Russian oil sanctions should not be a blunt instrument

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Ukrainian Prime Minister Denys Shmyhal recently called Russian energy payments “blood currency,” underscoring the increasingly untenable moral position of the West. The world’s major democracies express outrage at the atrocities committed by Russian forces in Ukraine, but provide Moscow with hundreds of billions of dollars it can spend on its military efforts.

Bloomberg Economics estimates that due to rising prices, Russia is on track to earn $320 billion in energy sales in 2022, up more than a third from last year . This disconnect will become politically unsustainable, especially given a future Russian offensive in eastern Ukraine that is likely to be breathtaking in its brutality.

Western policymakers are scrambling to find ways to punish Russia amid significant uncertainty in the energy market. To get out of this dilemma, they should build on the political innovations of a decade ago, designed largely in reaction to Iran’s nuclear pursuits.

The wave of sanctions against Moscow continues to peak. In response to Ukrainian pleas, major oil trading companies such as Vitol and Trafigura announced that they would carry out existing contractual obligations, but would not accept any new business related to Russian oil. Last week, the European Union and Japan independently agreed to ban the purchase of Russian coal.

The debate over doing more

EU officials have acknowledged they will continue to discuss a further cut in Russian energy imports, although member states are divided over the costs in their quest to increase pressure on President Vladimir Putin.

While the focus has mostly been on European natural gas imports, buying Russian oil will be the next shoe to drop. Focusing on oil, while difficult, is easier and can have a bigger impact than focusing on gas.

Historically, Russia earned $4 in oil export revenue for every dollar earned from the sale of natural gas abroad. (This ratio of oil to gas dollars has fallen to 3 to 1 in 2021 due to extremely high natural gas prices.) The targeting of oil sales is aimed at the Russian jugular.

Also, since the oil market is global and oil is a commodity easily shipped from one place to another, managing a European (but not global) ban on Russian oil sales should be less of a pain. At least in theory, Russian oil shunned by Europe could head to other markets, displacing that of non-Russian producers headed to Europe, minimizing pain at the pump.

For some, however, this fungibility of oil is a disadvantage rather than a virtue of a possible ban on European imports. India is aggressively buying Russian oil shunned by other buyers. In a virtual meeting this week, President Joe Biden reportedly advised Indian Prime Minister Narendra Modi not to increase India’s dependence on Russian energy.

From this point of view, the deep discounts offered by Russia to lubricate sales mean that a European ban would reduce somewhat – but not revenue flows to Moscow. As a result, particularly if China were to buy more Russian oil, the main impact of a European ban would be to absolve EU countries from directly funding the war effort, rather than crippling Russia financially.

For others, the main concern about a European ban on oil from Moscow is its consequences for the global economy, not its impact on Russia. Europe now buys about half of Russia’s crude oil and petroleum products. A sharp disruption in these flows could shake up energy markets, given the uncertainty over how quickly, comprehensively and smoothly the oil market would revive oil trade flows. Mohammed Barkindo, secretary-general of the Organization of the Petroleum Exporting Countries, told EU officials this week that “it would be nearly impossible to replace a loss of this magnitude” as he spoke of a potential withdrawal of exports from Russian oil from the market.

The price of oil is now down from previous peaks, mainly thanks to a huge release from the US Strategic Petroleum Reserve and Covid-induced downturns in the Chinese economy, leading to revisions in forecast oil demand from the China this year. But prices could rise if more Russian oil leaves the market. The Oxford Institute for Energy Studies estimates that disrupting half of Russia’s oil exports, roughly the amount Europe buys every day, could push oil prices up to $160 a barrel by summer. .

Both of these reservations about a future ban on Russian oil purchases are valid, but they will not negate a deep unease about continuing energy relations with Russia as its forces attack eastern Ukraine.

Policy-making in the face of uncertainty

Fortunately, there are more options than doing nothing or risking the state of the global economy. One, already adopted by Europe to some extent, is to declare a ban on Russian energy imports which will be gradually implemented over the next few months or the rest of 2022. In addition to the new ban on the coal, Germany says it could stop buying Russian oil by the end of the year.

