance or maintenance in sanctions.
And Robin says – he kind of responds to the point you made about responding to those who are providing material support to Russia, in developing its armaments and so on. And he wonders exactly what that may entail, and for example, if China were to be providing material support, would they be potentially open to US secondary sanctions? So those two sanctions points please.
Wally Adeyemo
I think the key for us was that we have always seen that if it’s capital controls, or if it’s sanctions, ultimately, what people attempt to do, what governments attempt to do, is evade those things, to find ways to get around them, to find enablers who help them skirt the rules, or the road that had been created. And we’ve been very clear, and the G7 was clear last week, in their statement, saying that any individual, any company, any country, that provides material support to a company, an individual, or to the Russian state and then sanctioned, we’re going to hold them accountable.
And what this will look like is that we’re going to use the authorities that already exist within our countries, in the G7, to do exactly that, and we’re paying a great deal of attention to avenues for illicit finance, frankly, because these have existed for a long time, and we’re prepared to use our sanctions authorities and other authorities, to go after them. Fundamentally the thing that we found, though, is that for the vast majority of countries around the world, be they big or small, for the vast majority of companies around the world, if they want to do a global business, if they want to do business in the United States, in the United Kingdom, in Europe, in Japan, they’re going to choose to follow our sanctions.
Because the risk of not following it, the risk of being sanctioned by us, greatly outweighs any benefit of doing business with a sanctioned entity. That’s what we found in our sanctions programmes overall, that’s what we expect to find here. It’s one of the benefits of doing something like this multilaterally, is that if someone were to violate our sanctions, and we were to take action against them, they don’t only lose access to the US economy or using the dollar, but they lose access to using the pound, the euro, the yen, any major convertible currency. And any serious company, any individual countries, are not going to want to take that risk going forward.
Creon Butler
In terms of the supply chain, I mean, you mentioned both finance, as one way to tackle that, but also trade sanctions. I mean, do you have a view as to which is the most powerful, or is it a, sort of, combination of the two, which is how one would approach it?
Wally Adeyemo
Our view is that you have to take an integrated approach to going after the challenges that, for example, the Russian supply chain presents. Since the Russian invasion of Ukraine in 2014, we have been taking deliberate actions, using sanctions tools, to go after their defence, industrialised complex. But what they’ve done is they’ve set up proxies and shell companies that have allowed them to purchase things, and which we’re also going after.
But the thing that we know that is true of Russia’s economy, like every other economy, is that they have a supply chain. Russia does not produce a number of the things internally that they need to build their military equipment, or to build things for their economy, so using our export control tool puts us in a position where we can disrupt that supply chain. Using the tools of financial sanctions put us in a place where can also freeze the assets, not only of those Russian companies that are helping to build the military equipment, but also to freeze the assets of the alternative suppliers, potentially, that they’re using, in order to go after them quickly.
So our goal is to use an integrated approach that includes export controls which will bite over time, and sanctions that will bite immediately.
Creon Butler
Thank you very much. So I have a couple of questions online, and then I want to come back to the audience here, and they both relate to your previous point, really, about the fact that there are – the only convertible currencies are actually those from democratic advanced economies. Two people, Douglas Andrews and William Crawley, I mean, they challenge that, and they say, well, can’t China, for example, develop an alternative financial system to the Western system, particularly when they look at how powerful sanctions applied through that system have been? That’s their question.
Wally Adeyemo
So my view is that every country around the world gets a great deal of benefits from the system that exists. There are going to always be the idea of people having the potential to find alternative routes of payments, and of taking actions, but it’s important for us to just look at the Russian example. From 2014, when Russia invaded Crimea, we took a number of sanctions actions against Russia. Russia then decided that they were going to try and put together a plan for withstanding potential future sanctions.
That included building up Central Bank reserves, trying to do everything they could to withdraw their economy and make it able to withstand sanctions from the United States, and we see what happened. Ultimately, we were able to immobilise Russian reserves and fundamentally even a Russian economy that was trying to pull away from being engaged with the United States, their financial system, financial transactions, FX transactions that were happening there, on a daily basis, 80% of those transactions involved the dollar.
So for a country that was trying to – its best to get away from our system and to create its – an alternative system, you’ve seen the impact, because, fundamentally, the benefits of the system is something that every country wants to take advantage of. Ultimately, you want to be able to sell your goods and services to the vast majority of the global economy, you want to be able to participate, and in order to do that, you have to take on the rules of membership and to be able to connect to that, you’re going to need to use convertible currencies fundamentally.
Creon Butler
Thank you very much. I’d like to come back to the room and I think I saw a couple of questions. Actually, I see a lot of questions, okay, so these will have to be very short and quick questions please, because we’ve only got about seven or eight minutes left. So if I could take you, sir, and you, sir, and then my friend here in the front? So, first of all, yeah, first question from you, sir.
Arthur Corvin Powells
Thank you for working hard to make the world a better place. My name is Arthur Corvin Powells. I’m a CEO of Project Ukraine, so we’re hiring all the amazing talent in Ukraine, you know, trying to rebuild the country, making plans as we go along. So on behalf of all of those people, I just wanted to thank you, but also ask you do you have any plans or what’s your thinking regarding sanctioning western elites, who have, you know, in effect, sold their soul for Russian oil, and have been promulgating propaganda for Kremlin and made the war quite likely more possible, no less than the oligarchs? So is there a way to disincentivise that going forward, to make sure that the western elites don’t do that by, you know, sanctioning them now?
