Energy & Environment

Global reliance on Russian energy a hurdle to US pressure campaign on Putin

The global reliance on Russian petroleum and natural gas is a major hurdle for President Biden and Western allies as they attempt to dial up economic pressure on Russian President Vladimir Putin. 

The U.S. 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 U.S. 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 U.S.’s total imports from Russia, President Biden said Thursday 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, behind the U.S. and Saudi Arabia, and the second-biggest natural gas producer, behind only the U.S. 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’s 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,” Singh said. “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.”

As a net exporter of oil and natural gas with a sturdy strategic reserve, the U.S. 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 U.S. 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 U.S. 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 U.S. 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. U.S. gasoline prices rose 40 percent 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 U.S. 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 U.S.-based financial firm from processing payments and transactions for Sverbank, effectively preventing Russia’s largest financial institution from access to the U.S. dollar. 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 U.S. financial system, days after Biden imposed a ban on any purchase or sale of Russian debt by U.S. firms. 

The sanctions not only prevent Russian firms from most business within the U.S., but also makes it nearly impossible to conduct transactions in U.S. dollars. Roughly 80 percent of the $46 billion in foreign transactions processed each day by Russian banks use U.S. dollars, 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 U.S. penny.

“This is not the outcome we wanted,” said White House press secretary Jen Psaki 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.  

“Sanctions on companies and asset freezes, they’re leading to a lot of nervousness among people in the global system,” he added. “You could argue that even though the sanctions aren’t really targeting Russian crude … they’re already having an impact.”

Even so, sanctions experts are skeptical that the high cost of current sanctions will be enough to curb Putin’s belligerence.

Ziemba said while the sanctions imposed Thursday are “significant escalation,” Putin and his inner circle still have room to maneuver around the penalties — even if most of the Russian population doesn’t.

“Is that pain and strain going to be enough to cause a policy change? That we don’t know, and given the events of the last few days, I’m somewhat skeptical,” she said.

Energy & Environment