Christine McDaniel, Mercatus Center Senior Research Fellow and former Deputy Assistant Secretary at the Treasury Department, joins Yahoo Finance Live to discuss sanctions against Russia and the U.S. response to geopolitical tensions.

Video Transcript

ALEXIS CHRISTOFOROUS: Welcome back, everybody. Western countries imposed sanctions this week on Russia, as President Biden said Moscow had begun its invasion of Ukraine. The measures are expected to have a limited impact on Russia's economy, but the US and its allies say they send a strong signal.

Joining me now is Christine McDaniel, former deputy assistant secretary at the Treasury Department and former senior trade economist in the White House Council of Economic Advisors under President George W. Bush. She is currently a senior research fellow for the Mercatus Center at George Mason University. Christine, thanks so much for being here with us. The US and its allies have never attempted before to cut a $1 and 1/2 trillion economy out of global commerce. So how much pressure can even unified Western sanctions have on Russia?

CHRISTINE MCDANIEL: Well, what we've learned that trade sanctions alone are not effective. We also need to cut off financial ties. And that's what we're seeing the Biden administration do in pretty close coordination with the EU. And they work best-- these sanctions tend to work better when they're targeted and strong, but really targeted at individuals and particular entities, agencies, organizations, anybody that is involved in facilitating or enabling the movement of goods, services, and capital in service to, in this case, you know, Russia's invasion of Ukraine.

And so that's what we're seeing now. And but it does need to be targeted, and it really does need to be coordinated because capital moves across borders so easily. And then with illicit laundering techniques getting more and more advanced, countries really need to stay on top of the intelligence and communicate with each other.

ALEXIS CHRISTOFOROUS: So I just want to run through quickly-- we had it up there on the graphic-- what the sanctions are at the moment. They include denying Russia the ability to borrow money in Western markets and to block financial transactions by two banks-- so there's some specificity, right-- and the families of three wealthy Russian elites. Is this what you're talking about in terms of getting specific? And does it go far enough? Because we know President Biden said that steeper penalties would follow if Russia continues its aggression. I'm wondering what that might look like.

CHRISTINE MCDANIEL: Right, well, it is the first tranche, as the US has said. And the US has said it-- the EU has said it as well. It's just the first step. So it does appear that the US and the EU are ready to take further steps if Putin continues to escalate. And further steps might include adding names to that list. The world is well aware of a list of at least three dozen particular oligarchs and their families.

But, you know, this is a pretty good start. I mean, think of it. You have the central Russia's Ministry of Finance, their sovereign wealth fund, and their central bank. And so that alone is hurting their ability to raise money from the West, definitely cutting off their ability for Western financing, and makes it difficult for them to trade on any new debt. But there's a lot they have in reserve, right? So you think not only this military aid to Ukraine, but there's a lot-- many more large state-owned Russian entities. Nord Stream 2 is always there.

More sanctions, bigger sanctions on Russian-- stronger sanctions on Russian banks, making it harder, again, for Russia to float their own debt. And that the big-- I think one of the big things that we haven't seen, I don't think I've ever seen used, is, cutting them out of the SWIFT system. So that would basically just allow them to engage in, really, any dollar denominated transactions around the world. So there's still a lot left that the US and the EU could do.

ALEXIS CHRISTOFOROUS: Now Biden said that he would take, in his words, robust action, to make sure that the pain of our sanctions is targeted at the Russian economy, not ours. But I'm wondering how much easier said than done that is. I mean, Russia is among the world's top exporters of oil and precious metals like copper, aluminum, palladium.

CHRISTINE MCDANIEL: Yeah, no, exactly, and the whole idea behind targeted sanctions is to maximize the penalties on those particular individuals involved and minimize any adverse effects on Russian citizens, and of course, citizens across the US and the EU as well. You might remember or some of your listeners might remember back in the 19-- in 1980, when there was that US embargo Russia-- on grain, right, after the '79 Afghanistan invasion.

And so it was then President Carter that did the grain embargo, only to find that it was ineffective. Russia was able to get grain from other sources. But it did really hurt the US farmers. And so over the years, we've seen new designs to try to maximize penalties on particular individuals involved and minimize adverse effects on broader populations. And that's what they're trying to do here.

ALEXIS CHRISTOFOROUS: You mentioned the Nord Stream 2 gas pipeline. I know Germany has put a hold on that for the moment. It's crucial to Russia's plans to increase energy sales to Europe. Does freezing that project hurt Russia more than any of those sanctions combined, do you think?

CHRISTINE MCDANIEL: That's a good question. You would-- just looking at the numbers, you know, it's undoubtedly a yes answer to that. The Nord Stream 2 offers Putin a very large source of revenue and a legitimate source of revenue, and the legitimate characteristic being, I think, really key there. So and because it hasn't even gotten online yet, it's not like Russia-- it's Russia losing an important revenue source, but Europe hasn't even benefited from it yet.

So it's not like it would be cutting them off from anything-- yet, at least. And Europe has been able to benefit a bit from Asia that have sent over extra energy that they had in surplus. So but look, if this continues on and on, then it will probably hurt Europe a bit. But right now, it looks like it would hurt Putin more, given that, again, you know, it's cutting off a very large source of legitimate revenue.

ALEXIS CHRISTOFOROUS: All right, Christine McDaniel, senior research fellow with the Mercatus Center at George Mason University, thanks for your insights today. Appreciate it.