Sanctions and the Russian Energy Industry with Ben Cahill and Eddie Fishman
42:55 Share

Welcome back. I'm Max Bergman, director of the Stuart Center and Europe-Russia-Eurasia program at CSIS. And I'm Maria Snegovaya, senior fellow for Russia and Eurasia. And you're listening to Russian Roulette, a podcast discussing all things Russia and Eurasia from the Center for Strategic International Studies.

Hello, everyone, and welcome back to Russian Roulette. Today, we have two of our esteemed colleagues back on the show to discuss all things connected to the Russian energy sector. In particular, we're trying to look at how the Western coalition can get better at targeting Russia's energy sector and specifically its hydrocarbon profits.

First up, we have Ben Cahill. Ben is Director of Energy Markets and Policy at UT Austin's Center for Energy and Environmental Systems Analysis and is a non-resident fellow at CSIS's Energy Security and Climate Change Program. He is also a non-resident fellow at the Arab Gulf States Institute in Washington, and he, not too long ago, was a colleague for all of us here at CSIS. So Ben, welcome back to Russian Roulette.

And also joining us is my former State Department colleague and office mate, Eddie Fishman, who played a key role in designing and implementing sanctions first on Iran and later on Russia after its 2014 invasion of Ukraine. Today, Eddie is a senior research scholar at the Center on Global Energy Policy at Columbia University's School of International and Public Affairs, SIPA. Additionally, Eddie is the author of a forthcoming book,

Choke Points, American Power in the Age of Economic Warfare, which will be published by Penguin Random House this February. And I think you can pre-order it. So stop what you're doing and go pre-order that book right now. Eddie and Ben, let's jump right in. Great to have both of you with us. I want to kind of get your sense on a very broad question.

that if you're Vladimir Putin, what are you paying attention to right now when it comes to your hydrocarbon export industry? How worried should you be? How happy should you be? What has gone well over the last two and a half years? And what may you be somewhat nervous about? It's a broad question to start off with. Ben, maybe I'll start with you and then go to Eddie.

Sure. Thanks, Max. So energy is about geopolitics. It's about Russia's place in the world, but ultimately it's about revenue for Russia. Over the past decade, oil and gas has typically provided 30 to 50% of the Russian budget. So it's a huge part of the economy. It's a

critical part of export earnings. And so I think the key question here is what's happened over the past two years to Russian export volumes and to government revenue. And, you know, the answer is that export volumes have held up pretty well. Russia is now producing about 9 million barrels a day of crude, more in condensate added to that and

typically two to two and a half million barrels a day of refined products, things like gasoline and diesel and jet fuel. So those exports really haven't dropped at all throughout this whole period. And the revenue has declined, but it's not a major decline for reasons that I'm sure we'll discuss. Basically, Russia lost its premium export market, which was Europe.

And it's been forced to export its oil and products over longer distances to a smaller number of buyers. So that's more expensive, more complicated. It drives up costs and it has led to a revenue decline. But the decline is pretty modest, maybe on the order of $10 a barrel.

The story is definitely different for natural gas. I mean, here Russia really has no good alternatives to the European market. That's just the nature of the way that natural gas is traded. The vast majority of Russia's gas exports was in the form of pipeline gas, not LNG. Cut off your key export market and you don't have good options. So their Russian gas revenues are down sharply. Gas problems taking an enormous hit and it's hard to see that being reversed anytime soon. But the important thing to remember is that when you look at Russia's hydrocarbon revenues,

Typically, oil provides 80% of those revenues. Gas is only 20%. And the economy ministry in Russia recently estimated that the country is going to earn $240 billion from energy exports this year. That's actually quite a bit higher than 2023, mostly because of higher energy prices. So again, the embargoes and the sanctions have had a huge impact on the global market. It's really reshaped Russian energy flows. It's disrupted the sector. All this has important long-term consequences, but the hydrocarbon exports and the budget are still in pretty good shape.

And Eddie, what are your thoughts on this, particularly as someone who looks at sanctions? This seems like a pretty big failure of sanctions, the oil price cap that was put in place trying to deprive Russia of revenue. How do you assess that and maybe start looking backward on how do you kind of assess the energy component when it comes to the sanctions policy?

Sure. So first, I'd like to say I very much agree with what Ben said. You know, if you're looking at what's gone well, you can kind of summarize it that Russia's oil production has stayed very strong. They have successfully redirected oil exports from Europe to India.

What has not gone well is natural gas. And the irony here, of course, is that natural gas is the one area where the West really didn't impose really significant sanctions. And so a lot of the losses that have occurred in the natural gas sector have really been because of Russia's own actions, right? Russia tried to weaponize its own natural gas exports to Europe in the summer of 2022, basically cutting off its own key market, thinking that that might weaken European resolve heading into that winter. And what we all saw was that Europe adapted much, much more quickly and more completely than anyone ever thought.

