The economic war on Russia has been a grand experiment for sanctions
The economic war on Russia has been a grand experiment for sanctions
Since the invasion of Ukraine, Russia has been cut off from much of the global economy, with over 20,000 sanctions and other restrictions in place, according to Stephanie Baker, an investigative reporter at Bloomberg News. Companies like McDonald’s and Starbucks have pulled out. A coalition of countries have agreed to a price cap for Russian oil in the hopes of reducing the country’s energy revenue. Never before has an economy the size of Russia’s been targeted by so many sanctions, but are those sanctions working?
Baker, author of the new book “Punishing Putin: Inside the Global Economic War to Bring Down Russia,” says it depends on your definition of success.
“If working means they force [Russian President Vladimir] Putin to withdraw his troops from Ukraine, then clearly they haven’t worked yet,” said Baker in an interview with “Marketplace” host Kimberly Adams. “But if working means ‘Have the sanctions imposed meaningful costs on the Putin regime and its abilities to sustain the war?’ then clearly they have been working.”
The following is an excerpt from the book, looking at one of the most crucial policies against Russia: the oil price caps.
When leaders gathered for the G20 summit in Rome at the end of October 2021 for their first face-to-face gathering since the pandemic, Biden decided to share U.S. intelligence with some European allies revealing for the first time Putin’s plans to invade Ukraine. Behind the scenes, U.S. officials were trying to build a coalition to counter Putin if he did invade. They quickly realized the West’s biggest weakness in the event of a war: its dependence on Russian oil and gas.
Russia is the world’s second-largest crude oil exporter behind Saudi Arabia. The late U.S. senator John McCain once called Russia “a gas station masquerading as a country.” The strength of the Kremlin, going back to the Soviet period, has always relied on the global price of oil, its principal source of hard currency. During his twenty-four years in power, Putin has enjoyed a relatively high price for oil, which has, in turn, enabled him to pour money into the Russian military. Western leaders had to figure out some way to put a lid on Russia’s profits that would hinder his ability to fund the country’s military-industrial complex without causing a global energy price spike. But the United States and Europe had two very different pressure points. Americans were sensitive to higher prices for gasoline — a byproduct of oil — to fuel their cars; Europeans cared more about natural gas piped in from Russia, used widely to heat homes and power industry. Those divergent interests made it all the more unlikely that Washington, Brussels, and London would find the political willpower to counter Russia as an energy superpower.
Energy prices were already running high as economies reopened after the pandemic. A short-term fix was available. A network of underground salt caverns in Texas and Louisiana known as the Strategic Petroleum Reserve (SPR) holds the world’s largest supply of emergency crude oil. Set up in 1975, after the Arab oil embargo caused gas prices to spike, the reserve is one tool the U.S. president can use to release oil to cool prices.
“Energy was the one area where Russia had an asymmetric advantage over the West,” Daleep Singh, Biden’s deputy national security adviser, told me, recalling the discussions around the G20. “We were trying to get ahead of what we knew might be a supply disruption in the aftermath of a war. If Russia were to press its advantage by weaponizing its supply of energy, we needed to be ready to respond in kind with a collective release of our own reserves.”
In November 2021, Biden announced the release of 50 million barrels of oil — enormous by historical standards, but it was equal to only about two and a half days of U.S. demand. The drop in prices was short-lived, and by December, concern about the buildup of Russian troops on Ukraine’s border, combined with pent-up demand after COVID, was causing oil prices to shoot up again. As a Russian invasion looked ever more likely, the price of natural gas also began to spike. Europe relied on Russia for about 40 percent of its imported natural gas, raising the prospect of thousands of people dying from the cold because they couldn’t afford to heat their homes if Putin ordered his troops into Ukraine.
Once Russia invaded, the global price of oil and natural gas skyrocketed. Initially, Western leaders consciously decided not to go after Russia’s energy exports, fearing any move would simply cause prices to spike even further. As one senior Biden administration official put it, “We wanted to put pressure on Russia, not cause a global recession.” The administration refrained from blocking Gazprombank, Russia’s third-largest bank, which serves the energy sector, apart from restrictions on its ability to raise funding in the West. As a result, Putin continued to enjoy a steady stream of petrodollars, with Gazprombank serving as the main conduit. It was a gaping hole in the otherwise sweeping package of financial sanctions. Oil and gas revenues comprised 45 percent of Russia’s federal budget in 2021. Calls to attack those revenues began to build.
In a video address in early March, [Ukraine President Volodymyr] Zelensky piled on the pressure for a full boycott, likening buying Russian energy to “giving money to a terrorist.” Ukraine’s foreign minister, Dmytro Kuleba, called out Shell for buying Russian oil. “Doesn’t Russian oil smell [like] Ukrainian blood for you?” he tweeted. Days later, Shell announced its plan to withdraw from Russian hydrocarbons, including an immediate halt to spot oil purchases, a historic shift for a company that was such a major player in the market. Shell’s decision accelerated the withdrawal of Western energy companies from Russia, but it also raised concerns about how the global market would replace Russian barrels.
