Biden tightens the noose on Putin with a farewell blitz
Stephen Bartholomeusz
Senior business columnistIn the final days of the Biden administration, the US has announced a barrage of new sanctions on Russia that will greatly increase the leverage that Donald Trump will have in negotiations with Vladimir Putin to end the war in Ukraine.
On Wednesday, US Treasury targeted the regional clearing platforms – payment platforms – set up by Russia and China to facilitate cross-border payments for oil and military goods that enable them to evade the financial sanctions imposed by the US and its allies.
The Treasury also relisted about 100 entities from Russia’s energy, defence and finance sectors in a move that brings those sanctions under a US law that requires that Congress has to be given 30 days to consider any delisting. That’s been described as an attempt to “Trump proof” the sanctions by ensuring that Congress can frustrate, if it wishes, any attempt to weaken the sanctions.
The US State Department, also on Wednesday, sanctioned more than 150 new entities and individuals, focusing on Russia’s defence industry and its international suppliers, including Chinese companies that supply “dual-use” technology to Russia.
The new moves follow last Friday’s imposition of what the Treasury described as “sweeping action” to reduce Russia’s energy revenues, including sanctions on two of Russia’s biggest oil companies, two companies that insure Russian oil cargoes, LNG and oil projects, energy exporters, oilfield service providers and more than 180 ships, including 160 oil tankers.
China’s Shandong United Energy Pipeline Transportation Company, which the Treasury said “facilitated port calls and discharges” of Russia’s oil, was also on the sanctions list.
US Treasury Secretary Janet Yellen said on Friday that the actions were directed at Russia’s key source of revenue for funding the war in Ukraine.
“With today’s sanctions, we are ratcheting up the sanctions risk associated with Russia’s oil trade, including shipping and financial facilitation on support of Russia’s oil exports,” she said.
Friday’s sanctions, the targeting of the two big energy companies, Surgutneftegas and Gazprom Net, and Russia’s vast tanker fleet in particular. Russia’s major oil customers after G7 sanctions and price caps on its oil were imposed at the outbreak of war – China and India – fear being caught up in secondary sanctions and are scrambling to find alternative supplies.
The oil price, which had been flatlining around $US76 ($121) a barrel since mid-July in an oversupplied market, responded immediately and now trades above $US82 a barrel.
Between them, the two oil companies and their subsidiaries that are now subject to sanctions account for about 970,000 barrels a day of Russia’s oil shipments or about 30 per cent of its oil exports.
The pre-existing sanctions, imposed in 2022, imposed a $US60 a barrel price cap on Russian oil exports, denying finance and insurance to anyone supplying or receiving oil from Russia priced above the cap. There were some exceptions from the sanctions that enabled banks to continue facilitating Russian energy transactions, some of which have now been removed.
The earlier regime was designed to reduce Russia’s oil revenues without adversely impacting the supply of Russian oil. The measures were designed to avoid increasing global oil prices at a time when the global economy was still struggling with the supply side after-effects of the pandemic and experiencing unpalatable levels of inflation.
Russia responded by building and insuring its own fleet of ageing tankers and shipping its oil, at discounted prices, to its remaining buyers in China, India and Turkey.
If Ukraine and its allies in the West, particularly the US, can hang on, economic conditions within Russia and its capacity to maintain its war efforts could become unsustainable.
While the volume of its oil exports has been reduced, its increasing ability to sell its cargoes at prices above the $US60 a barrel cap has sustained the revenues that have financed its actions in Ukraine.
The most recent round of sanctions, however, is expected to slash billions of dollars a day of revenues from those exports.
Why has it taken so long for the US to take action to attack Russia’s finances meaningfully?
An obvious explanation is that Biden no longer has to be concerned about US petrol prices and inflation. That’s Trump’s problem.
More fundamentally, with inflation receding and the oil market facing a glut – the International Energy Agency has forecast about 1 million barrels a day, about the same volume as the new sanctions might force from the market – the impact of the tougher sanctions should be more muted.
This week’s actions also, as suggested, give Trump a stronger hand in negotiations with Putin to end the war, which he initially promised to do on “Day One” of his administration (along with a raft of similar promises) but has recently conceded might take somewhat longer.
While superficially quite strong, Russia’s economy – which grew about 3.6 per cent last year – is very reliant on its oil revenues. It’s also highly vulnerable.
The economy has been radically altered by the war and web of sanctions the West has created to reduce its access to external finance and military equipment.
It is now an economy largely devoted to supporting the war in Ukraine, with defence spending this year budgeted to account for 8 per cent of GDP or nearly 40 per cent of all government spending.
That understates the cost of sustaining the invasion. At the direction of the Kremlin, as much as $400 billion of lending of “preferential” or very low-cost loans have been made to businesses supplying the war effort.
The building up of the military and its supply chain (and an exodus of young Russian males from Russia) has produced an acute labour shortage, with an unemployment rate of only 2.3 per cent. Three-quarters of Russia’s companies have reported shortages of workers.
Inflation is running at close to 10 per cent, and Russia’s central bank has been forced to increase its benchmark rate to 21 per cent, creating arguably the world’s harshest monetary settings.
The combination of increased wage costs – wage costs in defence-related factories have risen as much as 60 per cent – high inflation, ultra-high interest rates and higher taxes on businesses and individuals are exerting extreme pressure on non-war-related businesses, which are operating at around 80 per cent of capacity, with many of them increasingly unprofitable.
Social spending and infrastructure investment have been declining significantly as finance is diverted to the war effort.
Before the war, the majority of Russia’s exports generated hard currency. Thanks to the sanctions, fully convertible currencies now represent only about 10 per cent of its export revenues. Most of its trade is now denominated in roubles, renminbi and rupees. The value of the rouble has plummeted to its lowest levels since the start of the war.
The threat of stagflation – high levels of inflation but low levels of economic growth – is real, with the International Monetary Fund forecasting GDP growth of only 1.3 per cent this year.
In other words, despite Putin’s bravado, the war is rapidly undermining Russia’s economy, the government’s finances, its non-defence industries, and its banking system, and the latest blitz of US sanctions will exacerbate the stresses by significantly impacting its key pillar, Russia’s oil revenues.
If Ukraine and its allies in the West, particularly the US, can hang on, economic conditions within Russia and its capacity to maintain its war efforts could become unsustainable.
