Ideas
February 26, 2022 4:11 PM EST
Jayanti is an Eastern Europe energy policy expert. She served for ten years as a U.S. diplomat, including as the Energy Chief at the U.S. Embassy in Kyiv, Ukraine (2018-2020), and as international energy counsel at the U.S. Department of Commerce (2020-2021). She is currently the Managing Director of Eney, a U.S.-Ukrainian decarbonization company.  

The sanctions package the White House has implemented against Russia in the last 48 hours is remarkable. It is broad, deep, and targeted all at once. It is also almost certainly going to be more hype than impact. Russia is already subject to numerous sanctions since its 2014 support of separatists in Donbas. It has neither given Crimea back to Ukraine nor left the Donbas in peace, and clearly the threats of more sanctions had none of the hoped for deterrent effect.

Putting aside that sanctions do not generally work, and certainly not on a timeframe of relevance to an invaded country, the Biden Administration and the rest of the free world have reiterated that their support for Ukraine will not much exceed sanctions.

If this is what we have to work with, let us at least make it truly hurt by including embargoes of Russian energy, too.

At present, the energy sanctions instituted against Russia are limited to the trickle down effect of banking sector and other restrictions, and to a block on several Russian state-owned energy companies accessing new debt and equity on U.S. markets. These companies are Gazprombank, Gazprom, Gazprom Neft, Transneft, and RusHydro. This will make doing business harder for these companies. 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. Oil prices have insulated Russia from sanctions hits, at least in the short to medium term.

Nor will sanctioning Nord Stream 2 or Germany’s refusal to continue with its certification have any effect on Putin’s inclinations. This is because Nord Stream 2 was never necessary either for gas transit or for Russian economics. Over 100 bcm capacity of the 225 bcm total between Russia and Europe is already sitting unused in existing pipelines running principally through Poland, Ukraine, Belarus, and the Baltic Sea. The 55 billion cubic meter (bcm) capacity Nord Stream 2 pipeline was only ever an effort to bypass and damage Ukraine. Thus, once Russia holds Kyiv, Nord Stream 2 instantly becomes redundant as a tool of aggression against Ukraine. Just as instantly, the sanctions against it become meaningless beyond symbolism, and even then only as a symbol to the West.

Other parts of the White House’s sanctions package are also unlikely to hit hard. The ban on sensitive technologies reaching Russia will definitely set the country back a bit, especially with several Asian countries having agreed to join the tech blockade. Importantly, these 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 also has its own, albeit relatively unsophisticated, semiconductor chip manufacturers. 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. The technology angle is blunted as a U.S. pressure point, but certainty its inclusion is an important piece in a comprehensive sanctions package.

Yet so far energy sanctions are mostly missing. This is despite the fact that Russia is literally dependent on energy exports. Oil and gas together constituted over 30% of Russian gross domestic product before the 2021 (mostly Russian engineered) energy crisis sent prices soaring. In 2019 oil and gas were together over 60% of Russian exports. It is a gaping hole in the U.S. sanctions package that Russian hydrocarbon exports have not been embargoed. 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 especially will suffer if Russian gas imports are blocked; Europe imports 40% of its natural gas from Russia, but for Germany it is up to 50%, on top of 45% dependency on Russian coal and 34% on Russian oil. Meanwhile, Germany is continuing to phase out nuclear, making it more reliant on Russian energy imports.

Russia is reciprocally dependent on energy exports, however, giving Europe leverage with which it could partially join a U.S. petroleum embargo. European governments are worried about keeping their countries warm and lit. This is partially a supply issue, but also a question of timing. Europe is moving toward climate friendly fuel sources anyway, but it cannot do so overnight because of restrictions in capital and construction timeframes. Alan Riley argues that at least the capital restriction could be mitigated by a levy on Russian oil imports. Because the European Union imports approximately 600 million barrels of oil per day, an E.U. levy of just €10 per barrel of oil imported from Russia would provide collateral on which to issue a 20-year €400 billion Eurobond. Rather than waiting for the tariffs to accumulate to finance the energy transition, a eurobond could be accomplished very quickly, and the money could be used to secure alternative fuel supplies, build energy transition infrastructure, and build energy resilience. The European Union could wean itself off Russian petroleum imports with money raised off of Russia.

