Europe has yet to hit Russia where it would hurt the most: banning its oil and gas

“Without a doubt, it’s the gaping hole,” said Juan C. Zarate, former assistant secretary of the Treasury for terrorism financing and financial crimes during the George W. Bush administration. “Everyone realizes that Putin is using Russian energy as a sword and shield in the sanctions dispute, so the question is how to get out of this dependency without causing huge damage to European economies?”

Europe is much more dependent on Russian energy than the United States and has sought alternative supplies to avoid shortages and massive price hikes if it cut off that supply. Around 40% of the natural gas and 25% of the oil consumed by the European Union come from Russia. The United States does not import natural gas from Russia and only 8% of oil imports last year came from there.

Some Europeans Nations fear that even more modest steps to reduce Russian purchases of oil or gas could push Putin to cut off their supply altogether – even if it would deprive him of much-needed money. And European officials are wary of a potential public reaction to the price hike: French President Emmanuel Macron, for example, faces a surprisingly strong challenge in a runoff election this month from far-right candidate Marine Le Pen, who opposes sanctions on Russian energy.

But recent revelations of atrocities in Bucha and Mariupol could change the calculus. In the wake of what many are calling war crimes and genocide, European Union leaders this month voted to ban Russian coal imports and reportedly began drafting an oil ban as well.

“With the way the Russian military has behaved in Ukraine, I think the tolerance to do more to counter Russian aggression has grown,” said Jeffrey J. Schott, sanctions expert at the think tank. Peterson Institute for International Economics. “But how far? It’s hard to say.

A European ban on Russian oil and gas would be the most important way to increase the economic consequences of the war on Moscow, experts have said. It would deprive Putin of significant revenue and also allow the United States to toughen financial sanctions that purposely contain loopholes to allow Europeans to continue to buy energy. For example, the Biden administration has yet to impose harsh sanctions on one of Russia’s largest financial institutions, Gazprombank, because it plays a vital role in state-owned Gazprom’s natural gas sales.

“The United States has done everything possible not to spoil the work for Russian energy purchases,” said Edward Fishman, a former State Department official in the Obama administration who is now a deputy principal investigator. at the Center for a New American Security. thinking group.

Russian sanctions are a complex balancing act for the United States and Europeans. The Biden administration has worked hard to act in concert with its allies in most cases to increase the effectiveness of sanctions. And European leaders — especially the Germans, who rely heavily on Russian oil and gas — have been reluctant to target those supplies because of the potential damage to their own economies.

“Our goal from the beginning has been to impose as much pain as possible on Russia, while doing the best to protect the United States and our partners from undue economic harm,” Treasury Secretary Janet Yellen told lawmakers. the House in a hearing this month. Pressed by some Republicans on energy exemptions built into US sanctions and Europe’s reluctance to hit Russian oil and gas exports, Yellen said the Europeans are trying to manage the trade-offs.

“They clearly recognize the importance of depriving Russia of export revenue wherever possible, but unfortunately they are dependent on oil and natural gas,” she said.

In retrospect, the United States and its allies turned the screw too slowly as they increased sanctions on Russia, especially when it came to cracking down on its energy industry, said Schott of the Peterson Institute.

“The gaps shouldn’t have been so big in the energy trade, because we’ve basically been funding the Russian war effort for six weeks now with Western oil and gas purchases,” he said. . “While conditions are becoming much more difficult in the Russian economy with higher inflation and some shortage of imported goods, this has not been crippling or even to the point that the Russian government would not be able to maintain its military operations.”

Russia’s invasion of Ukraine on February 24 triggered the toughest sanctions ever imposed on a major developed country. The United States and its allies – not just the Europeans, but the Japanese and others – have decided to isolate Russia from the world economy. They targeted many of his biggest banks and state-owned companies, while imposing personal sanctions on Putin and other government officials, their families and the billionaire oligarchs who cut off their access to assets outside. from the country.

