Easy Russia sanctions exhausted, US and allies face economic bite

Ukrainian soldiers next to destroyed Russian tanks and armoured vehicles, in Bucha, Kyiv, Ukraine, on April 6, 2022. PHOTO: REUTERS

WASHINGTON (REUTERS) - As the world's wealthy democratic powers prepare to roll out a new round of sanctions against Russia in response to horrifying images of executed Ukrainians in the city of Bucha, it has become clear that the easiest options are now exhausted and stark differences have emerged among allies over next steps.

The European Union is set to take a first stab at Russia's energy sector in response to its invasion of Ukraine launched in February, banning imports of Russian coal.

But EU countries remain divided over whether and how to restrict Russia's gas and oil sectors that are more critical to their economies.

The United States and Group of Seven allies also are preparing new sanctions on Russian financial institutions, state-owned enterprises and more Russian government officials and their family members.

In addition, they plan to ban new investment in Russia, and the US has banned Moscow from paying sovereign debt holders with money in US banks.

The moves may increase economic hardship for Russians but may not put much of a dent in Russia's energy revenues, the lifeblood of its economy, according to US sanctions analysts.

Russia supplies around 40 per cent of the EU's natural gas consumption, which the International Energy Agency values at more than US$400 million (S$544 million) per day.

The EU gets a third of its oil imports from Russia, about US$700 million per day.

"We are at the point where we have to take some pain," said Mr Benn Steil, international economics director for the Council on Foreign Relations think-tank in New York.

"The initial batches of sanctions were crafted as much to not hurt us in the West as much as they were to hurt Russia."

Divisions over imposing sanctions on Russian energy were apparent on Monday, when Austrian Finance Minister Magnus Brunner voiced opposition to sanctions on Russian oil and gas, telling reporters in Luxembourg that these would hurt Austria more than Russia.

Hours earlier, French President Emmanuel Macron said the killings of civilians in Bucha made clear the necessity of a new round of sanctions on Russia targeting oil and coal.

Lithuania last Saturday said it would stop importing Russian gas to meet its domestic needs and end "energy ties with the aggressor".

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Next steps

Next steps could include banning more Russian financial institutions from dollar and euro transactions, including Russia's largest lender Sberbank, which was left out of the harshest sanctions already imposed partly to limit the pain for Russia's people, according to Mr Daniel Tannebaum, a former compliance officer at the US Treasury Department's Office of Foreign Assets Control.

Russian bank Gazprombank, thus far spared because of its role in energy finance, also could become a target, sanctions experts said.

The US 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 only gets tougher.

"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 Mr Clayton Allen, US director at the Eurasia Group political risk consultancy, said of sanctions.

To move to a tougher round of sanctions, US officials will need to provide some assurances to European countries that energy markets and supplies can be stabilised to avoid severe economic hardship, he said.

An economically weakened EU helps no one, he added. "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." 

US Secretary of State Antony Blinken is expected to press the case for more actions in Brussels this week at Nato and Group of Seven meetings of foreign ministers. US Deputy Treasury Secretary Wally Adeyemo held similar meetings last week in London, Brussels, Paris and Berlin.

The US Treasury Department said on Monday that Mr Adeyemo "discussed ways to increase costs on Russia while mitigating spillover effects" at meetings with senior German government officials.

Despite recent additions of dozens of Russian companies to the US Treasury's sanctions list, "substantial" legal commerce continues between Russia and the West, from energy to metals and grain, said Mr Tannebaum, who leads consulting firm Oliver Wyman's anti-financial crime practice.

There also are still loopholes to close, including continued sales by German and French companies into Russia, and the ongoing hunt for luxury yachts and other assets parked by Russian oligarchs, according to one European diplomat involved in sanctions talks.

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