With Western countries rolling out new sanctions against Russia midst the roll out of horrifying images of war crimes in the Ukrainian city of Bucha, it has become clear that their easiest sanction options have now been exhausted; there are now some stark differences among allies over the next steps.
While the European Union has proposed stopping the import of Russian coal, there are difference among EU countries over the move. Resistance is even stronger for restricting Russian oil and gas, given the impact on their economies.
While the Group of Seven have largely removed Russia’s biggest lenders from the U.S. dollar-based financial system, this has spurred growth in SWIFT alternatives which are now gaining momentum. The IMF has also issues a warning to this effect.
Washington has also barred US companies from pursuing new investments in Russia and blocked Russia from paying sovereign debt holders with money in U.S. banks.
Western sanctions are now starting to turn Russia back into an austere, 1980s Soviet-style closed economy.
Moscow however continues to generate billions from energy exports. U.S. Treasury Secretary Janet Yellen has told U.S. lawmakers that stronger curbs on Russian energy are not yet possible since European allies are heavily dependent on Russian oil and gas.
Russia supplies around 40% of the European Union’s natural gas consumption, which the International Energy Agency values at more than $400 million per day. The EU gets a third of its oil imports from Russia, about $700 million per day.
“We are at the point where we have to take some pain,” said Benn Steil, international economics director for the Council on Foreign Relations. “The initial batches of sanctions were crafted as much to not hurt us in the West as much as they were to hurt Russia.”
With Western sanctions starting to bite Europe, divisions among Europeans have become more apparent. Last week on Saturday, Austrian Finance Minister Magnus Brunner voiced opposition to sanctions against Russian oil and gas since they would hurt Austria more than Russia.
Given the lack of unity on curbing Russia energy imports, the West has now limited options to ratchet up pressure on Moscow.
An investment ban could push more multinational firms to leave Russia, opined Daniel Tannebaum, a former compliance officer at the Treasury’s Office of Foreign Assets Control.
“You could outright start banning trade in more industries, a move that would cut Russians off from more types of Western products such as pharmaceuticals, similar to a luxury goods ban imposed in the early days of the war,” said Tannebaum, CEO of Oliver Wyman, an anti-financial crime practice.
The United States has been pushing European allies to inflict more pain on Russia while trying to make sure that the alliance against President Vladimir Putin does not fray, a balance that will increasingly become more difficult.
“You’ve kind of hit the ceiling – on both sides of the Atlantic – for what can be done easily and what can be done in short order,” said Clayton Allen, U.S. director at the Eurasia Group, a political risk consultancy.
If the US decides to move to a tougher round of sanctions, Washington will first need to provide concrete assurances to its European allies that energy markets and supplies can be stabilized to avoid economic hardship, said Allen while adding, an economically weak EU helps no one.
“If Western Europe is plunged into a recession, that’s going to drastically limit the amount of support – both moral and material – that they can provide to Ukraine,” said Allen.