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In a bid to pressurise Russia to end the war in Ukraine, the United States on Wednesday (October 22) imposed sanctions on two major Russian oil companies, Rosneft and Lukoil, which, according to US Treasury Secretary Scott Bessent, “fund the Kremlin’s war machine”.
“…Given President (Vladimir) Putin’s refusal to end this senseless war, Treasury is sanctioning Russia’s two largest oil companies that fund the Kremlin’s war machine…,” Bessent posted on X.
These sanctions are the first that have been imposed by the Donald Trump administration since it took office this January. They also mark a change for Western policy around Russian oil, where previously efforts had sought to limit revenue for the Kremlin but without affecting the flow of barrels.
The Russian economy is fuelled by its energy and other natural resources. Russia has the largest natural gas reserves in the world, the second-largest coal reserves, and the eighth-largest oil reserves; the energy sector has routinely accounted for around 20% of the country’s GDP, and upto half of its federal budget.
Since Russia invaded Ukraine in February 2022, some of the most direct Western interventions in the conflict have targeted Russia’s energy sector in a bid to cripple the economy. This, Western analysts and policymakers have believed, would fundamentally inhibit Russia’s capacity to wage war on Ukraine.
The Russian economy, however, has been remarkably resilient to these interventions.
For one, the “sanctions” thus far have been designed not to cut off Russian oil supplies altogether but to impose price caps, which in turn would reduce the oil revenue the Kremlin takes in. Despite threats, secondary sanctions — that is, sanctions on third party entities who are buying Russian oil or facilitating transactions — have not been imposed.
This has largely been done to keep the oil market stable: a sudden drop in supply would send prices skyrocketing which would, in turn, result in price rise across the economy and exacerbate the ongoing cost of living crisis in the Western world.
The state-run Rosneft and privately-held Lukoil are two of the big three oil and gas companies in Russia (the third and the largest is Gazprom). According to Bloomberg, the two companies together account for nearly half of Russia’s total crude-oil exports, amounting to 3.1 million barrels of oil per day.
The Treasury Department has effectively frozen all assets belonging to Rosneft and Lukoil (and their subsidiaries), and barred US firms and individuals from doing business with them. This is a significant departure from previous interventions which have revolved around a $60 price cap.
“This (the latest sanctions) appears to imply that you cannot buy Russian crude oil regardless of the price,” John Kilduff, partner at Again Capital, told CNBC. “It’s a blanket ban.”
Washington has also threatened secondary sanctions on foreign financial institutions that do business with the two companies. This is significant since much of Rosneft’s and Lukoil’s exports are to India, China and Turkey. “Even if the Indian, Chinese, Turkish refiners want to keep buying, their bank[s] may say ‘no’,” Marshall Billingslea, a treasury official during Trump’s first term, told The Guardian.
The question now is whether the US is willing to walk the talk regarding secondary sanctions. “…[The] key then will be if there’s a threat of secondary sanctions on banks, oil refineries and traders in third countries who are dealing with Rosneft and Lukoil,” Eddie Fishman, a senior fellow at the Atlantic Council, told CNN.
Trump has long been trying to pressure India to stop buying Russian oil. This was the stated reason for the additional 25% tariff imposed by Washington on Indian goods and services.
While the latest move does not introduce secondary sanctions, many Indian oil refiners are nonetheless expected to pivot from Russian oil in the near future. Both Rosneft and Lukoil supply oil to both state-owned and private Indian refiners.
On Thursday, a source with direct knowledge of the matter told Reuters that Indian state refiners were reviewing their Russian oil trade documents to ensure that no supply would be coming directly from Rosneft and Lukoil. Reliance, India’s top buyer of Russian oil, also said it was recalibrating its crude imports from Moscow in response to the sanctions, Reuters reported.
Thus even without officially imposing secondary sanctions, their looming threat, as well as sanctions on supply chains which significantly hike up costs of importing Russian oil is already pushing Indian companies to consider other options.
Trump’s public posturing had made it difficult for India to cut back on Russian oil immediately, even if it wanted to. It was clear that India did not want to be seen as compromising on its strategic autonomy and was unwilling to be dictated to by the US on whom it should be doing business with, particularly when it comes to Russia—an old and key strategic partner. The sanctions now offer India far more headroom to quickly taper off Russian crude, which would have otherwise been difficult under the current circumstances.
However, the supply to China is expected to be less-affected, if at all. This means that even if India does pivot, China will still remain a buyer of last resort for Russian oil. It is yet to be seen if that alone can sustain the war economy.
