Sanctions on Russian companies and asset freezes, are
leading to a lot of nervousness among people in the global system. You could
argue that even though the sanctions aren’t really targeting Russian crude ...
they’re already having an impact.
The US and European Union are reluctant to target the
Russian energy sector and drive oil and gas prices even higher after months of
rising costs for consumers. The dynamic gives Putin important leverage and could
undermine unity among the US and its European allies in how they respond to his
invasion of Ukraine.
Biden
and European leaders have imposed strict new penalties on Russian banks,
state-owned companies and business leaders close to Putin — and on Friday
announced sanctions on Putin himself. But Western allies have avoided taking
steps that could interrupt access to Russian oil and natural gas. While fossil
fuels make up more than half of the US total imports from Russia, President
Biden said that the country would avoid sanctioning them.
“In our sanctions package, we specifically designed to allow
energy payments to continue,” he said.
Russia is the world’s third-largest oil producer, after the
US and Saudi Arabia, and the second-biggest natural gas producer, after the US.
Oil and mineral fuels, such as petroleum, coal and natural gas, make up a
majority of its exports. While oil is a global commodity, the natural gas
market is more localized, meaning that Europe and Asia are its biggest
markets.
“Energy sanctions that directly targeted Russian crude or
product exports — they would hit the Russian economy harder than any other
measures, but they also present the most risks to the global energy markets,”
said Ben Cahill, a senior fellow at the Center for Strategic and International
Studies at Energy Security and Climate Change Program.
Asked Thursday during a press briefing about oil, Daleep
Singh, the White House’s Deputy National Security Adviser for international
economics, said the administration didn’t want to disrupt the energy market at
this point.
“When
it comes to energy, this is the one area where Russia has systemic importance
in the global economy. We’re not going to do anything which causes an
unintended disruption to the flow of energy as the global economic recovery is
still underway.” Daleep Singh
As a net exporter of oil and natural gas with a sturdy
strategic reserve, the US has more flexibility to handle rising prices than its
European allies, who could face severe energy shortages if Russia pulls back
its supply. Sanctions on the Russian energy sector could also backfire if
Russia can offset lower sales with higher prices.
“Russia has been known to use energy as a weapon to cut
exports, sometimes under the guise of additional maintenance or other issues,”
said Rachel Ziemba, founder of macroeconomic advisory firm Ziemba Insights.
“Even to the extent that Europe and the US have said, ‘Well,
we don't want to impact or impede too much domestic short-term energy trade,’
We don't know exactly what the Russian entities will do,” she added.
But because oil is a global commodity, less availability of
Russian oil could impact US prices.
“I think that’s why the Biden administration and especially
the Europeans are hesitant to impose direct sanctions on the oil sector,
because it is somewhat self-defeating because you end up harming European and
US consumer and businesses if there’s not enough spare capacity or strategic
reserves or alternative supplies to provide a medium-term alternative to that
Russian oil,” said Robert Johnston, a senior adjunct scholar at Columbia
University’s Center for Global Energy Policy.
And the issue is politically difficult for the Biden
administration, as Republicans have repeatedly criticized him over high
gasoline prices even though presidents have a limited impact on its cost.
Putin promised unprecedented “consequences” for
nations that try to hinder Russia’s invasion of Ukraine, and both Biden
and his European allies face serious domestic blowback if sanctions cause a
massive energy shock. US gasoline prices rose 40% year over year in January,
and an interruption to global supplies would add even more fuel to inflation —
particularly if both the U.S. and Europe lean more on American energy
sources.
"Vladimir Putin realizes what we all know, which is
that a good chunk of allies in Europe are highly dependent on Russian oil and
natural gas. Even if we impose these huge sanctions, they're only sustainable
for American allies for a certain amount of time,” said Jamil Jaffer, founder
and Executive Director of George Mason University’s National Security
Institute.
With Biden hamstrung by Putin’s leverage over the energy
sector, the US has dialed up the pressure on Russia through its own power over
the global financial system.
The Treasury Department on Thursday announced new sanctions
meant to limit Russia’s financial sector and ability to raise money through
global markets, including severe restrictions on major Russian banks with
limited carve outs for energy transactions and humanitarian aid.
The new sanctions block any US-based financial firm from
processing payments and transactions for Sverbank, effectively preventing
Russia’s largest financial institution from access to the US$. The Treasury
Department also blocked all business with VTB Bank, the country’s
second-largest financial firm, along with its subsidiaries and three other
Russian banks.
More than a dozen state-owned Russian firms and wealthy
business leaders have also been blocked from the US financial system, days
after Biden imposed a ban on any purchase or sale of Russian debt by US
firms.
The
sanctions not only prevent Russian firms from most business within the US, but
also makes it nearly impossible to conduct transactions in US$. Roughly 80% of
the US$46 billion in foreign transactions processed each day by Russian banks use
US$, according to the Treasury Department.
Financial sanctions imposed so far have already roiled the
Russian economy and markets. Russian stocks crashed earlier this week,
borrowing costs have spiked and the value of the Russian ruble fell to its
lowest level in history — to worth just more than a US penny.
“This is not the outcome we wanted,” said White House Press
Secretary Jen Psak during a Thursday briefing.
“It's both a tragedy for the people of Ukraine and a very
raw deal for the Russian people. But Putin’s war of choice has required that we
do what we said and to ensure this will be a strategic failure,” she said.
And while oil was left out, some noted that sanctions on the
financial sector could have indirect impacts on the country’s energy sector.
“If you look at the pricing for Urals blend, which is the
main export blend that goes to Europe from Russia, Urals blend is already
trading at a big differential … buyers are very wary,” Cahill said.
