Oil sanctions on Russia

 

A twitter thread from Edward Fishman

Putin's war shows no sign of letting up. It's time to impose sanctions on the lifeblood of Russia's economy: Oil.  Oil is the weak spot in the pressure campaign. It doesn't have to be.

Here's how the US & Europe can cut Russian oil sales while limiting adverse side effects (🧵):

(1) First things first: Russia's economy is heavily dependent on oil sales. Russia exports 5m barrels of oil per day. This accounts for roughly half of Russia's export revenues—by far Russia's largest source of cash. Oil adds >$100b to the Kremlin's coffers each year.

(2) The West has avoided targeting Russia's oil sales for two reasons: first, concerns about spiking domestic gasoline prices; second, if oil prices ⬆️ by more than Russia's sales ⬇️, sanctions could perversely benefit Moscow, as it could earn more cash selling less oil.

(3) The West has not, however, kept Russia's oil sector entirely off-limits. It has just focused on future production, not current sales. Rosneft, the state-owned oil giant, has faced debt sanctions since 2014. There have also been sweeping prohibitions on the provision of goods & services to Arctic offshore, deepwater, and shale oil projects in Russia since 2014. Last week, the US also imposed controls on exports to Russia's oil refineries, noting a "a strong interest in degrading Russia’s status as a leading energy supplier over time."

(4) There is more that can be done to curtail Russia's future oil production. For starters, the prohibitions on Arctic offshore, deepwater, and shale could be expanded to cover ALL oil projects in Russia, including existing conventional projects.

(5) Most critical of all, however, is cutting Russia's oil sales directly. This cannot be done overnight—5m bpd is too much supply to replace at a stroke. But that doesn't mean it can't be done in phases. In fact, a phased approach is exactly how the US slashed Iran's oil sales.

(6) Some history: The Iran oil sanctions were the result of Congressional legislation—NDAA for FY2012. The design was clever. Buyers of Iranian oil could continue buy so long as their country "significantly reduced" their total purchases over the preceding 6 months. Meanwhile, oil proceeds could only accrue in Iranian-owned escrow accounts in third countries. For instance, if Chinese buyers paid Iran for oil, that cash built up in Iranian bank accounts in China. It could only be used for bilateral trade; it couldn't flow back to Iran.

(7) These sanctions led to consistent and substantial reductions in Iran's oil sales: from 2.5m bpd to under 1m bdp in just a year and a half. When the US reinstated the program in 2018, Iran's oil exports dropped even further, falling below 500k bpd.  Additionally, the sanctions caused tens of billions of $ of Iranian oil revenues to build up in foreign bank accounts. The prospect of repatriating these funds to Iran gave the US a major carrot in nuclear talks. Iran could literally quantify the benefits of a nuclear deal.

(8) A similar model could be used to cut Russia's oil exports. The first step for the US is to stop importing Russian oil ourselves. This should be easy: we buy just 13.5k bpd from Russia. We can replace that swiftly and with minimal consequences.

(9) The next step is harder: the US & Europe need to threaten secondary sanctions against anyone around the world that buys Russian oil. But they should provide exemptions for entities based in countries that "significantly reduce" their purchases over the previous 3-6 months.   In the US, General License 8 already provides broad sanctions exemptions for energy-related transactions. Under this plan, the US would make access to GL8 conditional on material and consistent reductions in purchases of Russian oil.

(10) Taking another page out of the Iran playbook, the US and Europe should require Russian oil revenues to remain in bank accounts located in purchaser countries. This would ensure Moscow can't use its oil proceeds to fund its military machine.

(11) This phased reduction strategy would deprive the Kremlin of billions without shocking global oil markets. It would give a strong market signal to other producers to compensate for diminishing Russian cargoes. It would cut Putin's cash flows at their source.

(12) It just might be MORE effective than the Iran strategy. The US led the campaign against Iranian oil largely alone. On Russia, the US & Europe would be working hand-in-hand, leveraging access to their markets & financial systems to disincentivize purchases of Russian oil.  Moreover, many market participants are already voting with their feet and ceasing purchases of Russian oil. The reputational hazards of paying Putin millions are just not worth it. See: the backlash against Shell for buying a Russian oil cargo at a bargain price last week.

(13) How could such a campaign start? The US & Europe could launch it today, if they so choose (they should). Alternatively, the US Congress could require such a campaign in future legislation. Recall this is how the campaign against Iran's oil exports was born.

(14) I believe such a campaign is likely in the coming months. The only question is: When?  My perspective: Putin's aggression in Ukraine is worsening each day, and it will take time to reduce Russia's oil sales in a major way—so the sooner we begin, the better.