Creon Butler
Thank you. Eric, this – I’ll take this question from this gentleman.
Erik Britton
Hi there, Erik Britton from Fathom Consulting. There’s a lot of evidence that we’ve looked at that suggests that sanctions are most effective in the threat, rather than the implementation phase, so the question, I guess the answer to which is going to be both, but I’m interested in the balance. Is the purpose of the sanctions regime that’s in place against Russia now primarily about trying to change outcomes in Ukraine, or is it primarily aimed at building credibility for future threats against other countries?
Creon Butler
Thank you, and final quick – further quick question from Leslie.
Leslie Vinjamuri
Hi, I’m Leslie Vinjamuri, Creon’s friend, and I direct the US and Americas Programme here at Chatham House. It’s such an honour, thank you for taking the time, I can only begin to imagine the pressure that you’re currently under. I have a question about sanctions and sanctions lifting, I really appreciated what you said about the need to have, really, sanctions that are based on very clear economic analysis and on very clear specification of the conditions under which they would be lifted. And I’m curious if you could say more about that, and also especially about the efforts underway to co-ordinate between the US and its allies and partners on the lifting part. I noticed, I think, correct me if I’m wrong, that Liz Truss said just recently that sanctions would be lifted when Russia withdrew its troops, is that a co-ordinated comment?
And then as a final sort of question, I mean, what is your thinking on the UN? To what extent – how disheartening or what is your sort of longer-term perspective on the inability in a situation like this to work through the Security Council on sanctions? Has it hindered your ability to get things done, has it made it just that much harder, and if that continues to be the case, do you have a plan?
Creon Butler
So I’m afraid there’s four questions there altogether, so the gentleman first here about…
Wally Adeyemo
So I think we’ve, between us, as the G7, made very clear in the statement last week by our leaders, that we’re going to go after those who facilitate evasion, no matter where they are. So if you are a western financial institution or individual who’s helping these elites evade our sanctions, we are also going to look to take actions there, as well. So we’re focused on making sure that wherever these elites or the Russian state attempts to use – to evade sanctions, we’re going to use our tools to go after them, as well. So we’re committed to doing that, and it’s something that I know that Secretary Yellen and the Attorney General have spoken to their counterparts about. It’s something I’m going to talk to my counterparts about, as I make this – make my trip from the UK to Continental Europe going forward.
I think on your question about the intent of sanctions, I think the two questions relate to each other. Ultimately, the goal here is behavioural change, that’s what we’re seeking to do is, to get Russia to stop the invasion and to withdraw their troops. Sanctions as designed should always be designed, as I said, based on our review, to be able to be reversed. The question is when do you reverse them, and my view is that ultimately, that’s going to be a determination that’s made as part of – the Ukrainians and the Russians are currently talking and having detailed negotiations.
Ultimately, if you get to a place where we want – the behaviour has changed, in the same way that we’ve applied these sanctions, we will want to think about how we potentially withdraw these sanctions, working closely with our allies and partners and with the Ukrainians to figure out what we’re willing to do in response to behavioural change.
I think the question about the UN is of course a hard one, because as you know well, the Russians sit on the Security Council. Them being a member of the Security Council will mean that it’s going to be hard to do actions like take punitive sanctions actions against Russia using those UN institutions. But I think the thing that’s heartened me in this case is that outside of the UN you’ve seen a coalition of 30 countries come together to be able to take these actions, countries that represent the majority of the global economy. Ultimately, our goal is going to be to continue to press the case at the UN Security Council, because it’s important that the world stand up and show that it politically condemns the actions that Russia is taking in Ukraine.
But we believe with the coalition that we’ve built, we have the tools and the ability to continue to mete out significant economic damage to the Russian economy and their war machine, in order to hopefully change their behaviour and stop their invasion of Ukraine going forward.
Creon Butler
Thank you very much. I will take the privilege of asking the final question and it’s, both you and I worked in the G7 and the G20, and I remember back in 2014, after the US – the Russian attack on – previous attack on Ukraine, there was a very calibrated response, and that included actually continuing to work with Russia in the G20, or at least to work in the G20, working with Russia was not easy. But now President Biden today has spoken about, well, should Russia be a member of the G20, given what’s happened?
And yet, one can certainly see there’s not going to be a consensus for excluding Russia from the G20, or at least I can’t see how that would work at the present time. So – and yet, you know, if we were in a meeting now, it would be extremely difficult, sitting across the table from a Russian official, so what is your perspective on that, how do you see that going forward?
Wally Adeyemo
Yeah, I think the President addressed, as well, ultimately our views that the Russians should not be a member at the G20 meeting, and ultimately that’s a decision for the membership of the G20 to make. But the most important thing is the thing that we are doing now, which is taking away the privileges that Russia enjoyed by being a member in good standing of the global economic community, taking away their most favourite nation status, taking away their ability to borrow or seek assets from international financial institutions, and making clear to President Putin that he has a choice.
Ultimately, he can choose the path of diplomacy, and withdrawal of his troops from the Ukraine, or he can choose the path where we will continue to take steps that will isolate his economy, and make it harder for him to project power going forward, and we’re committed to doing so, in collaboration and co-ordination with our allies and partners. That’s what is going to matter in terms of fundamentally putting Russia in a position where it cannot in the future project power and destabilise the region and the world.
Creon Butler
Well, unfortunately, I’m afraid we’re out of time. Wally, I’d like to thank you. I mean, this has been a fantastically interesting session, you’ve given us an awful lot to think about, so I’ll just – if you could join me in just thanking Wally.
