This piece originally appeared in The Hill on Friday, July 29, 2022.
As the war in Ukraine grinds on with no breakthroughs in sight, so do Western sanctions on Russia’s economy. These states of limbo are connected: after responding to Moscow’s invasion in February by imposing restrictions on major Russian financial institutions, the U.S. and its allies have become complacent, allowing a weakened Vladimir Putin to amass enough hard currency to keep on fighting.
A game-changer in the war requires the U.S. to cut off Russia from its oil and gas earnings, which brought in nearly $100 billion in the first three months of the war. A senior State Department official admitted at a Senate hearing last month that, due to elevated energy prices, Russia’s revenues could now be as high as they were before the invasion, in spite of international sanctions against the country. The ruble is actually stronger than it was a year ago.
The president shares responsibility for Russia’s resilience. When the U.S. levied financial sanctions earlier this year, including on the Russian central bank, the Biden Treasury Department erred on the side of caution by carving out an exemption for energy-related dealings — from the initial drilling of oil and gas to final sales abroad. This permitted Russia and its trading partners to use the U.S. financial system for transactions involving blacklisted banks. Rather than let this exemption expire in June, Treasury has renewed it for another five months, even as Russia continues to slaughter Ukrainian civilians.
President Biden can stanch the bleeding by closing this energy loophole and extending
U.S. sanctions to cover additional Russian banks. If his administration is concerned that blocking energy transactions may lead to market disruptions, Treasury could instead place Russia’s energy revenues in an escrow account, where they would remain off limits until Moscow ends its hostilities. This is an approach the U.S. and other countries have applied to Iranian energy sales, and there is no reason the president can’t work with allies in Europe and Asia to replicate it. This would allow oil and gas to continue flowing but withhold proceeds from the Putin regime until Russia changes course.
While Treasury Secretary Janet Yellen had previously expressed openness to an escrow policy, the Biden administration has sent her abroad to shop a different, more convoluted idea. This new proposal aims to reduce Moscow’s energy profits by setting up a buyer’s cartel among U.S. allies — and possibly even China — by lifting EU sanctions on maritime insurers if cargo ships transport Russian oil that is sold below a price cap. Though well-meaning, this plan is unproven: it counts on squeezing Moscow even as it raises demand for bargain-rate Russian crude. Sorting out complex issues of implementation and enforcement will also eat up time Ukrainians don’t have.
Moreover, the Putin government could simply refuse to deliver oil beneath a cap, pushing up global prices until purchasing countries in the U.S.-led cartel begin to defect. Rivals like China may also gain strategic influence if invited into the buying group, and Beijing could end up benefitting from even steeper discounts on Russian oil than those it already negotiates. Why else would China participate in such a scheme when its foreign minister touted “strategic resolve” in Sino-Russian relations earlier this month?
If the Biden administration wants to punish Moscow but avoid upsetting energy markets, betting on price controls brings unnecessary dangers. An escrow option would instead incentivize Russia to maintain production by using profits as a carrot and driving a hard bargain for their release. The president also wouldn’t run the risk of providing economic stimulus to Beijing, and he wouldn’t have to ask European governments to undo shipping insurance sanctions they agreed to only a month ago.
Even as Yellen has been traveling to Asia to drum up support for Russian price caps, her Treasury colleagues back in Washington are busy objecting to virtually any financing from multilateral lenders for fossil fuel projects in developing countries, bending the knee to climate-change groups instead of diversifying long-term supplies away from Russia. Even carbon-free energy generation like nuclear power has been kept off the table for fear of offending environmental extremists.
Five months after Russia’s invasion, the president’s lack of direction is untenable. Ending the Russian assault on Ukraine means an all-out effort to cordon off Moscow from its energy windfall and reorient the world toward new sources of oil and gas. This is the path to a Ukrainian victory if the Biden administration gets serious. It is not too late.