Mapping The "Scalpel, Not A Meat Axe" Approach To US Sectoral Sanctions Against Russia

The threat of "sectoral" sanctions is the latest arrow in America's quiver against Russia's unwillingness to back off and, as the FT reports, the US is seeking support from Europe for these efforts. The problem, as we have discussed, is that energy binds Russia to the rest of the world in a codependent relationship. Consumers – especially in Europe – need Russian oil and gas as much as Russia needs the revenue they bring in. The US believes it can circumvent that obstacle as "the situation calls for a scalpel, not a meat axe... we need targeted asymmetric sanctions that hurt them more than they hurt us."

As The FT explains, the plan is to block exports of oil and gas technology only for new projects run by state-controlled companies, with the objective of casting the long-term future of Russia’s energy industry into doubt, while safeguarding its short-term contribution to global fuel supplies. In other words, do you believe in miracles?

 

 

As the US looks for levers to exert influence over Russia, energy is an obvious choice. Oil and gas generate more than 50 per cent of Russian federal government revenues, and Rosneft and Gazprom, the country’s two largest energy companies, are both state controlled.

 

The problem is that energy binds Russia to the rest of the world in a codependent relationship. Consumers – especially in Europe – need Russian oil and gas as much as Russia needs the revenue they bring in.

 

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The energy sanctions being proposed by the US are intended to circumvent that obstacle.

The plan is to block exports of oil and gas technology only for new projects run by state-controlled companies, with the objective of casting the long-term future of Russia’s energy industry into doubt, while safeguarding its short-term contribution to global fuel supplies.

 

“This situation calls for a scalpel, not a meat axe,” says Robin West of the Center for Strategic and International Studies. “We need targeted asymmetric sanctions that hurt them more than they hurt us.”

 

By allowing continued exports of oil and gas equipment and services to Russia’s existing oil and gasfields, the proposed sanctions should make very little difference to the country’s energy exports.

 

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However, blocking exports of equipment and services for new projects could have a “very meaningful impact on Moscow”, according to Jason Bordoff of Columbia University’s Center on Global Energy Policy.

 

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The sanctions would not send Russia’s oil and gas production into an immediate slump, but over time the natural decline of existing fields would depress the country’s output.

 

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The uncertainty over Russia’s long-term prospects in oil and gas would probably also depress the share prices of Rosneft and Gazprom.

Which all sounds great in practice. But do they really think Putin will stand for this? And will the Europeans agree?

The US is seeking support from European countries for its plan, but that may not be necessary.

 

The tricky question will be what to do if the Ukraine crisis drags on. As time passes and the effect on Russia’s output grows, the strains on world energy markets will become more noticeable, potentially driving up prices for oil and gas.

As Mr Bordoff warns/concludes:

“In a global economy, each of these actions may also come at a cost to the countries imposing the sanctions that needs to be considered.”

Sure - what could go wrong?