And so what you have is a situation where they've lost their biggest gas market in Europe and their only hope really for the future of the gas sector is liquefied natural gas or LNG. And the problem there is that in order to get LNG off the ground, they need Western technology. And so the situation is not looking good on natural gas. You're at

Your additional question, Max, about should Putin be worried, and this maybe will also get to energy sanctions more broadly, I think the easy answer here would be, oh, no, he shouldn't be worried because for all the reasons Ben said, you know, they're making money hand over fist selling oil. My own view, though, is he should be worried. And it's because this key part of his economy, the part of the economy that as Ben correctly notes, is comprising 50% of his budget revenues.

hasn't really been targeted by significant sanctions. And the reason it hasn't been targeted by significant sanctions isn't because sanctions can't affect those revenues. It's because we have not yet had the political will to take the steps that actually would drive down Russia's revenues. So I think maybe the one other point I'll make before pausing and seeing if you have any additional thoughts is, you know, the goal here from the beginning of the sanctions campaign was

It was a very, very challenging goal was to impose really significant costs on Russia's economy while leaving its energy sector relatively unscathed. And I think that we have very quickly, honestly, a couple of years ago, bumped up against the kind of limit of how much pain you can impose on Russia without really significantly impacting its oil revenues.

The approaches we've taken, like the price cap, really haven't been ultimately guided primarily by cutting off Russia's revenues. They've had other goals, really. And I think that Putin probably knows that if the West were to actually get his act together, potentially after the election, his economy is extremely vulnerable.

If I may jump in here, thank you very much, Eddie and Ben. Before we deep dive into sanctions, I have one question about what the hell is going on in OPEC at the moment. Recently, there's a lot of trouble and apparently some tensions among the OPEC members. Just to remind our audiences that Russia started collaborating with OPEC more closely in the 2010s in the context of the OPEC-floss format, and that's one of the major reasons why

why the oil prices remain quite comfortable for Russia and allow Russia to continuously accumulate significant oil revenues is because OPEC controls the prices.

But recently, there was some additional news coming, including Prince Abdulaziz bin Salman of Saudi Arabia claiming that Saudi might be pumping up its oil production and potentially pushing the oil price down almost as low as $50 per barrel, which, by the way, as we know from our last week's episode, is not going to be sustainable for Russia's war in Ukraine. Eddie, let's start with you.

Yeah, look, I think that OPEC plus is inherently an alliance of convenience. It's even weaker than the core of OPEC. We've seen divergent interests between the Saudis and Russians in the past. We know that Russia has not always been actually cooperative with the cuts that it says that it's going to make. And so I do think that it's a mistake to think that OPEC plus is a monolith.

And we could get in another scenario of a price war between the Russians and the Saudis. Ben, I don't know if you have any other perspectives there, but I would say it's a mistake to kind of view it as a monolith.

And may I also, Ben, pass this question to you also to follow up on that. To what extent fracking developing the United States elsewhere is a challenge to OPEC? Essentially, it seems that the further OPEC pushes the oil prices up, the more incentives are there for independent oil producers to pump up more oil, right? And that kind of undermines the existence of OPEC. And some analysts even suggested that they might be witnessing the last years of OPEC.

Do you think that's a credible assumption? Because obviously it will lead to huge turmoil on the markets. Last to chew on there. So first, I would respectfully disagree with Eddie a little bit on OPEC+. I totally agree that it's not a monolith. There are always tensions between these countries. But I think that this relationship is actually quite important to Russia and to Saudi Arabia as well. And I think it's probably going to be durable. If we take a step back a little bit,

The whole concept of OPEC+ was really conceived in late 2016, the so-called Declaration of Cooperation. And the idea was that the big oil producers needed a bigger tent. They were dealing with all these complicated questions about the rise of US shale, short cycle oil, which was much more unpredictable, hard for OPEC to deal with, big long-term questions about the future of oil demand, climate concerns. And the thinking was that they needed to bring in some other big producers to grapple with these questions together.

And that's why bringing Russia into the fold and creating OPEC+ was from their perspective, a pretty big achievement. And I think that from the Saudi perspective, it's been a big success. There's been a ton of volatility in the oil market over the last seven years. We can go down the list, but they feel much more secure in confronting these challenges with a larger group of producers.

If you add up all of OPEC+ today, it's about 40% of global production, but this is after very deep production cuts, so it's a share of global capacity. It's higher. They really believe that OPEC+ is stronger with Russia in the tent. Now, it's definitely true that there is some resentment of this relationship, right? Including from other OPEC countries, because as Eddie pointed out, Russia continually misses its target. It overproduces every month. Normally, if you do this in OPEC, this is a big problem. Saudi Arabia gets very upset when other countries don't abide by the rules and do what they say they're gonna do.

and occasionally it uses its market power to get people in line. So far, it's really striking that Russia continues to get a free pass over and over again, despite always overproducing. And to me, this kind of indicates there's a pretty strong political alignment, right? I think that this relationship has somewhat strong support in Moscow and Russia. Is it forever? No, there will definitely be tensions that emerge.

