The Vital Missing Link in the U.S. Sanctions Against Russia
Amazing is the extraordinary sanctions package that the White House applied against Russia over the past 48 hours. It’s broad and deep. And it targets all of them at once. The impact of the plan is almost certain to outweigh its hype. Russia already faces numerous sanctions after its support for separatists within Donbas in 2014. They have not given Crimea back Ukraine and they are still trying to make the Donbas a peaceful place.
While sanctions don’t generally work and are unlikely to be effective for a particular time period, the Biden Administration, along with the rest of free nations, have stated that they will support Ukraine in a way that is more than sanctions.
Let’s make this work if we must.
The energy sanctions put in place against Russia at the moment are restricted to the trickledown effect of restrictions on banking and other areas, as well as a ban on certain Russian state-owned energy companies from accessing equity or new debt on U.S. exchanges. Gazprombank Gazprom Gazprom Neft Transneft RusHydro and Gazprombank are the names of these Russian companies. These companies will find it more difficult to do business. But for Gazprom, for example, the record setting (up to €186 per megawatt hour) natural gas prices of 2021 have given Russia plenty of blubber to live off during a sanctions-imposed hibernation. In the medium- to short term, Russia has been protected by oil prices.
Nor will sanctioning Nord Stream 2 or Germany’s refusal to continue with its certification have any effect on Putin’s inclinations. Nord Stream 2 wasn’t needed for Russian gas transit. There are currently over 100 billion cubic meters of the total 225 bcm between Russia and Europe that remain unutilized in the existing pipelines, which run through Poland and Ukraine as well as Belarus and the Baltic Sea. Nord Stream 2, a 55 billion-cubic-meter (bcm), capacity pipeline, was never intended to damage or bypass Ukraine. So, when Russia takes Kyiv the Nord Stream 2 pipeline becomes ineffective as a tool for aggression against Ukraine. It is the same instant that the sanctions against it are meaningless beyond symbolicism and, even then, only as symbols to the West.
Other parts of the White House’s sanctions package are also unlikely to hit hard. Russia will be repelled by the ban on sensitive technologies entering Russia, even though several Asian nations have already agreed to participate in the technology blockade. These countries include South Korea (and Japan). But as Ambrose Evans-Pritchard detailed in the Telegraph, Russia dominates the global supply chains for titanium, palladium, neon, and other critical strategic minerals; it is a “full-spectrum commodity superpower.” Russia can retaliate effectively, if only by trading these minerals to China in exchange for U.S. sanctioned technologies. Russia has its own semiconductor chip manufacturing companies, though they are not very sophisticated. Additionally, once it controls Ukraine, Russia will gain the smaller country’s wealth of uranium, its military and nuclear manufacturing prowess, including Motor Sich, and multiple other tech and military powerhouses. Although the technology aspect is not as important as the U.S.’s pressure point, it is still important to include in any comprehensive sanctions package.
However, energy sanctions remain largely unimplemented. This is despite Russia’s dependence on oil and gas exports. Together, oil and natural gas accounted for more than 30% Russian gross domestic products before the 2021 energy crisis. The mainly Russian-engineered energy crisis sent Russian prices skyrocketing. Together, oil and natural gas accounted for over 60% of Russian exports in 2019, The fact that Russian hydrocarbon exports are not embargoed is an obvious flaw in U.S. sanctions. If, as Jason Furman now famously said Russia is little more than a “a big gas station,” then how can the White House not sanction its pump?
Read More: Why Sanctions on Russia Won’t Work
This glaring omission in Biden’s sanctions package could be the consequence of a promise to the countries of Europe, cowering in fear as their dependency on Russian gas renders them impotent to fight back against Russia’s invasion. This is not unreasonable. Germany will be particularly affected by Russian gas imports being blocked. Europe imports 40% of their natural gas from Russia; Germany imports up to 50%. This is on top of Germany’s 45% dependence on Russian coal and 34% dependency on Russian oil. Germany continues to eliminate nuclear and is more dependent on Russian energy imports.
Russia and Europe are mutually dependent on oil exports. However, this gives Europe the leverage to partially join an U.S. petroleum embargo. European countries are concerned about the safety of their nationals. Partly this is a matter of supply, but it also has to do with timing. Europe has been moving towards climate-friendly fuels for some time, however it is not able to do this overnight due to restrictions on capital and construction times. Alan Riley suggests that the capital limitation could be reduced by an E.U. levy on Russian oil imports. A levy on oil imported from Russia would reduce the European Union’s imports by 600 million barrels per hour. levy of just €10 per barrel of oil imported from Russia would provide collateral on which to issue a 20-year €400 billion Eurobond. A eurobond, which could be issued within 20 years, could help finance the energy transition rather than waiting for existing tariffs. With money from Russia, the European Union could be able to reduce its dependence on Russian oil imports.
