Officials: U.S. aims to cripple Russian oil industry
BERLIN » The Biden administration is developing plans to further choke Russia’s oil revenues with the long-term goal of destroying the country’s central role in the global energy economy, current and former U.S. officials say, a major escalatory step that could put the United States in political conflict with China, India, Turkey and other nations that buy Russian oil.
The proposed measures include imposing a price cap on Russian oil, backed by so-called secondary sanctions, which would punish foreign buyers that do not comply with U.S. restrictions by blocking them from doing business with American companies and those of partner nations.
As President Vladimir Putin wages war in Ukraine, the United States and its allies have imposed sanctions on Russia that have battered its economy. But the nearly $20 billion per month that Russia continues to reap from oil sales could sustain the sort of grinding conflict underway in eastern Ukraine and finance any future aggressions, according to officials and experts.
U.S. officials say the main question now is how to starve Moscow of that money while ensuring that global oil supplies do not drop, which could lead to a rise in prices that benefits Putin and worsens inflation in the United States and elsewhere. As U.S. elections loom, President Joe Biden has said a top priority is dealing with inflation.
While U.S. officials say they do not want to take large amounts of Russian oil off the market immediately, they are trying to push countries to wean themselves off those imports in the coming months. A U.S. ban on sales of critical technologies to Russia is partly aimed at crippling its oil companies over many years. U.S. officials say the market eventually will adjust as the Russian industry fades.
Russia’s oil industry is already under pressure. The United States banned Russian oil imports in March, and the European Union hopes to announce a similar measure soon. Its foreign ministers discussed a potential embargo in Brussels on Monday. The Group of 7 industrialized nations, which includes Britain, Japan and Canada, agreed this month to phase out Russian oil imports gradually, and their finance ministers are meeting in Bonn, Germany, this week to discuss details.
“We very much support the efforts that Europe, the European Union, is making to wean itself off of Russian energy, whether that’s oil or ultimately gas,” Secretary of State Antony Blinken said in Berlin on Sunday when asked about future energy sanctions at a news conference of the North Atlantic Treaty Organization. “It’s not going to end overnight, but Europe is clearly on track to move decisively in that direction.”
“As this is happening, the United States has taken a number of steps to help,” he added.
But Russian oil exports increased in April, and soaring prices mean that Russia has earned 50% more in revenues this year compared with the same period in 2021, according to a new report from the International Energy Agency in Paris. India and Turkey, a NATO member, have increased their purchases. South Korea is buying less but remains a major customer, as does China, which criticizes U.S. sanctions. The result is a Russian war machine still powered by petrodollars.
U.S. officials are looking at “what can be done in the more immediate term to reduce the revenues that the Kremlin is generating from selling oil, and make sure countries outside the sanctions coalition, like China and India, don’t undercut the sanctions by just buying more oil,” said Edward Fishman, who oversaw sanctions policy at the State Department after Russia annexed Crimea in 2014.
The Biden administration is looking at various types of secondary sanctions and has yet to settle on a definite course of action, according to the officials. The United States imposed secondary sanctions to cut off Iran’s exports to curtail its nuclear program.
Large foreign companies generally comply with U.S. regulations to avoid sanctions if they engage in commerce with American companies or partner nations.
“If we’re talking about Rubicons to cross, I think the biggest one is the secondary sanctions piece,” said Richard Nephew, a scholar at Columbia University who was a senior official on sanctions in the Obama and Biden administrations. “That means we tell other countries: If you do business with Russia, you can’t do business with the U.S.”
But sanctions have a mixed record. Severe economic isolation has done little to change the behavior of governments from Iran to North Korea to Cuba and Venezuela.
One measure American officials are discussing would require foreign companies to pay a belowmarket price for Russian oil — or suffer U.S. sanctions. Washington would assign a price for Russian oil that is well under the global market value, which is more than $100 per barrel. Russia’s last budget set a break-even price for its oil above $40. A price cap would reduce Russia’s profits without increasing global energy costs.
The U.S. government could cut off most Russian access to payments for oil. Washington would do this by issuing a regulation that requires foreign banks dealing in payments to put the money in an escrow account if they want to avoid sanctions. Russia would be able to access the money only to purchase essential goods like food and medicine.
And as those mechanisms are put in place, U.S. officials would press nations to decrease their purchases of Russian oil gradually, as they did with Iranian oil.
“There wouldn’t be a ban on Russian oil and gas per se,” said Maria Snegovaya, a visiting scholar at George Washington University who has studied sanctions on Russia. “Partly this is because that would send the price skyrocketing. Russia can benefit from a skyrocketing price.”
But enforcing escrow payments or price caps globally could be difficult. Under the new measures, the U.S. would have to confront nations that are not part of the existing sanctions coalition and, like India and China, want to maintain good relations with Russia.