Raft of new US sanctions leave Putin’s oil and gas revenue unscathed

The US sanctioned hundreds of Russian officials, lawmakers, family members and businesses Friday in what Treasury Secretary Janet Yellen called a “sweeping action,” but in reality the measures will have little practical effect on President Vladimir Putin’s ability to sustain his country’s economy with oil and gas revenue.

That raises fundamental questions about the effectiveness of sanctions, despite how big it looks on paper for the Biden administration to go after Russia’s central banker, Elvira Nabiullina, and Alexander Novak, the deputy prime minister and a key figure in Russia’s energy sector. A raft of sanctions so far haven’t materially affected the war on the ground in Ukraine or dented Putin’s determination to pursue it despite repeated setbacks.

Putin’s brazen annexation of regions in Ukraine — and his threat to use nuclear weapons to defend his land grab — required a response of some kind. For the Biden administration, it came down to the need to send a signal, to communicate to countries that may be inclined to support the Russian government and work with its key financial officials that they could eventually land on the wrong side of US sanctions policy.

“I want to issue a clear warning to those who would think about providing political and economic support to these annexed territories or to Russia’s efforts to justify and defend the annexation: You can be subject to US sanctions as a result of those activities,” said US National Security Adviser Jake Sullivan.

But it’s not clear that this talk of secondary sanctions is enough.

“To further isolate Russia, there needs to be a serious look at deploying secondary sanctions, rather than just threatening,” said Daniel Tannebaum, a former Treasury Department official who is a partner at Oliver Wyman. “Secondary sanctions force countries to choose between doing business with the target of sanctions or those imposing sanctions. In this instance, you could carve out energy, agricultural, food and medicine-related transactions but more broadly ban additional sectoral trade.”

US agencies came up with the long list of new sanctions targets after Putin announced the annexation based on sham referendums in areas of Ukraine. President Joe Biden said this week that the US would “never, never, never recognize Russia’s claim on Ukraine sovereign territory.” On Friday, Biden declared that a massive leak from the Nord Stream gas pipeline system in the Baltic Sea was an intentional act, and that Russian statements about the incident shouldn’t be trusted.

“It was a deliberate act of sabotage. And now the Russians are pumping out disinformation and lies,” he told reporters at the White House.

Yellen said in a statement that Friday’s moves were meant to “further weaken Russia’s already degraded military industrial complex” and that the US was taking specific aim at Russia’s “financial architecture” to limit its ability to prop up its economy. But the Treasury also said it would continue to allow people other than Americans to buy Russian oil and gas, which critics of the US response have cited as a weakness in the sanctions regime.

“There’s been a paradox in these sanctions,” Senator Bill Cassidy, a Louisiana Republican said in an interview on Bloomberg Television’s “Balance of Power With David Westin.” “As the international price of oil has gone up, Russia has had increased revenue from selling oil and natural gas.”

Assistant Treasury Secretary Elizabeth Rosenberg told the Senate Foreign Relations Committee on Wednesday that imposing financial costs on Russia while mitigating the effects of its actions has required “extraordinary planning, coordination, economic analysis, diplomacy, and creative policy making.”

She pointed to a 35% drop in Russia’s stock market since the start of the war and said its economy was expected to contract over the next two years. She told senators that Russia has had to turn to Iran and North Korea for weapons because of the export controls imposed by the US and its allies.

The Treasury Department has been working with European allies to impose a cap on the price of Russian oil. The proposal would let oil flow from the country to buyers in the developing world provided the insurers and finance companies that facilitate the transport attest that it’s sold below a pre-set cap. The Treasury has said it anticipates the cap will be “well above” the cost of production.

When the new US sanctions were announced, attention turned immediately to Nabiullina. She has served as Russia’s central bank governor since 2013 and was appointed to a new five-year term in March. Before that, she served as Putin’s economic adviser. She has managed the economic fallout from international sanctions, quickly adjusting to a wartime policy when the ruble tumbled 30%.

“I don’t think that sanctioning Governor Nabiullina itself is going to make that much difference, I think it’s more symbolic,” said Rachel Ziemba, a fellow at the Center for a New American Security. “The big question and step is about the price cap and what happens with the energy markets. That’s the piece that’s still not been addressed. So while it’s a very long list, I’m not sure it’s a full game-changer.”

A bipartisan pair of senators — Chris Van Hollen, a Maryland Democrat, and Pat Toomey, a Pennsylvania Republican — have introduced legislation that would impose secondary sanctions on countries such as India and China that purchase Russian oil at prices above the cap. The Treasury Department has shied away from using secondary sanctions to enforce the cap out of fear the measures would drive important allies like India away from the West.

Beyond the energy sector, there’s a question around how porous US sanctions on prominent Russian officials and citizens may prove to be. Russian Oligarch Oleg Deripaska evaded sanctions to fly his girlfriend to the US in 2020 to ensure that their child was born on American soil. A second attempt was halted by authorities earlier this year, according to the Justice Department.

Tannebaum and Ziemba said the most effective part of the US actions was restrictions on certain exports to Russia, including critical technology. More significant still is the threat of penalties for third countries who sell those items to Russia, they said.

The effectiveness of the package lies in the additional entries on the Commerce Department’s Entity List, Tannebaum said. “That will make it harder for Russia to import the goods needed to keep their war in Ukraine going.”