US sanctions on Russia carve out room for energy to breathe, keep oil prices in check for now

The US has no plans to intentionally disrupt energy flows from Russia as the risks to the fragile economic recovery and global oil markets remain too steep, a White House official said.

Deputy National Security Advisor and Deputy National Economic Council Director Daleep Singh was steadfast in his resolve Feb. 24 when pressed on the absence of any immediate energy-related repercussions for Russia's invasion of Ukraine. As Russia's military campaign into Ukraine intensifies along with rebukes of Russian President Vladimir Putin's actions, the White House on Feb. 25 did not signal that it would budge from that position.

"When we consider which sanctions to apply, we're not cowboys and cowgirls pressing a button to impose costs," Singh told reporters. "We follow a set of principles."

In addition to demonstrating that the US has the capacity to deliver overwhelming costs to Russia, sanctions also must avoid any perception of targeting Russian civilians as well as any "unwanted spillovers back to the US or the global economy," he said of those principles.

White House Press Secretary Jen Psaki said Feb. 25 the US is joining the European Commission in directly sanctioning Putin, Russian Foreign Minister Sergey Lavrov and members of the Russian national security team.

Other US sanctions aim to cut off Russia's largest banks from the US financial system and stop foreign investment from flowing to 13 major state-owned firms, including top energy producers Gazprom, Gazprom Neft and RusHydro; pipeline operator Transneft; and top shipper Sovcomflot.

The measures against Sberbank and VTB, the top two Russian banks that account for more than half of the banking system, will drastically alter their ability to operate, the US Treasury Department said.

Energy payments waiver

A key Treasury waiver allows "energy-related" transactions to continue with five of the sanctioned Russian banks until June 24.

The waiver gives an extremely broad definition of "energy related," listing the extraction, production and refining of any petroleum products as well as other commodities capable of producing energy, such as coal, wood, agricultural products for biofuels, uranium, and electricity of all kinds.

The Biden administration could let that waiver expire in four months if the conflict is still raging or if energy markets have cooled off enough to lessen the risks of supply disruptions.

Sanctions against other major energy producers, including Venezuela and Iran, have come with waivers to allow energy sector activity for a few months. Iraq's waiver to import Iranian power supplies, for example, has been renewed countless times but remains a source of diplomatic pressure between Baghdad and Washington.

Swift criticism

The absence of US and European measures to ban Russia's access to the international financial messaging service SWIFT received criticism, but several US sanctions experts defended the move.

A SWIFT ban is "overrated" as a sanctions tool, said Daniel Fried, a State Department sanctions coordinator during the Obama administration who is now with the Atlantic Council.

"The blocking sanctions on Russia's big banks hit harder," he said Feb. 24. "Sanctions now aren't about changing Putin's mind. They're about hitting Russia's economy so he has fewer resources."

Keeping direct energy sanctions off the table will not be tenable for long if Putin continues to escalate, said Eddie Fishman, another Obama-era sanctions adviser now with the Center for a New American Security.

"We'll get to Iran-style sanctions," he said. "The only question is: How soon?"

Asked why the US did not take a more aggressive stance on Russia's oil and gas assets, Singh pointed to the Russian energy sector's "systemic importance in the global economy," as the country is the world's No. 2 producer of both natural gas and crude oil.

"Russia depends on those revenues just as much as the world needs its energy," Singh acknowledged. "But we're not going to do anything which causes an unintended disruption to the flow of energy as the global economic recovery is still underway."

Pressed further on potential hits to Russia's energy sector, Singh said that measures designed to cut off Russia's access to cutting-edge technologies are expected to impact Russia's long-term productive capacity.

"We are seeking to degrade that capacity, but nothing in the short term as it relates to energy," he said.

Crude prices slide

With soaring inflation, high fuel prices and the relative lack of sanctions on Russia's energy industry, market concerns about near-term supply disruptions have eased.

NYMEX April WTI settled $1.22 lower on Feb. 25 at $91.59/b, and ICE April Brent fell $1.15 to $97.93/b.

S&P Global Platts Analytics does not expect oil supply to be curtailed, either from sanctions or Russia voluntarily holding back exports.

"Sanctions risks will persist for the foreseeable future, driven by geopolitical dynamics," said Paul Sheldon, Platts chief geopolitical adviser.

However, the EU approved a preliminary package of sanctions that will target Russia's oil refining and transport sectors.

EC President Ursula von der Leyen Feb. 25. announced an export ban that is expected to hit Russia's oil sector "by making it impossible for Russia to upgrade its oil refineries, which gave Russia export revenues of Eur24 billion [$26.8 billion] in 2019."

The White House has put an emergency release of crude from the Strategic Petroleum Reserve on the table as well as advocated for a globally coordinated crude stockpile release to help further ease global supply concerns. Psaki declined to comment on whether the administration had a set oil price in mind that would trigger an SPR release.

Highlights of latest US sanctions against Russia:

Sberbank, Russia's largest bank: US banks must close any "correspondent or payable-through" accounts and reject any future transactions within 30 days.

VTB, Russia's second-largest bank: full blocking sanctions instantly froze and blocked any assets held in US financial institutions.

General License 8: five sanctioned banks -- Sberbank, VTB, VEB, Otkritie and Sovcombank -- can continue energy-related transactions until June 24. Waiver defines energy very broadly.

Foreign investment restrictions on 13 major state-owned firms, including gas producer Gazprom, oil producer and refiner Gazprom Neft, pipeline operator Transneft, energy financier Gazprombank, agriculture financier Russian Agricultural Bank, shipping company Sovcomflot, and Russian Railways.

Individual sanctions including against Putin, Lavrov and Rosneft CEO Igor Sechin.