And to get back to your bigger question about challenges facing OPEC+, the oil market has gone a little bit wild in the last week because of events around Israel and Lebanon and potential attacks on Iranian oil facilities.

But in general, this is a very well-supplied market with pretty soft prices. Even with all this turmoil in the Middle East, oil price just today passed $80 a barrel, reporting this on October 7th. The rise of U.S. shale, the rise of non-OPEC supply is a big challenge for all the countries, and they're all grappling with it together. They've really restrained production for years now. They've had deep production cuts in place for two years, and yet they're not getting the price action that they want. So that is a challenge for Saudi Arabia, for Russia, for the rest of the group.

Ben, just to follow up there, I mean, isn't the rationale on the part of Saudi wanting to sort of crash the oil prices because right now the U.S.'s production is skyrocketing, non-OPEC plus producers are skyrocketing, and if you're Saudi Arabia, you know, they're perhaps eating some of your market share and yet undercutting

global prices and that if you were to crater prices, it would push U.S. producers out of the market. So there's perhaps a market rationale in doing so. So is your assessment essentially that the ties with Russia, I mean, that would be a disaster for Russia in terms of budget revenue. It would not be great for Saudi Arabia either, but they can afford it. For Russia, it would be bad.

And the reason why we dwell on this, the global oil prices, is that when you look at sort of modern Russian history and there's a real decline in oil prices that we saw in like the 80s and 90s, you have real political instability. And then when it goes up 70s, when you think about the 2000s, Russia gets very active in foreign policy. So I'm curious if you think that market demand from Saudi Arabia, that market challenge is going to be there. And if not, the U.S. will just keep producing, right? If oil prices are going to be somewhat inflated.

Yeah, it's a good point, Max. I think that a big challenge for OPEC Plus is that non-OPEC supply has been really robust in the last couple of years, mostly from the United States, but also from places like Canada and Guyana and Brazil. And OPEC Plus has made these big production cuts, but they're not delivering higher prices. And in fact, the more they cut, the more the United States and other countries around the world seem to take away their market share. That is a challenge. So far, the way that OPEC Plus has been trying to deal with this is

really banging on the gavel and saying, we need better production discipline. We need everyone to meet their targets and produce what they say they're going to produce, make the cuts they're supposed to. This is about Iraq, Kazakhstan. It's about Russia as well. Until they get that compliance in place, they really can't fulfill what their stated goals are with these big production cuts. There's always speculation out there in the marketplace. Will Saudi Arabia decide to blow the whole thing up?

which has happened in the past. I mean, we had this brief and very destructive price war happen in March of 2020, where Saudi Arabia created a lot of pain for Russia and other producers. Not impossible. I'd say the chances of that are rising. It's kind of a low probability, high impact event. And that would send a shockwave throughout the whole market for a couple months and would hurt a bunch of producers, definitely including Russia. I wouldn't say it's the most likely scenario, but the longer this continues with OPEC Plus continuing to give away market share, the more Saudi Arabia's options seem a little bit constrained.

Maybe one thing just to add on top of that is I remember even 10 years ago during the initial kind of hype around the shale boom in the United States, which caused the big price decline of the second half of 2014 that coincided with the first Russia sanctions. And I remember back then people in government saying, you know, this can't last forever. We're kind of at peak shale. This revolution has been borne out.

And I think one lesson, at least I've taken from the last 10 years, is we should never really underestimate oil producers and their ability to continue to improve their practices of oil extraction.

And shale producers in the United States have consistently beaten expectations in terms of their ability to produce at different price levels. And so I think that at this point, OPEC really needs to take that seriously, because to the extent that prices are even at this level that they've been lately, you're seeing record levels of production from the United States. And that's just market share that's being sucked away from the OPEC plus states.

Maybe we can now tilt to other ways to control oil prices, because no matter what happens with OPEC Plus at the moment, it's clear that Russia will be doing all right for quite some time, it seems. Eddie, you already kind of mentioned that you do not believe that the current sanctions designed, specifically involving the oil price cap, is the most efficient option to go after Russian oil revenues.

Could you elaborate on that a little bit? Why do you think so? And what are the other possible alternatives? Maybe it's working with OPEC or maybe something else. Sure. So I'm happy to focus initially on the price cap and then we can talk about other options. So, you know, the price cap, I think in order to understand it, you have to understand the context that created the price cap. So this policy really originates in the spring of 2022.

after the European Union had decided to impose an embargo on Russian oil, as well as to ban European oil services providers from providing services to shipments of Russian oil that went to third countries. And this is something that happens in the EU where you have 27 member states coming to a meeting and they say, oh, well, if...

I can't do something, then you can't do something. We need the pain to be shared across the union. And there are certain EU member states that bought a lot of Russian oil, some that bought none. And so one of the ways I think that Brussels was able to create the sense of equity across the EU was to say, okay, well, we'll no longer buy Russian oil, but we'll also no longer insure Russian oil and we'll no longer provide shipping services for Russian oil and various other services. And so what happened was the American officials really got very nervous around specifically the services ban.

thinking that if all of a sudden European companies couldn't ship or insure or finance Russian oil, that you may have a really significant disruption in flows of Russian oil and that you'd have significant supply coming off of the global marketplace, leading to an increase in prices.

