WASHINGTON — An escalating barrage of sanctions by the United States and its allies has staggered Russia’s economy since the invasion of Ukraine, but the measures have fallen short of inflicting maximum economic pain because of a pipeline-sized hole in the effort: the continued flow of Russian oil and gas abroad.
Those exports from the nation’s most vital industry have been delivering an estimated $1 billion a day to President Vladimir Putin’s regime, helping it stabilize the Russian economy and, more important, pay for the increasingly vicious and costly military assault on Ukraine. Although the United States has halted its purchases of Russian oil and gas, European nations — Russia’s largest energy export market — have yet to take that step.
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“Without a doubt, it’s the gaping hole,” said Juan C. Zarate, a former assistant Treasury secretary for terrorist financing and financial crimes during the George W. Bush administration. “Everyone realizes that Putin uses Russian energy as a sword and shield in the sanctions conflict, so the question is, how do you get out from under that dependency without doing a huge amount of damage to European economies?”
Europe is far more dependent on Russian energy than the United States, and has been seeking alternate supplies to avoid shortages and massive price hikes if it cuts off that supply. About 40 percent of natural gas and 25 percent of oil consumed by the European Union comes from Russia. The United States doesn’t import any natural gas from Russia and only 8 percent of petroleum imports last year came from there.
Some European nations are nervous that even smaller steps to scale back Russian oil or gas purchases could provoke Putin into cutting off their supply entirely ― although that would deprive him of much needed cash. And European officials are wary of possible public backlash to higher prices: French President Emmanuel Macron, for example, faces an unexpectedly strong challenge in a run-off election this month from far-right candidate Marine Le Pen, who opposes sanctions on Russian energy.
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But the recent revelations of atrocities in Bucha and Mariupol might change the calculus. In the wake of what many are calling war crimes and genocide, European Union leaders this month voted to ban imports of Russian coal and reportedly have begun drafting a ban on oil as well.
“With the way that the Russian military has conducted itself in Ukraine, I think the tolerance for doing more to counter Russian aggression has grown,” said Jeffrey J. Schott, a sanctions expert at the Peterson Institute for International Economics think tank. “But how far? That’s hard to say.”
A European ban on Russian oil and gas would be the most significant way to increase the economic consequences on Moscow for the war, experts said. It would deprive Putin of significant revenue, and also allow the United States to tighten financial sanctions that purposely contain loopholes to allow Europeans to continue to make energy purchases. For example, the Biden administration has yet to levy tough sanctions against one of Russia’s largest financial institutions, Gazprombank, because it plays a vital role in natural gas sales from state-owned Gazprom.
“The United States has gone out of its way to not gum up the works for Russian energy purchases,” said Edward Fishman, a former State Department official during the Obama administration who now is an adjunct senior fellow at the Center for a New American Security think tank.
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Russian sanctions are a complex balancing act for the United States and the Europeans. The Biden administration has worked hard to move in concert with allies in most cases to increase the effectiveness of the sanctions. And European leaders — especially the Germans, who are heavily reliant on Russian oil and gas — have been hesitant to target those supplies because of the potential damage to their own economies.
“Our goal from the outset has been to impose maximum pain on Russia, while to the best of our ability shielding the United States and our partners from undue economic harm,” Treasury Secretary Janet Yellen told House lawmakers at a hearing this month. Pressed by some Republicans on the energy exemptions built into US sanctions and the hesitancy of Europe to hit Russia’s oil and gas exports, Yellen said the Europeans were trying to manage the trade-offs.
“They recognize clearly the importance of depriving Russia of export revenue to the maximum extent that they possibly can, but regrettably have dependence on oil and natural gas,” she said.
In retrospect, the United States and its allies have been turning the screws too slowly as they increase sanctions on Russia, particularly when it comes to cracking down on its energy industry, said Schott of the Peterson Institute.
“The loopholes shouldn’t have been as big on energy trade because we have been essentially financing the Russian war effort for six weeks now with Western oil and gas purchases,” he said. “While the conditions are getting much more difficult in the Russian economy with higher inflation and some scarcity of imported goods, it has not been disabling or even to the point that the Russian government wouldn’t be able to maintain its military operations.”
