US likely to hold off for now on energy sanctions for Russia, fearing impact on global prices

US likely to hold off for now on energy sanctions for Russia, fearing impact on global prices
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The Biden administration is drafting options for multiple rounds of harsh sanctions on Russia if it moves to invade Ukraine, but energy sanctions are likely a last resort given the impact they could have on the global economy and domestic gasoline prices, three US officials tell CNN.

“We’re trying to do it in such a way where it is a menu of options. We will not do everything on that menu all at once,” one of the officials said. “The energy section of it is the more extreme option if it becomes necessary. I do not see that as being in the first tranche. You always want to keep things in your back pocket.”

The White House National Security Council referred CNN to comments made by national security adviser Jake Sullivan on Tuesday, in which he suggested sanctions would be severe. The State Department declined to comment.

Some administration officials believe there is a clear correlation between President Joe Biden’s approval ratings and the prices at the pump and don’t want to rock the boat, the officials explained. After this story was first published, the National Security Council said it won’t factor in domestic political considerations when sanctions options are presented to Biden.

“The NSC officials who will present the range of punitive measures to the President denied domestic political considerations are a factor in sanctions packages,” a senior NSC official said.

As conversations continue about these sanctions packages, experts warn that avoiding hard-hitting measures targeting Russia’s energy sector — which could affect global oil markets and prices at the pump — could mean the sanctions would not be strong enough to deter Putin.

Conundrum

“It will be very difficult to impose severe economic harm on Russia without affecting energy markets,” said Edward Fishman, a former State Department official who is now a senior fellow at the Atlantic Council. “Oil and gas account for 40 percent of Russia’s federal budget. The United States and Europe can take steps in advance to contain spillovers, but if they plan to impose serious economic sanctions on Russia, they cannot avoid the energy sector entirely.”

A source familiar with the matter said that “the options being presented to the President would inflict significant costs on the Russian economy and financial system.”

But the conundrum of how to structure the sanctions displays how foreign policy and domestic politics can often be intertwined.

Further, the Biden administration’s relationship with its European allies could dissuade the White House from targeting Russian energy companies. That is because Russia is the largest exporter of oil and natural gas to the European Union and inflicting harm on that supply could have major consequences heading into the winter.

Among the options is to bar Russian energy producers from debt markets if Moscow moves to invade, an action applied to some Russian energy producers in 2014 when Russian President Vladimir Putin invaded and then annexed Crimea. But there is also a fear that Russia could retaliate against any sanctions by holding back its oil production and wreaking havoc on markets, an official noted.

“I think the risks with oil prices and gas prices being loosely pegged to oil, that would be a tough thing to sell domestically,” said Julia Friedlander of the Atlantic Council when asked about potential sanctions on Russia’s energy markets.

“Because it is a publicly traded commodity, right? It’s not a direct supply and demand question,” she added. “I would foresee that being something that could blow back in our faces, but you know, never say never.”

Officials from the State Department, the Treasury and the National Security Council are meeting regularly to develop sanctions options and believe there is a way to craft high-stakes economic measures that will harm Russia enough without upending the international economy. Part of their strategy is to draft options for multiple rounds of sanctions, explained a senior administration official.

The first official added that the first tranche of sanctions would likely involve trade restrictions and target Russian banks and other financial institutions.

Another administration official added that the US and its European allies recognize that tough sanctions “would come with some collateral risk” and will likely impact European economies. But the officials said there is a broad understanding that there are no “scalpel-like” sanctions left to impose that will effectively deter Russian aggression — and US allies understand that an invasion could be far more destabilizing for Europe than a hit to their economies.

The State Department’s number three official, Under Secretary Victoria Nuland, said that the US was discussing the energy sector ramifications with European allies. “This is part of what we’re discussing with our allies and partners as we build the sanctions packages, that we need to understand the exposure of allies and partners, but also the risks to Mr. Putin and to his government,” Nuland told Senate lawmakers. “As you know, energy is the cash cow that enables these kinds of military deployments. So Putin needs the energy to flow as much as the consumers need it.”

Sullivan would not publicly detail the economic measures that the Biden administration is considering but told reporters this week that the US is “laying out for the Russians in some detail the types of measures that we have in mind.”

“I will look you in the eye and tell you, as President Biden looked President Putin in the eye and told him today, that things we did not do in 2014 we are prepared to do now,” Sullivan said.

The US has the ability to draw up harsh measures because the global financial market is so reliant on US currency and banks.

Maximum leverage

“The comparative power of the United States in the financial world globally so far outstrips anything that the US has in energy markets or otherwise,” said Brian O’Toole, a former Treasury official who is now a senior fellow at the Atlantic Council.

But experts point out that the Biden administration must play its strongest hand in diplomatic conversations now, before it is too late.

“The point of maximum leverage is now, before Putin has decided to attack Ukraine. If Russian troops are pouring across the border and the West imposes sanctions, the game is already over. We have lost. We don’t want to get to that point. That’s why it’s so important for the sanctions threat to be both serious and credible now. It needs to alter Putin’s cost-benefit analysis about invading Ukraine,” Fishman said.

An adviser to Ukrainian President Volodymyr Zelensky echoed that assessment, telling CNN that he believes imposing sanctions only after Russia invades would be futile, and that at least some penalties should be imposed preemptively to get Russia to back off.

“The view from Kiev is that any prospective sanctions should Putin invade have already been factored in by Moscow and provide close to zero deterrence value,” the adviser said. “However, the imposition of strong sanctions now — with rollback provisions built into them should Russia take real steps to de-escalate — have a chance to work.”

This story was updated with additional details Wednesday and Thursday.

The-CNN-Wire
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