The Trump administration has taken decisive action to leverage its considerable sanctions authorities and increase pressure on the Russian government and its war machine. The latest US sanctions, targeting the major Russian oil and gas producers Rosneft and Lukoil, bring the United States into much closer alignment with both the United Kingdom (which issued similar sanctions last week) and the European Union, which has just finalized its own fresh package of sanctions including a complete phase out of Russian natural gas imports into the bloc. What this will ultimately mean for global energy markets depends on several factors.
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Ellen Wald: Enforcement could mean higher oil prices—but the lack thereof risks failure
The Russian oil sanctions signal a major shift, but critical questions remain
Designating Rosneft and Lukoil is the most effective step of the Trump administration has taken to pressure Russia during its second term so far. Between them, these companies export 3.1 million barrels of oil per day—overwhelmingly to buyers in East and South Asia who have thus far remained willing to purchase Russian crude oil.
However, that may now be changing. Indeed, the Treasury announcement came with the explicit warning that secondary sanctions—targeting those buyers of Russian crude oil from these companies that continue to do so—could be considered in the near future. This threat is arguably as powerful, if not more so, than the concrete actions already taken. The threat of secondary sanctions will have an immediate and powerful effect on India and Turkey, two of the three largest consumers of Russian crude. Meanwhile, Chinese state oil companies PetroChina Sinopec, CNOOC, and Zhenhua Oil have announced that they will no longer deal in seaborne Russian crude oil supplies at least for the short term. It is thus a real possibility that two to three million barrels of oil could be taken off the global markets with no major buyers available to take them.
That said, a critical question remains: enforcement. It is unclear yet whether the United States will match the threat of secondary sanctions with actual enforcement of the new sanctions measures it has already enacted. The shadow fleet remains vast and elusive, and although the recent tranche of UK and EU sanctions continues to file away at the fleet’s available vessels, the willingness of the United States to meaningfully support sanctions enforcement will make all the difference in how much crude actually comes offline, and to what extent Russian crude production must be shut in for lack of anywhere to go.
Chinese refiners are already well practiced in evading US sanctions, for their part, and can usually find workarounds if they still want these Russian cargoes at bargain-basement prices. Importantly, the approximately 900,000 barrels per day (bpd) of Russian crude oil that China imports via pipeline will be unaffected by these new sanctions, and independent refiners may likewise hedge their bets and resume Russian imports faster than the larger national refiners. In either scenario, the actual volumes of crude oil taken off markets may be significantly less than initial estimates but still very material.
Ultimately, however, the price impacts are another matter and what will matter most to the White House. OPEC could replace displaced supply, a topic likely to be on Trump’s agenda with Saudi Crown Prince Mohammed bin Salman in November. Undoubtedly, these new sanctions will be on the agenda for the Xi-Trump Summit, and a major consideration for ongoing US-India trade talks as well.
David Goldwyn is chairman of the Atlantic Council’s Energy Advisory Group and a former special envoy for international energy affairs at the US Department of State and assistant secretary of energy for international affairs.
Andrea Clabough is a nonresident fellow with the Atlantic Council Global Energy Center
Enforcement could mean higher oil prices—but the lack thereof risks failure
The Trump administration has painted the sanctions as a significant development in the ongoing conflict between Russia and Ukraine. In combination with similar sanctions from the United Kingdom and the European Union, the sanctions could potentially hit Russia’s oil revenue in a significant way, but, as with all sanctions, the effect depends on implementation and enforcement.
Global markets will likely see some disruption in Russian oil flows to China and India as the financial implications of the sanctions become clear. For example, China’s state-owned oil companies suspended new seaborne purchases of Russian oil, for now. Most of the companies that buy crude oil from Rosneft and Lukoil already do so through intermediaries, and it is likely that new companies will be set up to subvert financial connections between Russian oil suppliers and customers. Many Indian refiners are also reviewing whether their Russian oil purchases can be directly linked to Rosneft, Lukoil, or any of the subsidiaries named in the recently sanctions. It is expected that they will also pause purchases until the impact of the sanctions becomes clear.
The impact of these sanctions on both the global oil market and on Russia’s economy will depend entirely on how the United States, UK, and EU enforce the sanctions. If these western powers show that they will swiftly and severely punish entities that transact with Russian oil companies, then sufficient fear may be instilled in Russia’s crude oil customers to cut back on seaborne Russian oil imports. The Trump administration’s best bet is to make a few high-profile examples of sanctions’ enforcement, while simultaneously promising China and India that they will not be cut off from Russian oil for very long—if Putin comes to the negotiating table. Such a move would cause global oil prices to rise, potentially to $80 or higher, but given the abundance of oil currently on the global market and spare capacity from producers like Saudi Arabia, the impact on consumers would not be economically disastrous.On the other hand, if the Trump administration doesn’t follow these sanctions with a show of force, they will simply become another blip on an oil price graph.
Ellen Wald is a nonresident senior fellow with the Atlantic Council Global Energy Center
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Image: (Парк 300-летия Санкт-Петербурга, Primorskiy Prospekt, Санкт-Петербург, Russia, Pixabay, https://unsplash.com/photos/a-large-ship-in-the-water-qOGWmWeH-_c)
