Too Big to Nail

Energy sanctions against Russia are incremental for a reason.

Photo by Evaristo Sa - AFP - Getty
Photo by Evaristo Sa - AFP - Getty

Calling the deadly attack on a Malaysia Airlines flight an "outrage of unspeakable proportions," President Barack Obama said Friday that the United States will dial up the pressure on Russia if it continues to support armed groups in eastern Ukraine. But when it comes to the energy sector — a key chunk of Russia’s economy and the major focus of the current American sanctions — that won’t be a quick or easy job to do so.

The tools available to the United States, such as export bans on key energy-sector technology, will be of limited use if the European Union continues to shy away from putting tougher measures in place against Russia. Fresh sanctions looked unlikely Friday, July 18, despite the airliner disaster; EU officials said they hope to finalize the latest list of sanctioned individuals and firms by the end of the month, but had not yet decided whether to take any further steps in the wake of the latest escalation.

Even if Europe gets on board, more-ambitious sanctions, including a full Iran-style embargo of Russia’s energy exports, seem far-fetched, as Obama himself said in May. Russia is the world’s third-largest oil producer and a major exporter of natural gas. Russia, in other words, may be too big to nail.

In any event, Russian strongman Vladimir Putin has been working to reduce his reliance on the West for energy revenues and is finding fresh allies in Asia. Moscow just inked a landmark natural gas deal with China; Beijing will invest more than $20 billion to help develop energy infrastructure in Russia’s Far East, and it has exchanged billions of dollars in bank loans for long-term supplies of crude oil.

The Obama administration has mulled targeted export bans on important energy-sector technology, such as advanced drilling equipment and software needed for the toughest oil exploration and production jobs. Those would only impact Russia’s future development of its energy sector, not its current production. They wouldn’t inflict the kind of immediate pain needed to change Putin’s calculus in the short term.

Indeed, big Russian energy firms that have already been hit with sanctions, such as Rosneft and Novatek, said this week that they will continue business as usual for now; even their deals with big Western oil companies such as Exxon Mobil and BP are going full speed ahead despite the latest anti-Russian measures.

In part, the big energy firms are gambling that the administration’s bark is worse than its bite. So far, at least, they’re right: Even as it rolled out this week a new slate of sanctions on Russian firms — including two big banks and two large energy companies — the Obama administration has underscored its willingness to keep raising the temperature if Putin doesn’t respond.

"We will continue to make clear that as Russia engages in efforts that are supporting the separatists, that we have the capacity to increase the costs that we impose on them — and we will do so," Obama said in his remarks Friday.

That echoed promises of tougher future steps laid out by officials this week. A senior administration official, unveiling the latest restrictions on Russian businesses Wednesday, vowed that the United States could expand both the reach of the latest sanctions and the number of companies targeted.

The steps outlined Wednesday were the toughest yet: They bar four Russian firms from tapping U.S. capital markets, prohibiting them from issuing new stocks or bonds. That will certainly sow uncertainty in energy and financial markets and increase those companies’ cost of doing business, but alone it will not strangle them. The administration’s threats to tighten its grip reflect how incremental the steps to date have been.

"Right now, the noose is very loose. The market’s not worried about it, and all it’s doing to these companies is making life a little more difficult," said Elizabeth Rosenberg, a former Treasury official and now an energy analyst at the Center for a New American Security. She said the new steps outlined this week open the door for a whole array of creative sanctions to steadily increase the pain.

"You can take such small, incremental steps many times over — there’s no limit to the ways in which Treasury can slowly tighten that noose."

Any talk of sanctions immediately raises comparisons to Iran, another energy state that has been getting hammered by Western economic measures for years. Taking a page from the Iran playbook to fully block Russia’s energy exports, which account for just over half of Moscow’s revenues, seems exceedingly unlikely, however.

The use of tough energy sanctions in the Iran case has set an unhelpful precedent for other international hot spots, such as Russia. For years, the United States had sought to put severe pressure on Iran in order to force Tehran to scale back its nuclear development. And for years, Iranian energy exports were off-limits to sanctions: In a global oil market, removing more than 1 million barrels a day of oil would have had severe economic repercussions for everyone, especially the oil-dependent United States.

But after the U.S. energy boom, which increased U.S. oil production by about 3.5 million barrels per day, targeting Iranian exports suddenly became feasible. Beginning in 2012, export restrictions passed by the United States and several other countries managed to slash Iran’s oil exports almost in half. That helped to poleax its economy (without killing the global economy) and helped bring Iran to the nuclear negotiating table. Its negotiators are currently in Vienna for last-ditch talks with U.S. diplomats designed to strike a deal before a self-imposed July 20 deadline.

Russia is a different kettle of caviar. It produces about 10 million barrels of oil per day and exports more than 7 million, compared with Iranian pre-sanctions numbers of about 3.5 million and 2.5 million barrels a day, respectively. Russia’s exports of crude, and especially natural gas, are crucial to the global economy in a way that Iran’s never were.

Obama administration officials acknowledged as much this spring. In an April event at the Atlantic Council, Amos Hochstein, a top energy official in the State Department, dismissed the notion of removing Russian oil exports from the global market.

Obama himself on Friday hinted at the limits of applying Iran-style energy diplomacy to Russia even in the present crisis.

"We have consistently tried to tailor these sanctions in ways that would have an impact on Russia, on their economy," he said, "while minimizing the impacts on not only the U.S. economy but the global economy." Russia, he noted, "is a large economy" with numerous links to the rest of the world — another difference with pre-sanctions Iran.

Jamila Trindle contributed to this article.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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