Risks of US secondary sanctions on Russian oil buyers rise as EU ponders embargo

Risks are rising that the US will impose secondary sanctions on Russian oil customers as G7 partners, including the EU, expand their commitments to curb flows, analysts said May 5.

US secondary sanctions, like those reimposed on Iran in 2018, pressure third-party importing countries to reduce their purchases from the target country over time by a certain amount or risk being cut off from the US financial system.

"The primary goal will be to prevent Russia from simply rerouting oil elsewhere," said Brian O'Toole, a nonresident senior fellow at the Atlantic Council and a former senior sanctions official at the US Treasury Department.

O'Toole expects the US to "take action that mirrors whatever the EU does and put the might of US sanctions behind the EU actions."

Escrow system

A Stanford University working group, led by former US Ambassador to Russia Michael McFaul, has urged the Biden administration to compel buyers of Russian energy to make payments into escrow accounts that would be withheld from Moscow until the war ends. US authorities would enforce this mechanism through secondary sanctions.

Eddie Fishman, an Obama administration sanctions adviser and a member of that working group, said secondary sanctions are not intended to penalize importing countries but rather serve as an incentive to avoid repatriating funds to Russia.

A Chinese company, for example, could continue buying Russian oil within the constraints set out by the US policy, paying into a Gazprom bank in China, for example, Fishman said. But if the Chinese buyer sent the payment to Russia, they could incur US secondary sanctions.

"So the choice that's posed to these Chinese banks or energy companies who are involved in these transactions is: do you comply with this policy? And if not, you risk losing access to the US financial system," Fishman said in an interview with the Capitol Crude podcast that will publish May 9.

"Usually, no matter who it is, the choice between the US financial system and the Russian financial system is a pretty easy one to make."

India, China as triggers

Rachel Ziemba of Ziemba Insights said a US decision to impose secondary sanctions could be triggered by "any signs that India, China and others are stepping up and significantly boosting imports."

"I don't think there is yet a consensus on how this should work, nor do I think [the US government] is yet ready to set up a set of escrow accounts," she said.

Ziemba said secondary sanctions might focus on ensuring reductions in energy flows and capping Russian revenues, while another option would be to allow for purchases as long as buyers did not increase volumes.

"Implementation and enforcement of a complete global oil ban are complicated by tight global supplies and by difficulty cracking down on potential future barter arrangements," she said. "Of course, even partial bans or sharp reductions would face significant enforcement issues."

Like China, India's response to Russia's shrinking customer base and the lure of steep discounts for its Urals crude exports will be key to any US sanctions enforcement effort.

US President Joe Biden urged Indian Prime Minister Narendra Modi to diversify the country's oil imports away from Russia during a virtual meeting April 11 but did not appear to lean heavily on him for specific reductions or timelines.