Maybe the White House is less concerned about the rising cost of gas and utilities for American customers who are currently facing some of the most expensive prices since 2014. Midterm elections are coming, and Biden’s approval rates are underwater. The U.S. could sanction Russian oil and/or gas or more generally Russian energy, which will cause a significant increase in energy prices worldwide. Americans will be paying more for electricity, gas and most likely for all other commodities. An Administration responsible for record-setting 7% inflation will face political consequences.
The fallout from Russia’s invasion is already roiling markets and supply chains, however. American consumers are already being affected. Instead of trying to shield American voters from the dangers of war, the White House can win this battle by hurting Russia.
Additionally, companies in the United States could benefit from high oil prices. Already there is a fierce bidding war among tankers carrying U.S. LNG. Europe and Asia fight to outbid one another. The Administration should not dip into its strategic petroleum reserves in an attempt to please the U.S. voter, but could instead work to relax U.S. petroleum export regulations. Andrew Fink suggests that this might include revising or repealing the Jones Act, Merchant Marine Act of 1920’s requirement that U.S. oil movements at sea must be made on U.S. vessels with U.S. crews. In reality, the law bars foreign governments and oil companies from taking part in U.S. domestic petroleum trading. If the law were to be relaxed, Europe would then have more options for buying its fuel in America and could transport it more efficiently home to take over Russian oil.
The U.S. may also remove exemptions that permit Russian oil product transactions to continue, despite the fact that sanctions were intended to prevent that from happening. This sanctions package doesn’t target energy. In fact, it includes provisions to allow workarounds for energy inclusions. Adam Tooze highlighted that the Administration, in Biden’s own words, “specifically designed [the sanctions package] to allow energy payments to continue.” The Treasury Department included exemptions—called General Licenses—from the financial sanctions for energy transactions. It is acceptable that western countries, and their corporations, do business with non-U.S. bankers as long as payments are not processed by U.S. banks. In fact, Javier Blas reported that in just the 24 hours immediately following Putin’s recognition of the so-called People’s Republics of Luhansk and Donetsk the European Union, U.S., and United Kingdom “bought a combined 3.5 million barrels of Russian oil and refined products, worth more than $350 million at current prices,” and “another $250 million worth of Russian natural gas.” Plugging our own sanctions holes is a good place to start making the sanctions package effective.
Read More: Even if Russia Wins, It Won’t Do So Easily
Even though small actions are important, they’re not enough. The U.S. sanctioned some Russian energy activities after Russia annexed Crimea in 2014. For Novatek, Rosneft and Gazprombank financial transactions were stopped in the U.S. Further sanctions were imposed on certain activities in the oil industry of Gazprom and Gazprom Neft as well as Rosneft. Lukoil was also banned. While these sanctions made business more challenging for the companies involved, it wasn’t too difficult. It would have the greatest impact on Russia if it had an energy embargo.
What the White House should—and can—do now, is institute a full-spectrum energy export embargo on Russia. Executive Order 14024 already authorizes this. Europe may balk at this, but Europe is going to survive. It has still 32% of its natural-gas supplies. Each E.U. Each member has a 90-day emergency supply of oil. The weather is above the average in large parts of Europe. It is almost spring. Two months’ reserve supply is enough for Europe to stay warm until the seasons change. The world’s energy markets will adapt before next winter.
Although two months does not allow for new LNG terminals to be built or long-distance pipelines to be constructed, this is sufficient time for Canada, Norway and Saudi Arabia to boost their production. Experts expect the U.S. to increase its oil production by more than a million barrels per day in 2022, despite being a net importer. Biden already requested Saudi Arabia to boost production. The U.S. has other options. Given the high price of oil and the Russian invasion, many will agree. To improve Europe’s medium-term energy security, the U.S. could reaffirm its support for EastMed, for instance. Along with additional renewables and nuclear, terminals could be added. The construction of biofuel infrastructure takes less than a year. If the U.S. can convince Iran to a nuclear deal, they can remove sanctions that have been placed on Iran’s oil supply.
It is important that the White House works with European Union in order to freeze or seize any Russian energy assets located outside Russia. Gazprom, in particular, has many assets around the globe which could be seized and used as a way to compensate for Russian oil-and gas imports into Europe. Russia would be responsible for losing its energy dominance if it was subject to a European levy.
As energy prices rise, these measures will hurt all countries. Europe is especially vulnerable. But Russia’s invasion of Ukraine has already thrown energy markets and prices into turmoil. The U.S. must impose a complete-spectrum export ban on Russia if it is serious about punishing Russia and its Western allies for their aggression against Ukraine. It is impossible to weaponize the U.S. sanctions without it. It is currently porous and toothless when a full 36% of Russia’s budget in 2021 was from oil and gas.
Other sanctions aim at Russia’s veins; oil and gas blockades cut it off at the artery.
The Ukraine is worth it. The peace and stability in Europe are worth it. It is well worth the effort to maintain a liberal world order. It is worthwhile for the future of west democracy.