Another option being explored is to create an escrow account into which a portion of the proceeds from any Russian oil sales will go, above a certain price deemed sufficient to motivate continued Russian sales.

But such measures may appear insufficiently ambitious or overly self-serving in the weeks ahead, putting pressure on political leaders to do more.

The United States will also be asked to do more, even though the Biden administration has already ended American purchases of Russian energy. Members of Congress speak of “secondary sanctions” – sanctions against third parties (such as companies or banks) that pursue transactions with Russia in a way that strengthens a specific element of the state. Energy purchases definitely fall into this category.

Uncertainty is always a challenge for policy makers, but in this case the uncertainty is epic, especially in the face of growing emotions over Russia’s atrocities and accusations of genocide.

Faced with both plausible yet widely divergent future scenarios, good policy makers often wonder if there are any tools or strategies that might prove useful should either situation materialize. This time should be no different.

Lessons from a Sanctions Superpower

American policymakers are lucky that the United States is a sanctions superpower. This superlative applies not only in the sense that the United States uses sanctions more often and more aggressively than any other power. He also experimented with sanctions, employing creative ideas from the past that serve as suggestions for the future.

Secondary sanctions have generally been associated with US overreach and outrage among allies, as they are often seen as an example of US use of economic power when its diplomacy fails. failed to rally others. This is not necessarily the case.

In fact, the secondary sanctions that have been used to deter non-US countries and companies from buying Iranian oil may offer useful lessons for today. Sanctions incorporated into the National Defense Authorization Act in 2012 offered a series of mechanisms for policymakers to calibrate pressure on Iranian oil flows based on market conditions and political realities.

In 2012, Arab revolutions were sweeping the Middle East and oil prices had been hovering around $100 for the past few years. With prices high and the world still emerging from the Great Recession, officials in President Barack Obama’s administration and elsewhere were reluctant to isolate Iran, one of the world’s largest crude suppliers, from the market. world oil market without certain important safeguards.

The Defense Authorization Act recognized this and required the administration to report periodically to Congress on the state of the oil market. And the president had to regularly determine whether the oil markets were sufficiently supplied to continue the sanctions. (Given Saudi cooperation to stabilize oil markets and the boom in U.S. shale oil production at the time, the administration never needed to use the provision to suspend sanctions. )

In addition, the NDAA created what became known as “significant reduction exemptions” from sanctions. The Obama administration could use these waivers for countries that have made progress in significantly reducing dependence on Iranian oil.

This package allowed the White House a great deal of discretion and led to exemptions for some of the US treaty allies, such as Japan and South Korea, as well as non-allies, including China and India. . The legislation also included the usual national security waiver, which gives the executive the ability to declare that suspending sanctions in a particular case would be in the national interest.

As pressure mounts in Washington for more economic sanctions against Russia, and for secondary sanctions in particular, Congress would be wise to consider these innovations beginning in 2012. They could give the Biden administration the flexibility to reduce dependence on Russian energy.

Imagine, for example, that Biden and Modi discussed sanctions provisions like those used with Iran in the 2012 NDAA. Prime Minister that he had the tools to roll back any US sanctions if oil markets seemed too tight.

Rather than giving Modi the stark choice between secondary sanctions or the complete severance of India’s energy relationship with Russia, Biden could have prompted a more gradual and realistic Indian move away from Russia.

Sanctions are often referred to as a “blunt instrument”. They don’t need to be.

More from Bloomberg Opinion:

Putin was a victim of the dictator’s disease: Hal Brands

• Germany must wean off Russian gas sooner, not later: Chris Bryant

The most powerful weapon in the Ukrainian war could be a mobile phone: James Stavridis

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Meghan L. O’Sullivan is a Bloomberg Opinion columnist. She is a professor of international affairs at Harvard’s Kennedy School, North American chair of the Trilateral Commission, and a member of the board of directors of the Council on Foreign Relations and the board of directors of Raytheon Technologies Corp. She served on the National Security Council from 2004 to 2007.

More stories like this are available at bloomberg.com/opinion

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