Geopolitical experts size up US sanctions options in Russia-Ukraine standoff

US sanctions targeting Russian energy flows other than the Nord Stream 2 gas pipeline are seen as less likely in the Ukraine standoff, although financial sanctions and export controls expected in the event of an invasion still pose risks to oil prices and global commodity markets.

The Biden administration has promised to level crippling economic sanctions against Russia if it invades Ukraine, including financial sanctions to restrict foreign capital and exports to block US software and technologies that it says are "essential inputs to Russia's strategic ambitions."

"The gradualism of the past is out, and this time we'll start at the top of the escalation ladder and stay there," a senior administration official told reporters Jan. 25.

Other options include banning Russia from dollar trades and blocking access to the international financial messaging service SWIFT, both of which analysts see as less likely because they would have massive consequences for energy markets and the global economy.

Minimizing economic risks

S&P Global Platts Analytics expects the Biden administration to stick to financial or individual sanctions that minimize any economic impact outside of Russia, given the White House's intense focus on domestic inflation and high energy prices.

Any actions to limit US imports of Russian crude would have minor market impacts, as US refiners could backfill by easing exports of US Gulf Coast sour crudes such as Mars, according to Platts Analytics. Lower US imports of Russian oil feedstocks would have a bigger impact, but Gulf Coast refiners could run Canadian or Latin American heavy grades at a cost to margins.

Platts Analytics does not expect the US to impose secondary sanctions on Russian oil customers, given Europe's heavy dependence on the flows and oil prices already racing to $90/b.

"The West is unlikely to jeopardize such large volumes," Platts Analytics said.

Dollar, SWIFT bans

Rapidan Energy Group sees 30% odds of a Russian attack on Ukraine "that leads to punishing sanctions such as tighter controls on targeted US technology exports to Russia and additional restrictions on the ability of US persons to transact in Russian debt."

Fernando Ferreira, Rapidan's geopolitical risk director, said the US may also impose market-moving sanctions to otherwise "minor" Russian military activities such as sabotage, cyberattacks and undercover operations. He said risks of this increased when President Joe Biden signaled Jan. 19 that the US response would depend on the type and scale of Russian action.

Ferreira said broader sanctions such as banning Russia from SWIFT or targeting its energy industry would require buy-in from the EU, which is unlikely short of an open invasion of Ukraine.

Global impacts

ClearView Energy Partners said Biden's warning Jan. 19 that Russian banks would "not be able to deal in dollars" if Putin invades Ukraine indicates the White House may have ruled out a SWIFT ban.

"Severing these financial communication links could lead to a substantial — and potentially sustained — disruption of Russian energy exports," said Kevin Book, ClearView managing director, adding that Russian oil and gas exports have accounted for 4%-5% of global demand over the past 20 years.

"An enduring interruption in even a small amount of that supply could drive up global energy prices across the board," Book said.

Book added that the Treasury Department's Office of Foreign Assets Control generally seeks to avoid negative systemic consequences for national economies and global markets.

"We also believe OFAC may be wary of prohibitions on dollar trade, not only because sanctioned parties' moves to other currencies can create enforcement headaches, but also because circumvention by currency diversification may raise questions regarding the US dollar's reserve currency status," Book said.

Nord Stream 2 pressure

The Eurasia Group raised its risks of Russian military action that would lead to significant western economic sanctions to 40%, from 30%, with a diplomatic solution still the likeliest scenario.

"Russia's actions to date are set to trigger sanctions against individuals and entities," Alex Brideau, head of the Eurasia Group's Russia coverage, said in a Jan. 19 note. "Cyber operations are a potential trigger for similar sanctions, too. But since Russia's moves to date fall short of an outright attack, the Western sanctions responses are meant as a signal that much stronger measures could be forthcoming."

In the event of a limited Russian strike and occupation near Donbas plus potentially significant cyber operations, the Eurasia Group expects the US sanctions response to be "quick and strong from the outset," with financial restrictions and export controls.

"Major energy sanctions, apart from targeting Nord Stream 2, also are less likely than other options," Brideau said. "The US and EU both have incentives to avoid steps that would disrupt oil and gas exports from Russia, with their resulting negative market effects."