Energy, policy experts float alternative approaches to energy sanctions on Russia

Energy sanctions against Russia need to be reconfigured to better target the country's revenues from oil and natural gas trade rather than stifling export volumes and in turn sending global oil markets and domestic fuel prices skyrocketing, energy experts and diplomats said June 10.

"The jump in oil prices meant that Russian oil revenue did not suffer, has not suffered even though it has to offer discounts to move barrels," Edward Chow, senior associate in the Energy Security and Climate Change Program at the Center for Strategic and International Studies, said during a discussion hosted by the Atlantic Council.

The decision by the US and its allies to forego direct military intervention to stop Russia's war against Ukraine made economic sanctions "a second-best solution" that will come with economic and political consequences, Chow asserted.

"If the West actually achieves the stated goal of banning Russian oil and gas, then we will see record crude oil prices above $150/b and we will be looking at not $5/gal gasoline this summer in the US but $6," he said.

Chow questioned whether US policymakers were preparing their constituencies for this or if they were instead "somewhat conflicted between wanting to be seen as doing something without accepting the economic consequences of our actions."

Changing the target

But Chow offered that this outcome can be avoided, as it is the result of the target of the energy sanctions thus far being set wrong.

"The objective should be to reduce significantly Russian oil revenue, not volume," he said. "The answer, at least my answer, is for the West to impose a hefty oil import tariff on Russian oil. At current prices, I would start with a tariff of at least $50/b, with funds collected dedicated to Ukrainian humanitarian relief and future reconstruction."

Chow contended that the tariff structure would force Russia to significantly increase the price discounts it has had to extend to buyers of Russian oil, hitting the Russian government's revenue through the collection of export tax without hampering Russian oil producers "who will produce as long as the price is above their production costs."

Olexander Scherba, former Ukrainian ambassador to Austria and now chief adviser to the CEO of Ukraine's state Naftogaz, advocated for stronger action -- a full embargo on Russian oil and gas by the EU and the imposition of secondary sanctions against exports by the US.

"Everything that hurts [Russian President Vladimir] Putin and limits these numbers that are still unfortunately soaring of Russian revenues from oil and gas trade should be used," Scherba said. "For us, it's a simple answer, probably not as simple for the US."

Recognizing that the EU is not in a position to immediately turn away from Russian oil and gas, he supported a transfer cap until a full embargo is feasible.

A transfer cap, he said, would allow Russian oil and gas to continue to flow to the EU, paid for at the contract price, but with banks and offtakers transferring only a fraction of the fuel's costs to Russia, with the majority held in escrow accounts. He said this would hurt Russia while easing pressure on the global oil markets.

Assumptions

Richard Morningstar, former US ambassador to the EU and to Azerbaijan and founding chairman of the Global Energy Center at the Atlantic Council, questioned whether Russia "would play that game," when it came to either the transfer cap or import tariff, and raised implementation and enforcement questions.

Looking particularly at the tariff idea, he said it assumes that Russia would consider the complete loss of revenue from the West to be too great and would accept the tariff situation and discount prices accordingly. It further assumes, he said, that Russia would conclude that potential revenue from China, India and others would not sufficiently come close to substituting what it would lose from the West.

Chow acknowledged that his proposal counts on "Russia being somewhat sensible economically because they need the revenue and they don't want to do permanent damage to their petroleum industry."

He pointed to the long-term financial impact of leaving barrels in the ground and the technical challenges as it would degrade the pressure of the reservoirs. If Russia were to allow production, currently around 11 million b/d, to drop to 7 million b/d or lower, that could damage the ultimate recoverability of its oil reserves, Chow said.

Smarter oil sanctions

"No secondary sanctions will be needed against the likes of India, China, Turkey, since the objective is no longer to stop all Russian oil exports, which would severely damage the global economy and strain alliance unity in supporting Ukraine, but the objective would be instead to deprive the Russian government of economic rent from oil exports as much as possible," Chow continued.

"I really hope that by the time of the G7 and NATO summits at the end of this month, we and our allies will design more effective or smarter oil sanctions rather than risk the sanctions regime unraveling," he added.

Erik Woodhouse, deputy assistant secretary for the Division for Counter Threat Finance and Sanctions at the State Department, said he expected to see sustained efforts to reduce revenue to Russia from energy sales, but because "energy is a sensitive issue ... globally ... that's something that we're going to have to work on over time."

"It's undeniable" that sanctions are having an impact, and the US will continue to maintain and expand pressure on Russia through sanctions and a full array of other diplomatic tools, said the deputy assistant secretary for counter threat finance and sanctions. "In the end, [Putin and Russia] are going to have to make a decision as to how much economic pain and isolation they're willing to endure on this front."