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U.S. may take a hugely controversial step to stop Russian oil exports funding the war in Ukraine

May 19, 2022, 2:30 PM UTC

Sanctions are supposed to hurt their targets more than those deploying them, which is why embargoes on Russian oil are—so far—not working out so well for the West.

The U.S., the U.K. and Canada have all stopped importing Russian energy, but they were never major customers of Vladimir Putin’s anyway, and their actions have fed into spiraling energy costs that are in turn worsening inflation back home.

Russia’s biggest oil customer, Europe, still can’t agree on a unified oil embargo because of EU member Hungary, which says such a move would have a “nuclear bomb effect” on its economy.

“Obviously, some EU states, in whose energy balance the share of Russian hydrocarbons is especially high, will not be able to do this for a long time, to ditch our oil,” Russian President Putin crowed earlier this week—as well he might, given that the EU is sending him an estimated $450 million a day for Russian oil, thus effectively working alongside high oil prices to keep his economy afloat and fund his Ukrainian war effort.

To fix this situation, the U.S. is reportedly preparing to take a drastic step that could step up tensions with countries such as China, India, and Turkey.

According to a Thursday report in the New York Times, the Biden administration plans to impose a global price cap on Russian oil, to be enforced with secondary sanctions that would stop countries and companies buying the stuff at higher prices, for fear of being blocked from commerce with U.S. companies and allies.

“That means we tell other countries: If you do business with Russia, you can’t do business with the U.S.,” former U.S. sanctions official Richard Nephew told the newspaper.

The idea is that this would largely maintain the supply of Russian oil to the world—thus avoiding general price hikes—while depriving the Kremlin of the bumper revenues it is currently enjoying.

While the level of the proposed cap is yet to be determined, the idea would be to keep it above the roughly $40 per barrel that allows Russia to break even on its production, but far below the current market prices for oil, which are north of $100 per barrel.

However, secondary sanctions are massively controversial because they essentially involve bullying the world into doing what the U.S. says, by affecting even transactions that don’t touch the U.S. itself. The German government has complained bitterly about the practice before, arguing that it is illegal under international law.

Oil exports are particularly vulnerable to secondary sanctions, because unless the exporter is selling its oil via pipeline—as is the case with a large proportion of Russia’s exports to China—it has to be sent by ship.

And there are many players in that business who would be enormously exposed to secondary sanctions, from shipping companies and port operators to banks and insurers.

India. Turkey, and increasingly China too, are major customers who receive Russian oil via ship, and who have thus far refused to join in international sanctions on Russia.

The U.S. has taken the secondary sanctions route before, notably with Iran, whose oil exports became subject to Trump administration sanctions in 2019 that put further pressure on already-strained relations between the U.S. and China, a major Iranian-oil customer. China is reportedly still receiving Iranian oil shipments on the sly.

Italian Prime Minister Mario Draghi last week floated the idea of tackling the oil-price-and-supply conundrum by creating “a cartel of buyers, or to persuade the big producers, and OPEC in particular, to increase production.”

“Think of it like a reverse OPEC: instead of wielding control over supply to set prices, the allies could leverage their control over demand to do the same,” wrote former U.S. Russia-sanctions lead Edward Fishman and Fletcher School assistant professor Chris Miller in a Foreign Affairs piece earlier this week, arguing for a global price cap on Russian oil.

According to the Times, the White House hasn’t settled on the most appropriate type of secondary sanctions.

However, Fishman and Miller suggested “imposing full-blocking sanctions on vital nodes in Russia’s oil sales, including Rosneft, the state-owned oil giant; Gazprombank, the main bank serving Russia’s energy sector; and Sovcomflot, Russia’s largest shipping company [while] at the same time, the United States and others could provide exemptions for oil shipments that comply with the price cap.”

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