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Russia’s invasion of Ukraine on Feb. 24 triggered the toughest sanctions ever leveled on a major developed nation. The United States and its allies — not just the Europeans, but the Japanese and others — moved to isolate Russia from the global economy. They targeted many of its largest banks and state-owned companies, as well as levying personal sanctions on Putin and other government officials, their families, and billionaire oligarchs that cut off their access to assets outside the country.
“Responsible nations have to come together to hold these perpetrators accountable,” President Biden said on April 6. “And together with our allies and our partners, we’re going to keep raising the economic cost and ratchet up the pain for Putin and further increase Russia’s economic isolation.”
The costs have been steep so far for Russia. The World Bank recently estimated the sanctions will cause Russia’s economy to contract by a whopping 11.2 percent this year. The Russian government reported on Wednesday that the annual inflation rate hit 16.7 percent in March — nearly double the four-decade-high level in the United States. The Russian government and some of its companies are on the brink of defaulting on their debt.
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Biden boasted in a speech in Poland late last month that the sanctions had almost reduced the value of the Russian ruble “to rubble,” which meant the costs for Russia to import goods was skyrocketing. But after plunging dramatically in the first few weeks of the war, the ruble has regained most of its value. Continued energy sales have brought in a steady supply of foreign currency that has helped offset the limits the United States and its allies have placed on Moscow’s access to dollars, euros, and yen, allowing the Russian central bank to stabilize its currency.
“The value of the ruble is crucial. Sanctions are carefully calibrated to deliver a psychological effect on the adversary. Collapsing the value of the ruble is a deliberate goal,” said Marshall Billingslea, who served as assistant Treasury secretary for terrorist financing and financial crimes in the Trump administration. “By their own metric, the Biden administration has so far failed in reducing the ruble to rubble.”
The failure to fully sanction Russian energy exports has delivered enough cash to Putin to extend the war effort by at least two to three months, said Billingslea, now a senior fellow at the Hudson Institute think tank.
“They can keep this up for six or seven more months before the financial situation starts to look a little more grim,” he said.
Russia exported about three-quarters of its natural gas and half of its oil to Europe in 2021, according to the US Energy Information Administration. Josep Borrell, the EU’s top diplomat, said on April 6 that member countries had paid Russia about $38 billion for energy since the Ukraine invasion.
EU leaders have a plan to reduce their natural gas purchases from Russia by two-thirds by the end of the year, and hope to replace it with liquefiednatural gas from Egypt, Qatar, the United States, and other countries. As discussions on additional steps continue, Borrell said on Monday that “nothing is off the table, including sanctions on oil and gas.”
Canada announced a ban on importing Russian oil just four days after the invasion began. About a week later, the United States followed with a ban on all Russian energy imports and the United Kingdom said it would phase out all Russian oil imports by the end of the year. On April 8, the EU approved a ban on imports of Russian coal after a four-month phase-out.
But EU nations only purchased about a third of Russia’s coal exports. The biggest hit to Putin would be a ban on oil and natural gas.
“I think outside of targeting Russia’s oil and gas sales directly, we’ve hit a bit of a ceiling when it comes to pressure on Russia,” Fishman said.
German opposition is the main obstacle to EU action, experts said. Germany gets about half its natural gas from Russia, and a report released Wednesday said the country would fall into a sharp recession if Russian gas imports were cut off. A top German official said this month that the nation was trying to wean itself off Russian energy “as soon as possible,” but worried “when will we do more harm to Putin than to ourselves?”
Still, public opinion in Germany can change. Before the invasion, analysts thought it was unlikely that Germany would halt the Nord Stream2 pipeline project, which would transport natural gas from Russia. But after seeing the scope of the Russian attack, German leaders shelved the pipeline.
The increasing brutality of the war has pushed Europe closer to cutting off Russian energy imports, said Zarate, the former Treasury official who now is a senior adviser at the Center for Strategic and International Studies think tank.
“We’ve crossed the Rubicon in Europe around having that debate at all, which is pretty critical,” he said. “Now we’re talking about the wholesale ending of European purchasing of Russian oil and gas, which was almost unimaginable just a few months ago.”
And public pressure to be more aggressive on energy sanctions is only likely to increase in Europe as the war continues and Russia’s brutality escalates, said Daniel Drezner, an international politics professor at the Fletcher School at Tufts University.
“The longer this war goes on, there’s going to be more Buchas, there’s going to be more Mariupols,” he said.
Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.