Really, the United States viewed the price cap primarily as a way to limit that services ban and to actually create a pathway for the European Union to continue to provide services to shipments of Russian oil if they complied with the price cap. And so the reason that I think that history is important is that really the primary goal of the policy wasn't so much to cut Russian revenues. It was really to provide almost like a pressure relief valve from this proposed EU services ban. Certainly cutting Russian revenues was a secondary objective.

but it wasn't the primary objective. And you see that play out in the summer and fall of 2022 in the design of the policy, where U.S. officials primarily who are putting this together with others in the G7, their main concern is not around the possibility that the market won't care about the price cap and will

violate it. The main concern is around this possibility of overcompliance. Overcompliance sounds maybe like a technical term. It's something we talk about a lot in sanctions. And it's basically when instead of following sanctions regulations to the letter of the law, companies will say, you know what, it's not even worth my time. I'm going to exit the market entirely. So a good example of this is a country like Somalia. You have some sanctions on Somalia. And as a result, all banks pull out of Somalia and you can no longer send remittances there. That's something that happens particularly in the financial sector.

There was a concern that even talking about this price cap or putting in some restrictions would lead insurance companies to say, I'm not touching Russian oil no matter what, or lead tankers, shipping companies to say, I'm not going to touch Russian oil because there's no way I can guarantee that it's being shipped below $60 a barrel. And so Treasury crafted this policy to be easy to comply with. They effectively were worried about overcompliance, and so they made it as easy to comply with as possible.

And I think the result was that at first you had relatively effective regime that lasted for about six months. And then quickly when market participants realized that, oh, wait, like there really isn't much of a stick here. You saw the opposite happen where undercompliance became the problem and you've never had sort of a course correction. And so what happened was you had a policy that worked for a little bit, but then its efficacy eroded very quickly. And you haven't had sort of that course correction that was needed to kind of keep the policy working over time.

And Ben, do you share that assessment on the oil price gap? I do. And I think it was actually great that Eddie explained the origins of this. I mean, I think it's spot on that it was really designed to defuse or kind of draconian system that the EU originally designed. The inescapable fact is that this is a sanctioned regime that was really designed to prevent a spike in oil prices and an impact on the global economy and on US consumers. The White House is always really deeply concerned that

Slapping sanctions on the world's largest oil exporter, if you include both crude and products, was a potentially dangerous move, and they took a relatively soft approach. I think what we've learned in the last couple of years is that the G7 and the US just don't have as much leverage as they thought over the oilfield services sector in particular.

I mean, Russia has lots of incentives to trade its oil outside the reach of the G7. And it turns out that plenty of actors in the oil market are willing to help it do that, whether that's buying tankers or accessing alternative insurance, dealing with different types of banks and financial transactions. And they've also become quite clever at manipulating transactions to hide the headline cost of oil.

And we've seen that India and China and other countries are quite happy to buy discounted Russian volumes. They know they have more leverage in these commercial transactions. They're getting a pretty good deal. And so they're happy to go that route rather than comply with sanctions and price cap regime, which they see as onerous. I know that the system was designed to be as easy as possible and to say, look, we want to give you cheaper prices, help us do it. But from their perspective, there's probably a bit of a geopolitical calculation too. Why should we go along with these rules that Treasury and

and Brussels have created together rather than just getting the cheaper stuff ourselves and avoiding all the red tape. If I may also just dovetail on something that Ben said, though, because I think there's some misperception out there about what the price cap is. The price cap was structured specifically not to include a threat of secondary sanctions.

And this is something that I think people don't fully appreciate. So an Indian refinery that buys Russian oil for above $60 a barrel, that's not a violation of the price cap. The only entities that can quote unquote violate the price cap are ones who exist within jurisdictions that support the price caps. That's the G7+.

So if a U.S. insurance company were to insure cargo of Russian oil that was sent to India above the price cap, that U.S. insurer would be violating the policy. But the Indian refinery, in fact, is encouraged to buy Russian oil. And in fact, Treasury has said explicitly that if the Indian refinery can buy Russian oil without using Western services, that's totally fine. There's no threat to the Indian refinery whatsoever.

So effectively, the US government set up a policy that created a structural incentive to diversify away from Western services without any stick, without any enforcement mechanism whatsoever.

And I think that it's the type of policy that unfortunately seems good when you're just trying to get something done in the situation room and calm everyone who's worried about spiking oil prices. But then when you zoom out, even for a six to 12 to 18 month period, you realize this is a policy that's not going to lead us in the direction that we want to go.

And I do think that if you had come out with a price cap that included a threat of secondary sanctions from the get-go, you would have seen much, much stricter compliance. And frankly, it may not have actually been so bad for the Indians and the Chinese because they would have wound up having more negotiating leverage with the Russians.

