By JOSH BOAK – Associated Press
There is one glaring exception to President Joe Biden’s sanctions against Russia: oil and natural gas from that country will continue to flow freely to the rest of the world, and money will continue to flow to Russia.
Following Russia’s invasion of Ukraine, Biden defended his decision to maintain access to Russian energy to “limit the pain the American people feel at the pump.” However, some academics, lawmakers and other analysts say excluding an industry at the heart of Russia’s economy essentially limits sanctions and could embolden Russian President Vladimir Putin.
“Energy exports are the whole game,” said Columbia University historian Adam Tooze, an expert on finance and European politics. Politicians in the United States and Europe chose to “carve out the one sector that could really make the difference. I don’t think Russia is blind to what’s going on and it needs to show them that the West doesn’t really have the guts for a painful fight over Ukraine.”
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As part of a broader international push, Biden on Thursday announced sanctions targeting Russian banks and the country’s elites, restricting exports of vital technologies critical to military and economic development. The US and its European allies on Saturday tightened sanctions by announcing plans to freeze the reserves of Russia’s central bank and to ban certain financial institutions from the SWIFT messaging system for international payments.
But rules enacted by the Treasury Department allow Russian energy transactions to go further through unsanctioned non-US banks. And government officials stress that the sanctions are aimed at minimizing disruptions to global energy markets.
US crude prices closed just below $92 a barrel on Friday, right where they were in the days before the Russian invasion of Ukraine. Still, gasoline prices at the pump are up more than 33% year over year to a national average of $3.57 a gallon, according to the AAA.
Inflation, which is at its highest in 40 years and fueled in large part by gas prices, has hurt Biden politically as voters head into the November election.
The sanctions created a possible compromise for the president between his political interests at home and abroad. By invading Ukraine, Russia may have contributed to the supply chain problems and inflation that have been a key weakness for Biden, who is now trying to strike a balance between punishing Putin and sparing American voters.
Biden specifically touted the Russian energy carve-outs as a virtue because they would help shield US families and businesses from higher prices.
“Our sanctions package that we specifically designed to allow energy payments to continue,” he said.
Those domestic policies — which also apply to many European leaders — led to a raft of sanctions that Sen. Pat Toomey, R-Pa., said Thursday he fears “will not be enough to deter Putin from further aggression.” “.
“The government is deliberately leaving the largest industry in the Russian economy virtually untouched,” Toomey said. “The sanctions imposed on Russian banks, while welcome, cannot isolate the Russian financial system from international activities. Therefore, the US should impose crippling sanctions on Russia’s oil and gas sector.”
But Biden must also consider the needs of his European allies. Natural gas from Russia accounts for a third of Europe’s fossil fuel consumption. Restrictions on the world’s largest exporter of natural gas and second-largest oil exporter after Saudi Arabia could hurt a deal US officials say is key to confronting Putin.
This reliance on Russia could limit potential destruction from sanctions.
“It would definitely hurt Russia more if the energy sector was included in the sanctions package,” said Mark Finley, a fellow in energy and global oil at Rice University’s Baker Institute for Public Policy, in an emailed statement. “Oil licensing fees and taxes generally account for about 40% of the Russian federal government’s revenue.”
Finley noted that in recent years Russia has relied on oil and natural gas revenues to build its stockpile of foreign exchange reserves to over $600 billion, particularly to protect itself from financial sanctions. But that fiscal cushion could ultimately be threatened by the additional US and European sanctions.
Should there be a loss of oil and natural gas from Russia, the US appears unable to ramp up production of oil and natural gas quickly, while OPEC-plus countries have yet to publicly commit to significantly higher production .
Domestic oil and gas companies are dealing with tight supplies of rigs, sand, truck drivers and labor needed to drill for oil and gas, said Jen Snyder, chief executive officer at Enverus, an energy analysis firm. She noted that one supplier said its most modern and efficient drilling rigs would all be outsourced by the end of the year.
“All of these limitations can be bridged, but it takes time,” Snyder added.
The supply of natural gas in Europe was extremely scarce. But gas producers in the US cannot quickly export more gas to the world market. Because in order to ship natural gas overseas, it must be chilled and converted into liquefied natural gas at LNG export facilities, and in the US, these facilities are operating at full capacity.
In the face of sanctions over Putin’s invasion of Ukraine’s Crimea peninsula in 2014, the country’s elites and insider companies learned to adapt, often transferring their assets to newly created Shell entities with clean balance sheets. Those strategies are now being tested, although access to oil has been a perennial loophole that other countries in similar predicaments have exploited in the past, with Russia’s help.
Putin’s administration has helped teach other US opponents, such as Iran and Venezuela, how to circumvent Washington’s controls, said Marshall Billingslea, who helped set sanctions policy for the Trump administration.
“Sanctions enforcement is inherently a cat-and-mouse game, and they’ve had eight years since Crimea to set up alternative mechanisms to keep hard currency flowing to the regime,” Billingslea said.
Associated Press writers Joshua Goodman in Miami and Cathy Bussewitz in New York contributed to this report.
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