Soon after, Washington announced a ban on Russian oil and gas, which [President Joe] Biden said would “deal another powerful blow” to Putin’s “war machine.” For the United States, it was a relatively painless move. Only 8 percent of U.S. oil imports came from Russia. The United States is a net exporter of petroleum products, meaning it could easily replace supply. After Biden’s announcement, global worries about Russian supplies mounted, causing the price of oil to peak at $139 a barrel, the highest since just before the financial crisis of 2008. Gasoline prices in the United States jumped to a then-record high of $4 per gallon. While the United States fretted about oil, Europe was more worried about the skyrocketing price of natural gas. But in reality, the Continent was facing a full-blown energy crisis because of its heavy dependence on Russia. Unlike the United States or the U.K., Europe relied on Russia for about a third of its oil imports before the war, making talk of an outright ban a nonstarter, at least initially.
Singh had been brainstorming ways to cap Russia’s oil profits for months with Deputy Treasury Secretary Wally Adeyemo and David Lipton, an international affairs counselor to Treasury Secretary Janet Yellen. Singh told me some of their early thinking had been inspired by Mario Draghi, the Italian prime minister, who had been trying to persuade Europe to impose a price cap on natural gas from Russia. “At that point, we started thinking about the analogy to oil,” Singh told me. For decades, a group of oil-producing nations led by Saudi Arabia had clubbed together through a cartel — OPEC — to agree on production quotas. Now the idea was for consumers to band together to demand lower prices. “Why don’t we try to use our collective bargaining power as the world’s largest block of consumers to limit any price spikes?” Singh recalled the thinking at the time. “There’s already a sellers’ cartel, so why not create a buyers’ cartel?” It was a radical step that flipped the idea of OPEC on its head.
But that effort only gained momentum when officials in Washington got wind of a plan being hatched in Brussels to ban Russian oil from Europe altogether, a move that threatened to plunge the global economy into a downward spiral. The proposal set off alarm bells in Washington. U.S. Treasury officials were growing increasingly worried that an EU embargo could blow up global energy markets and cause U.S. gasoline prices to spike ahead of crucial midterm elections.
For Europe, it was a sudden about-face. In the first month after the invasion, Germany’s Olaf Scholz warned that an immediate ban on Russian energy would trigger a recession. Greece was balking, saying its shipping industry would be upended. But the Baltic states and Poland were pushing hard for an embargo. After the atrocities in Bucha emerged in early April, once unthinkable policies became acceptable.
After the U.S. ban on Russian oil, there was now an unstoppable momentum for a similar move in Europe. “In the beginning, getting agreement on sanctions was sort of rolling a ball up the hill,” Björn Seibert, head of cabinet for European Commission President Ursula von der Leyen, told me. “Once the war started, the ball was rolling down the hill, which was much more complicated to control because everybody wanted more sanctions.”
In mid-April, Biden’s top economic brains got on a virtual call to hash out ways to limit Putin’s energy windfall and persuade the EU to change course. Singh joined the call with Biden’s trusted confidant Jared Bernstein and David Kamin, another senior White House economic adviser. Adeyemo hopped on with his colleague Ben Harris, Treasury’s top economist. Catherine Wolfram, a Treasury energy economist who had worked with Yellen at the University of California, Berkeley, logged in from home, recovering from a case of COVID. “It was clear that the Russians were minting money on energy markets and benefiting from a war premium — a war they’d started,” Wolfram told me. “It was the ultimate irony.”
They knew the numbers were scary. Russia was too big for an oil embargo. It accounted for about 11 percent of global oil production. Treasury’s initial models indicated that if all Russian oil was removed from the market, prices would go up by 100 percent, causing a global recession. Even taking half of Russia’s oil off the market could cause prices to jump 50 percent.
“You couldn’t do nothing because Russia was profiting from the war, and you couldn’t do what we have usually done to bad actors that are big oil exporters — an embargo — because you would suffer these big price increases,” Wolfram recalled. “We realized we needed to try something new.”
As they sought to head off an EU embargo, they batted around ideas. Imposing a punitive tax or tariff on Russian oil was one option. Tariffs are widely used by countries around the world to protect domestic products, like cars or metals, from competition; there was growing pressure to impose a tax or tariff on Russian oil and use the proceeds for Ukraine. But European officials shot down that idea because it raised the risk of increasing prices for Western consumers since importers would shoulder the costs of the tariffs.
The other idea was to use a price cap on Russian oil to restrict the Kremlin’s revenues. Trying to limit the price of oil from one country had never before been attempted, so there was no model to follow. The basic concept was simple — a coalition of countries would band together and agree to only buy Russian oil under an agreed price — but devilishly complex to implement. It was an exercise in thinking outside the box. They had to map out market assumptions — what would be the impact on Russia’s revenues, would Moscow reduce production, how would the market react. They asked Wolfram to crunch the numbers. A few days later, she came back arguing that a tariff or tax option and a price cap would have broadly similar effects. But the cap amounted to an unprecedented attempt to manipulate the global oil market.
Excerpted from “Punishing Putin” by Stephanie Baker. Copyright © 2024 by Stephanie Baker. Reprinted by permission of Scribner, a Division of Simon & Schuster, LLC
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