So I think this was one of these issues where the U.S. got in trouble by being scared of its own shadow. Very important point. Thank you, Eddie. And also one important observation as to how political constraints often interfere into the sanctions design. So my question is then, where does this leave us? Do we have the ability to make the oil price cap enforceable?

Are there instruments to do that? For example, some European countries consider options such as going after Russian shady fleet, which also is a threat, not just because it helps circumvent the sanctions, but also for environmental reasons. Or perhaps it's best to choose something completely different and just try something entirely different as an option. Ben, maybe let's start with you this time.

Well, I think there are probably several options. One is you can try to strengthen enforcement of the existing rules. If there are dodgy traders or middlemen that you know are falsifying paperwork, that you know are involved in illicit transactions that support trade, which is clearly breaking the rules of the price cap, as long as those rules are in place, you should enforce them and you should ramp up those actions to go after bad actors.

But I think that the nature of the price cap regime is such that it won't achieve the intended goals of really having a substantial hit on Russian revenue. In fact, I think that the more powerful option is to impose secondary sanctions or designations. And we've seen over the last year that the U.S. Treasury Department has stepped up some of its enforcement actions. It has had a number of so-called designations or targeted

sanctions on owners of tankers, owners of shipping fleets that are breaking the rules. I think those things do have an impact on the market. They do create a kind of wariness of engaging in these kinds of transactions. But I think Eddie's definitely correct that secondary sanctions, kind of the big stick that hasn't been wielded yet, would probably have a bigger impact.

We're about to have a presidential election in a month. The concern about high gas prices is very political in the sense that, you know, if gas prices are high, the incumbent party tends to not do very well. So we're about to have elections here in the U.S. Does that expand the bandwidth or the scope of what may be politically feasible in terms of going after

the Russian energy sector? And then if so, then what are the kind of steps that should be done? Eddie, I want to go to you on that. And then Ben, maybe what would be the impact on the global oil market if we do what Eddie says we should do? And hopefully Eddie has some great ideas that he's about to throw out. Sure. So quick comment on politics, and then I'll pivot into some policy thoughts. I do think that U.S. policy toward Russia, the sanctions policy in particular, is constrained by the specter of Trump.

In that the Democratic Party and the folks who are running foreign policy in the White House and the State Department, Treasury Department, have been, I think, inordinately anxious about oil prices because of the fear that it could potentially undercut Democrats' chances in the 2024 presidential election. And I think that potentially if you had a different type of a presidential election that felt maybe more normal and with stakes that were a little bit less existential, then you would have probably a broader scope for policy creativity.

So I think the simple answer to your question, Ben, is after the election, if the Democrats were to win, then I do think there's significantly broader scope for creativity and maybe taking on a little bit of risk when it comes to oil prices. In terms of policy, one thing I think that's really important

And this is honestly a big part of what motivated me to write my book, Choke Points, is that we don't know and we don't study our own history when it comes to sanctions. We don't understand what happened well or what worked well in one context and what didn't work in another context. And it's something that plagues U.S. foreign policy in a lot of areas, but I think it's particularly problematic when it comes to sanctions.

When folks talked about the price cap in 2022, many people made it seem like this was a novel enterprise to try to sort of decouple the price that Russia was getting paid for its oil from the volume of the oil that it was selling. The truth is, though, that the United States has done this extremely effectively in the past, basically imposing sanctions that weren't focused on

on oil flows, but entirely focused on revenues. And that worked probably more effectively than any other sanction the United States has done in the past several decades. And if it's okay, I'd love to just go through that history a little bit.

In 2011, there was a very strong debate going on in Washington about how to reduce Iran's oil sales. And at the time, Iran was selling about 2.5 million barrels a day to about 25 different customers around the world. And what effectively came out of that was a regime called the Significant Reduction Exceptions, in which the United States threatened secondary sanctions on buyers of Iranian oil.

unless they significantly reduce their purchases every six months. So the idea was you could get purchasers of Iranian oil to reduce their purchases, but you would have to give them a lead time to do that. And this worked really well. Within the first six months of it, you saw a decline of almost 50% of Iran's oil sales. You had a number of buyers get out of the market entirely. And lo and behold, we get down from two and a half million barrels a day, somewhere close to one million barrels a day. And then, of course, members on Capitol Hill say, this is not enough. We need to go to zero. We don't want any Iranian oil sales at all.

And for folks like me who are working on implementing this and actually we're talking to officials in Asia and refineries and traders, we knew that it was impossible to get Iran to go to zero. And if we tried to push the Chinese or the Indians to stop buying entirely, it would probably lead to either imposing secondary sanctions on really big Indian and Chinese companies, which politically would be very difficult, or them calling our bluff and basically losing the psychological power of sanctions entirely.

entirely. And so we came up with a sort of a third option. You know, sometimes they say necessity is the mother of invention, which is if we can't get Iran's oil sales to go to zero, maybe we can get their access to their revenues to go to zero. So what we did was we said, okay, Chinese companies, you can buy as much Iranian oil as you want, so long as you're complying with these gradual reductions every six months.