A demonstrator holds a placard reading "Enjoy Russian gas with smell of Ukrainian blood" during a protest against Russia's invasion of the Ukraine on February 25, 2022 in front of the Chancellery in Berlin. (John MACDOUGALL-AFP)
A demonstrator holds a placard reading "Enjoy Russian gas with smell of Ukrainian blood" during a protest against Russia's invasion of the Ukraine on February 25, 2022 in front of the Chancellery in Berlin.
John MACDOUGALL-AFP

Or, perhaps, the White House is more concerned with rising gas and utility prices for American consumers already facing the highest prices since 2014. Midterm elections are coming, and Biden’s approval rates are underwater. If the U.S. sanctions Russian oil and gas, or Russian energy more broadly, this will absolutely increase energy prices around the world. Americans will pay more for electricity and gas, and probably for everything else, too. There will be political fallout for an Administration already blamed for record 7% inflation.

The fallout from Russia’s invasion is already roiling markets and supply chains, however. American consumers will already be affected. Instead of the futility of trying to insulate American voters, the White House should eke out a win by hurting Russia in the process.

Moreover, high oil and gas prices could also easily be a boon for U.S. companies. There is already a bidding war for tankers of U.S. liquified natural gas (LNG). Europe and Asia are fighting to outbid each other. Instead of dipping again into the strategic petroleum reserve in a desperate attempt to appease U.S. voters, the Administration could work to liberalize U.S. petroleum export regulations. As Andrew Fink argues, this could include repealing or revising the Jones Act (Merchant Marine Act of 1920) requirement that U.S. petroleum movements at sea be on U.S. ships with U.S. crews. In practice, this law prevents foreign governments and energy companies from actively participating in U.S. domestic petroleum trade. If this were relaxed, Europe could then buy its fuel more easily from the U.S. and far more easily transport it home to replace Russian oil and gas.

The U.S. could also revoke the exemptions that allow Russian petroleum product transactions to continue despite sanctions advertised as designed to stop exactly that. Not only does the current sanctions package not target energy, but it in fact includes carve outs that allow for work arounds of the 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. As long as the payments are processed by non-U.S. banks, it is still completely acceptable for western countries and their companies to do business with, for example, Gazprom and Rosneft. 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

Yet small measures, although necessary, are not sufficient. After Russia annexed Crimea and invaded the Donbas in 2014, the U.S. did sanction some Russian energy activities. Financial activities in the U.S. were blocked for Gazprombank, Rosneft, and Novatek. Additional sanctions followed for certain oil production activities of Gazprom, Gazprom Neft, Rosneft, Lukoil, and Surgutneftegas. These restrictions made doing business harder for these companies, but they did not make it hard enough. A full energy blockade on Russia would hurt the most.

What the White House should—and can—do now, is institute a full-spectrum energy export embargo on Russia. This is already authorized under Executive Order 14024. Europe will balk, but Europe will survive. It still has 32% of its natural gas supplies. Each E.U. member country maintains an emergency 90-day supply of oil in stock, too. Weather is currently above average temperatures in much of Europe. Spring is nigh. Two months’ reserve supply is enough for Europe to stay warm until the seasons change. Meanwhile, the world energy markets will adjust before the next winter.

Two months is not enough time to build new LNG terminals or full length pipelines, but it is enough for the U.S., Canada, Norway, Saudi Arabia, and others to ramp up production. The U.S. is a net importer of oil, but experts expect it could increase production by over a million bpd in 2022. Biden has already asked Saudi Arabia to increase production, and there are others the U.S. can ask. Some are likely to agree given the astronomical price of oil, elevated by the Russian invasion itself. The U.S. can reinstate its support the EastMed pipeline project, for example, to improve medium-term energy security for Europe. Terminals can follow, along with more renewables and nuclear. Biofuel infrastructure can be completed in well under a year. And if the U.S can coax Iran back into a nuclear agreement, it can lift sanctions on Iranian oil that could then be used to offset Russian supply.

The White House should work with the European Union to seize or freeze any Russian energy assets held outside Russia. Gazprom in particular has numerous holdings around the world that could be seized, with the proceeds used to offset Russian oil and gas in Europe. Coupled with a European levy on Russian petroleum imports, this would leave Russia paying for its own loss of energy dominance.

These measures are going to hurt every country as energy prices rise. Europe is particularly vulnerable. But Russia’s invasion of Ukraine has already thrown energy markets and prices into turmoil. If the U.S. and its western allies are serious about punishing Russia for its assault on Ukraine, and doing so in a way that has a chance of forcing Putin to compromise, a full-spectrum energy export embargo must be the keystone sanction. The U.S. sanctions package simply is not weaponized 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.

Ukraine is worth it. Peace in Europe is worth it. The liberal world order is worth it. The future of western democracy is worth it.

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