“Responsible nations must come together to hold these perpetrators accountable,” President Biden said April 6. “And with our allies and partners, we will continue to increase the economic cost and increase the pain for Putin and further increase Russia’s economic isolation.

The costs have been high so far for Russia. The World Bank recently estimated that the sanctions will cause the Russian economy to shrink by 11.2% this year. The Russian government announced on Wednesday that the annual inflation rate hit 16.7% in March, nearly double the four-decade high in the United States. The Russian government and some of its companies are about to default on their debt.

Biden bragged in a speech in Poland late last month that sanctions had nearly reduced the value of the Russian ruble “to rubble”, meaning Russia’s costs of importing goods were skyrocketing. But after plunging dramatically in the first weeks of the war, the ruble regained most of its value. Continued energy sales have brought a steady supply of foreign currency that has helped offset the limits that the United States and its allies have placed on Moscow’s access to dollars, euros and yen, allowing the central bank Russian to stabilize its currency.

“The value of the ruble is crucial. Sanctions are carefully calibrated to produce a psychological effect on the adversary. The collapse in the value of the ruble is a deliberate goal,” said Marshall Billingslea, who served as Assistant Treasury Secretary for Terrorist Financing and Financial Crimes in the Trump administration. “By their own metric, the Biden administration has so far failed to reduce the ruble to rubble.”

The failure to fully sanction Russian energy exports provided Putin with enough cash to prolong the war effort by at least two to three months, said Billingslea, now a senior fellow at the Hudson Institute think tank. .

“They can go on like this for six or seven more months before the financial picture starts to get a little darker,” he said.

Russia exported about three-quarters of its natural gas and half of its oil to Europe in 2021, according to the US Energy Information Administration. Josep Borrell, the EU’s top diplomat, said on April 6 that member countries had paid Russia about $38 billion for energy since the invasion of Ukraine.

European leaders plan to cut natural gas purchases from Russia by two-thirds by the end of the year and hope to replace it with liquefied natural gas from Egypt, Qatar, the United States and others country. As discussions on additional steps continue, Borrell said Monday that “nothing is ruled out, including oil and gas sanctions.”

Canada announced an import ban on Russian oil just four days after the invasion began. About a week later, the US followed with a ban on all Russian energy imports and the UK said it would phase out all Russian oil imports by the end of the year. . On April 8, the EU approved a ban on Russian coal imports after a four-month phase-out.

But EU countries only bought about a third of Russia’s coal exports. The biggest blow to Putin would be a ban on oil and natural gas.

“I think outside of directly targeting Russian oil and gas sales, we hit a certain ceiling in terms of pressure on Russia,” Fishman said.

German opposition is the main obstacle to EU action, experts said. Germany gets about half of its natural gas from Russia, and a report on Wednesday said the country would fall into a deep recession if imports of Russian gas were cut off. A senior German official said this month that the nation was trying to wean itself off Russian energy “as soon as possible”, but worried “when are we going to do more harm to Putin than to ourselves?”

Yet public opinion in Germany may change. Before the invasion, analysts thought Germany was unlikely to stop the Nord Stream2 gas pipeline project, which would transport natural gas from Russia. But after seeing the scale of the Russian attack, German leaders suspended the pipeline.

The escalating brutality of the war has brought Europe closer to halting Russian energy imports, said Zarate, the former treasury official who is now a senior adviser at the Center for Strategic and International Studies think tank.

“We crossed the Rubicon in Europe around this debate, which is quite critical,” he said. “Now we are talking about the wholesale ending of European purchases of Russian oil and gas, which was almost unimaginable just a few months ago.”

And public pressure to be more aggressive on energy sanctions is likely only to grow in Europe as the war continues and Russia’s brutality escalates, said Daniel Drezner, professor of international politics at the Fletcher School. from Tufts University.

“The longer this war lasts, there will be more Buchas, there will be more Mariupols,” he said.

Jim Puzzanghera can be contacted at [email protected] Follow him on Twitter: @JimPuzzanghera.