So long as you pay Iran into a bank account in your own country that can only be used for bilateral trade in non-sanctioned goods. And, you know, talk about incentive, the Chinese banks love this because all of a sudden they were accumulating large balances of Iranian money that could only be used to basically buy Chinese goods and send them to Iran. And

And over 18 months, this led to an accumulation of 100 billion plus of Iranian oil proceeds being frozen in these restricted bank accounts. And so what we did was we basically said, Iran, keep selling oil. And in fact, we liked the fact that they were selling oil because it was giving us more and more leverage at the negotiating table that we could trade with each passing day.

This is a policy we haven't done to Russia. In fact, we've done the exact opposite, where we have a general license that says banks can process as many transactions for Russian oil as they want with zero restrictions whatsoever. It's called General License 8, and it exempts all energy transactions from financial sanctions. So I think to answer your question in short, if I had a magic wand, what I would want to do

is impose a full-fledged financial embargo on Russia, saying that you basically cannot pay Russia for oil unless it A, complies with the price cap. So that would very quickly globalize a policy that right now is only focused on the G7. And B,

You can only pay Russia into accounts that stay in your home country and can be used for non-sanctioned trade. And then that, at a sort of stroke, deals with the problem that I know Maria and Max, you've been focused on, which is how is Russia importing all of these components for their weapons program? They're using euros and dollars that they get from selling oil, which to me is absurd. If you control these revenues through financial sanctions, you could very, very quickly cut off a lot of those sales that are directly strengthening Russia's military machine.

And so you would still have to then threaten the secondary sanctions against China, India. You would have to implement, you would have to begin doing that, right?

Of course, yeah. So the beauty, though, of this policy and the reason it works so well with Iran is it's really a threat of secondary sanctions on banks. So it's Chinese banks saying, if you repatriate these funds to Russia, if you allow them to use the funds in ways that we don't like, then you would be sanctioned. And we've seen Chinese banks are incredibly compliant with U.S. sanctions, right? They've gotten out a lot of the businesses we don't want them to be in. The issue is there's a lot of Russian trade that's non-sanctioned. You have big Russian banks like Gazprom Bank that are not under blocking sanctions.

And you have, again, this general license that permits a lot of the energy trade just to go completely unscathed. So yes, this policy is backed up by the stick of secondary sanctions. But I think that the way it worked with Iran is we actually never used any of these secondary sanctions. We didn't have to because there was enough of an incentive for the Chinese and Indian banks to comply.

Now, Ben, what do you think about that? I mean, there's a difference in scale, obviously, between Russia and Iran as an oil producer and seller. But curious, your take on what Eddie just said. Also, if there's other ideas that we should pull off and put into a CSIS paper. Yeah.

Yeah, I like Eddie's ideas. I do think that it makes a lot of sense. I think it would tick the box of avoiding a major market disruption. So you think it would avoid that kind of nightmare scenario with you take 10% of global oil supply off the market and suddenly prices are skyrocketing. Is that the nightmare? Is it possible? Or you think that would be avoided in Eddie's scenario?

The oil market is facing several different nightmare scenarios right now that mostly have to do with the Middle East. I think all the questions about Russian oil are frankly on the back burner at the moment, but this could be just a fleeting moment. I think Russia's just a much bigger exporter than Iran. So it's a more complicated proposition to take it out of the market. And we've seen over the last two years that its export destinations and its customer base has shifted. I mean, India is the most notable change, right? Basically in 2021, Russia exported almost nothing to India.

Now it's up to 1.5 million barrels a day in some months. So India has really emerged as a critical buyer of Russian oil. I think Eddie's definitely correct that Chinese banks have shown they are quite concerned about the threat of secondary sanctions and that compliance tends to be pretty strong. These institutions really don't want to run afoul of US financial sanctions. I think that's generally true across the board. I also agree with the assessment that going after financial transactions involved in Russian energy trade hasn't really been the priority for the last couple of years. So that is a thread that could be pulled on.

And to get back to the original question, you know, I do think that there will be more latitude to do things after this election. I mean, this is a White House that has been unusually attuned to the cost of energy and any hint of increased gasoline prices for the political reasons that we discussed earlier. I think that the context probably changes a little bit after January. And the widespread perception is that the oil price caps haven't worked.

and maybe it's time for a rethink. So we should be open to putting different policy options on the table. One other thing I would mention is that we've seen in the past six months plus, Ukraine has continually attacked Russian oil infrastructure, including refineries, and that has had an impact. My understanding is that Ukraine doesn't really need a green light per se for Washington to do this, but naturally attacks like this that threaten to cause a disruption.

have some big political consequences. And so there's always this question of how far Ukraine is allowed to go, how far Washington would like Ukraine to go. You know, it's possible that after January, in a Kamala Harris administration, there'll be more acceptance of those kinds of things, which would create a lot more opportunities, I think, to go after the real sources of Russian energy revenues. Thank you very much, Ben. Perhaps the last question, I want to be cognizant of our time.

