Russia Energy Sanctions a Delicate Balancing Act
President Joe Biden has emphasized that the US is lining up broad economic sanctions against Russia, if it should decide to invade neighboring Ukraine.
Gone is the talk of highly targeted sanctions heard in previous years: "Their banks will not be able to deal in dollars," Biden said on Wednesday.
Nevertheless, several sanctions experts believe his administration will have to go after the Russian energy sector in some way if sanctions are announced, given the outsized role that energy plays in the country's economy.
The challenge for the US is how to target a country that relies heavily on oil and gas revenues while limiting harm to consumers at home and abroad — and also without ceding business opportunities in the targeted countries to non-Western firms.
Nord Stream 2
US officials have made very clear that Washington is ready to abandon waivers that have kept sanctions against the controversial Nord Stream 2 gas pipeline on hold if Russian forces invade Ukraine.
But it's less clear what additional steps the White House is considering, particularly given the Biden administration's well-documented concern about oil and gas prices and worries in Europe about retaliation from Russia.
"The United States government will have a delicate balancing act," said John Smith, a former head of the Treasury Department's Office of Foreign Asset Control who now works for the law firm of Morrison & Foerster.
Officials will have to consider sanctions "project by project, entity by entity, industry by industry in the coming days, weeks and months," he said.
Cutting Off Access to the Dollar
Biden's threat to block Russian use of the dollar would have widespread ramifications, both in energy markets and for companies with business interests in Russia.
Companies like Total Energies and Equinor would face complicated questions when it comes to financing and getting paid for their work in Russia.
And the likes of Exxon Mobil and Chevron, which tout their sales to Russian refineries, would also face questions about how to continue those operations.
A financial embargo would also make it very difficult for Russia to continue selling its oil and gas without specific accommodations from the US.
The US took similar steps with Iran in the lead-up to the 2015 nuclear agreement, blocking its banks and companies from the US financial system and prohibiting so-called "U-turn transactions" common in currency conversions.
"You could do that for Iran without extraordinary shockwaves because it was Iran," which was already isolated from much of the global economy, Smith pointed out.
"As significant as Iranian oil was at the time, it wasn't to the level and magnitude of Russia," he added.
Targeting Energy Exports
It's difficult to imagine broad targeting of Russia's energy exports, given Europe's high dependence on Russian gas — with oil playing a smaller but still important role.
Washington could consider blocking US imports of Russian crude oil, refined products or both.
Imports of Russian oil have risen in recent years, making up about 7.5% of combined US imports of crude and products in the year through October 2021, the most recent month for which official data is available.
The figure for crude alone is smaller, amounting to about 2% of all imports.
That could affect US refiners that use Russian oil products in their processing, but the overall impact on US industry likely would be limited.
"Is it a big deal? No. I think if you're a supply and trading type, I think it's an interesting problem to solve," said David Hackett at Stillwater Associates.
However, Hackett notes that some US refiners might have to pay more for alternative supplies, or to alter the configurations of their plants.
The refining sector could in fact be an Achilles' heel for Moscow, which relies heavily on imports of catalysts and other crucial technologies.
US officials have talked about enacting export controls on "strategic industries" in Russia, but it's unclear to what extent the energy sector is a target.
Blacklisting Russian Energy Firms
Washington could also blacklist Russian energy companies, but may try to do so in a way that keeps the oil and gas flowing — at least in the short term.
One option could be to blacklist Russian gas giant Gazprom under the same authority used to target oil behemoth Rosneft in 2014, says Brian O'Toole, a former Treasury sanctions official who is a non-resident fellow at the Atlantic Council.
That would make it difficult for Gazprom to raise financing, but would not necessarily pose a threat to its sales of gas to Europe and elsewhere under existing arrangements, he says.
Meanwhile, the European Commission could accelerate its investigation into Gazprom’s alleged gas market manipulation, a former European official pointed out.