What about India and China more broadly? Do you see them being as equally willing to be on board with sanctions towards Russia as we've seen them towards Iran in the past? Because this seems like the most crucial difference from what we've seen before, right? These days, it's not as likely that China, for example, will be willing to fully comply with the sanctions design. If you could comment on that, how do we bring these two big elephants to the room on board?

Yeah, I'm really glad you asked this question because I think this, again, gets to some misperceptions that are out there. The short answer to your question is if you design a sanctions policy on Russia that is premised on their governments willingly complying, that policy is dead on arrival. But I also think it's not true, having been involved in this, that they were willingly complying with Iran sanctions.

They did not have any oil sanctions on Iran, neither India nor China. The only sanctions they imposed on Iran were ones that were imposed by the entire UN. And those were very mild, really focused on nuclear materials and weapons. So when it came to the sanctions I outlined earlier that worked so well against Iran, they were done in spite of the Chinese and Indian governments. And they were really done because of the threat of secondary sanctions and individual refineries and banks in those countries completely

with them because there was downside to noncompliance and that they could lose access to the U.S. financial system and upside to compliance in that they would be accumulating large balances of Iranian money in their country that they would potentially boost exports from China to Iran, which certainly happened.

Right. So the reason that Iran had this hundred billion dollars plus trapped in bank accounts around the world was because the Iranians didn't want to use all of it to buy goods from China. They could have if they wanted to, but it was impossible for them to do so. What they really wanted to do was move the money into Europe and buy higher value.

things from Europe and elsewhere. I don't think for Russia, you'll get the Chinese or Indian governments to go along with any sanctions policy. But I do think that you could impose similar financial sanctions on Russian oil that have at least as good of a chance of success as the Iranian sanctions had. I think to go back to Max's previous question, which was on could this cause a supply disruption? My view on Russian oil is that

There's really only two ways for there to be a supply disruption. One would be to literally quarantine oil tankers, which is not happening anytime soon, you know, a naval blockade of some sort. The other would be for the Russian government to stop selling oil, to basically make a concerted decision that we're going to shut off, you know, we're going to remove a couple million barrels of oil from the market because in retaliation for Western sanctions.

And it's really that fear. It's the fear of Putin taking oil off the market that has impeded us from doing harder hitting financial sanctions. I don't think anyone really believes that financial sanctions would stop Russian oil from being shipped around the world. I mean, sanctions are powerful, but they're not that powerful. You know, they can't stop you from loading oil onto a tank or unloading it at a port. Right. So it's really the threat of retaliation. And so you have to judge, is Putin willing to take that route? Is he willing to cut a couple million barrels of exports a day to try to spike prices or

Most people I know, most people who are experts in this believe that he would never do that because it would be effectively suicidal for Russia's own economy. And I think the countries who would be suffering from that would be the exact countries that Putin wants to be friends with. It'd be basically an attack on India and China by withholding exports to those countries. My own view is this is a risk, right? It doesn't have no risk and that Putin could retaliate and it could be very bad. But I think that it's an acceptable risk worth taking.

I'm going to jump in here with Maria said it was the last question. I have one more or maybe there's two in here.

It has felt like when it comes to energy sanctions, it has been a bit, you know, if you flip a coin, it sort of heads Russia wins, tails Russia wins. In the sense that if by invading Ukraine, oil prices spike, Russia gets a huge windfall. If there's an effort to sort of take Russian oil off the market, if you don't take all of it off the market, and let's say you 20% or 10%, whatever it may be, oil prices go up and Russia still gets the same sort of revenue that it had gotten before.

So I'm curious, with some of the recommendations, Eddie, that you threw out, other recommendations I've seen of really going after the shadow fleet, is there a danger that you would just sort of increase oil prices such that Russia still benefits, or basically there's no real impact on Russia itself? And that's maybe sort of one question. The last question is sort of, Ben, more in your lane. The IEA, the International Energy Agency, has looked out to 2030, has seen that, you

that oil demand is basically going to start going flat, right? You know, China's mass producing electric vehicles, hopefully our oil consumption begins to fall. And that would seem to make it much more palatable for US producers for the United States and others to really try to take Russian oil off the market. And perhaps maybe from just a green economy perspective, from a climate change perspective, that actually having slightly elevated oil prices are really trying to go after

Russian energy would be beneficial, but I don't know if that's possible without really addressing that first part of the question. So maybe two convoluted questions to both of you to close.

I think we have to acknowledge that the overuse of energy sanctions in the last decade and the ever-growing application of sanctions has created a lot of resentment around the world. I mean, you have a strong alignment now between energy producing and importing countries to try to devise ways to get around the dominance of U.S. financial institutions in global energy trade over the longer term to try to reduce dependence on dollar-denominated energy trade. And the price gap is part of this, right?

I think that the growth of energy sanctions on Iran, on Venezuela, on Russia has really forced a lot of countries to get together and figure out ways to get around these things. And we found that actually some of this trade is kind of hard to contain. We're playing whack-a-mole in a sense with new illicit shipping practices, different ways to devise systems that don't depend on Western-owned tankers and Western insurance and reinsurance and trade finance, etc.,

And on the question about India's compliance with this whole thing, to me, it's an open question, honestly. And I think that Eddie's right that we have to distinguish between government reactions and the practical realities for banks, financial institutions, and others who really actually face the threat of sanctions. Politically, though, it's important to note a lot of these countries still see Russia as a normal trade partner, and they want to have good relations with Russia. I mean, a country like India

it's not just about energy. There's also a lot of relationship around the arms trade and military support. And Russia's seen as an important player in India's geopolitics. And the same is obviously true for China. So it's a complicated proposition. Maybe I'll stop there and see what Eddie wants to add to this. And we can tackle your question about the longer term future of oil demand and what that means for latitude. Yeah, I would agree that I think that there's resentment around the world around the use of US sanctions, particularly secondary sanctions. But

But I would say that when it comes to the oil market, it does feel like, to me, there's very few acts of geopolitical charity that occur.

really what countries are looking for, rather what refineries and traders are looking for, is the best deal. I think to the extent that Russian oil has been a good deal, you've seen it be very attractive to players like Indian refiners. I think if that equation were to flip and if Russian oil were to look like a risky proposition, I think they'd get out of the market. And I think, again, my best analog here is, again, Iran. Iran

Iran sells oil right now. They sell a million, million and a half barrels of oil around the world each day. And Indian refineries don't buy any of it. They used to. They did buy it before Trump reimposed sanctions in 2018. But they got out of the market because they don't want to risk secondary sanctions. And all that oil right now is going to China. So I do think that we should not...

overestimate the willingness of countries to buy Russian oil as a favor to Putin or as sort of a geopolitical calculus. Because I think that for a lot of big firms around the world that are buying Russian oil or trading Russian oil, the prospect of losing

on the U.S. financial system and U.S. market is existential. And it's really not worth buying discounted Russian oil if the threat of losing access to the U.S. is what's hanging over your head. I agree with that. And actually, the Indian Energy Ministry has been pretty forthright about this. I've heard them say a couple of times, I have to get the best deal for my people.

So that means buying discounts at all from Russia, great. But if other options become cheaper, presumably they'll do that too. Ben, quickly on the long-term trends here and what it means for Russia's economy. Yeah, I mean, over the long term, I think the trajectory of the Russian energy system is not great. I mean, we've already gone through the problems for the gas sector.

Really, the only good option is to try to sell more gas to China, but exports to Europe dwarfed those of China. That's not a solution that's going to appear anytime soon. The LNG export industry faces problems. As Eddie noted, they are quite dependent on Western companies for partnership, for equity finance, and especially for the technology to build new liquefaction plants.

So there, the West does have some leverage and Russia faces real problems. Now, over the long term, let's assume oil demand decreases quite a bit by mid-century. There will be a certain number of major oil producers that will be resilient no matter what, because they have large scale resources. It's cheaper to produce. They've got existing relationships with customers here and mostly thinking of them

the Middle Eastern countries like the UAE and Saudi Arabia and Kuwait, but Russia as well. So I don't think we can assume that these countries will lose their pricing power over the long term as oil demand diminishes, because they're likely to make up a larger share of global oil production. I do think that a big challenge for Russia is that they are falling behind in terms of developing new fields

to counteract the declines. Remember, this is a country that really depends on the workhorse oil fields in Western Siberia. Russia's done quite a good job at extending the life of those fields and maintaining that production, but it's always been a challenge to develop newer green fields to counteract natural decline rates. And with the first round of big energy sanctions in 2014,

This really limited their ability to develop the next frontier projects, things like deep water, shale oil, and Arctic resources, because they lost all the partnerships, the joint ventures that they signed with companies before 2014. And what this shows, I think, is that over time, you know, the Russian energy sector is falling behind. And if it remains relatively isolated from the rest of the world, if it doesn't have access to those kind of partnerships and technology, there will be a lot of long-term pressure on the Russian energy sector.

Great. Thank you, Ben and Eddie. I have a lot more questions, but we've already gone well over time. It was a really interesting conversation. And so we're going to have to leave it there. But Eddie and Ben, thanks again for joining us. And as always, thanks to our listeners for tuning in. If you haven't already, here's a regular reminder to please subscribe to our show and give us a five-star rating. And also, you should please go and pre-order Eddie's new book that is coming out in February. Once again, it is called...

Choke Points, American Power in the Age of Economic Warfare. Also, please subscribe to our sister podcast, The Eurofile, wherever you get your podcasts. Thanks again, and we'll see you next time. You've been listening to Russian Roulette. We hope you enjoyed this episode and tune in again soon.

Russian Roulette releases new episodes every two weeks on Thursdays and is available wherever you get your podcasts. So please subscribe and share our episodes online. And be sure to check out all the latest analysis by the Europe, Russia and Eurasia program at csis.org.