How Biden’s Sanctions on Russian Energy Are Playing Right into Putin’s Hands

AMAC Exclusive – By Daniel Berman

As Russian forces continue to advance in Eastern Ukraine, Joe Biden gathered this week with the rest of the G7 leaders in Bavaria, where he advocated more sanctions on Russian energy. On the agenda was a new effort to limit Russia’s energy exports, this time by imposing a price cap on Russian gas. These sanctions are not only likely to be ineffective, but may even help the Russian economy. In fact, the proposal would unintentionally play right into Putin’s hands.

Over the past several months, it has become obvious that energy sanctions on Russia have been a disaster –a disaster for Europe, America, and Ukraine, as well as for American relations with India, Latin America, and Africa. As for Russia, rather than crushing the Ruble, Moscow now has too much cash, and a currency whose value is suffocating the rest of the economy. All as a direct result of U.S. sanctions.

Western governments have utterly failed to cut-off Russia’s cash flow from energy sales. On the contrary, because of higher prices, Russia is actually making more money than before the war. While Russia is selling less for more, it is Europeans and Americans who are paying more for less.

Biden suggests this is a cost of resisting Putin’s aggression. While this might be a cost worth paying if Biden’s strategy would be effective, it has been just the opposite.

To understand why, it helps to appreciate that there are three major types of sanctions that tend to be imposed on states. The first are efforts to limit the resources of a regime by curtailing their exports. In the case of Iran or Russia, this would be blocking the sale of oil. The idea is that this starves the state of revenue with which to import foreign goods. But there are also embargos which function as sanctions on imports. Countries can be banned from importing weapons or components which can be used in the development of weapons systems, such as how Iran is prohibited from importing goods which can be used in the development of missile and nuclear technology. Finally, there are embargos which attempt to isolate a country’s population by preventing them from accessing basic goods which have no military value, but which may cause them to revolt. The closest example of this is how McDonalds and many other major Western corporations have pulled out of Russia in the hopes of turning the population against Putin.

It is this last kind of sanctions that have caused an unintentional problem when combined with the Biden administration’s energy sanctions. While the decision of McDonalds and other Western companies to pull out of Russia might have been a propaganda win, it actually undermined the effectiveness of other sanctions. Why? Well, the purpose behind sanctioning Russia’s oil exports was to try to cut off Russia’s source of foreign capital. Oil is sold for dollars and euros, and if Russia cannot replenish its supply, then the Ruble will lose value (in other words, Russia would experience crushing inflation). Yet what does Russia need foreign currency for? Buying foreign goods. And the major source of foreign capital leaving Russia was not from the Russian government purchasing weapons abroad, but rather, things like Russians eating at McDonalds, buying Apple phones, and paying for Netflix subscriptions. By removing all Western products from sale, there was no longer any way for foreign currency to leave the country. And because Russians could no longer buy Western products, but countries were still buying Russian oil with western currencies, Russia’s “income” in terms of euros and dollars actually increased, not decreased.

What was the result? Rather than crushing the Ruble, the opposite happened. The Ruble actually rose in value. It is now higher than before the war and approaching levels seen before the invasion of Crimea in 2014 and subsequent sanctions.

This creates a different sort of problem for the Russian government. Rather than worrying about a worthless currency and inflation caused by western sanctions, the high value of the Ruble is pushing salaries and wages within Russia higher as well. Just as a relatively strong U.S. Dollar causes American-made products to be expensive in the rest of the world, the newly strong Ruble is threatening to reduce the profit margins of exports, including Russian oil, which risks being less competitive on the world market. While Russian energy is cheap to produce, the margins for everything else are much closer, and the Russian government now faces the risk that mass unemployment and unrest will be caused not because Russia is earning too little money from energy exports, but too much.

It is highly ironic that Western sanctions have had exactly the opposite of the anticipated effect on the Russian economy. The major debate in Russia now is not over fears of inflation as in the West. Rather, it is over whether the Central Bank is doing enough to fight the risk of deflation because the currency is now so strong.

This is probably why Russia itself has begun using restrictions on energy supplies as a weapon. Russia is not actually trying to sell more energy, but rather it needs to sell less. If it can do so while also hurting its enemies in Europe and America, and in the process of forcing them to pay more keep up prices for what it exports in Asia, all the better. Russia already cut off gas to Poland and Bulgaria, and is threatening to cut off the E.U. as a whole this winter. This may be as much for domestic economic reasons as foreign policy ones.

All of this means that the plan concocted by Biden and other G7 leaders is not only futile – threatening secondary sanctions against states like India for buying Russian oil will only enrage public opinion there – but it will actually help Putin with his goal of selling less oil. It allows Putin to reduce his own energy revenues and stabilize the Russian economy without taking the blame from Russia’s customers such as Hungary and India. If, rather than Putin cutting off their oil for his own selfish reasons, Biden forces those countries still buying Russian oil to cease buying it, Putin gets what he needs and can make Biden appear to be the bad guy.

It is now obvious that any effort to cut off Russia’s energy exports was futile from the start. Alternative sources of energy did not exist for the European and American markets, much less to replace Russian supplies in India. Russia was always going to have a steady income.

But what if this entire situation were avoidable? What if there were a form of sanctions which, if imposed in February, would have degraded Russia’s war effort, inflicted much more extensive damage on the Russian economy, yet actually lowered energy prices in the U.S. and Europe rather than raised them?

Biden and NATO leaders should have recognized the position their lack of alternative sources of energy left them in and made the best of it. They should have avoided any efforts to limit Russian energy exports whatsoever. On the contrary, they should have bought as much as possible, while embargoing Russia’s ability to import, exacerbating the Ruble’s appreciation until inflation crushed the entire Russian economy. Perhaps Putin would have had to try and limit his energy sales, but if so, he would actually be responsible for high energy prices, and Biden’s allegations would have a basis in truth. The sanctions would have inflicted the same damage on Russia’s economy and war-fighting ability much more rapidly, while keeping energy prices lower in Europe and the United States.

This would have required the Biden administration and the U.S. foreign policy establishment to abandon its typical approach about sanctions. But what initially sounds like “cowardice” – continuing to buy Russian oil – actually would have been more effective at achieving the original goal.

That is the sort of creative thinking missing from the current national security establishment, which approaches sanctions as a substitute for a policy rather than as a component of one.

Daniel Berman is a frequent commentator and lecturer on foreign policy and political affairs, both nationally and internationally. He holds a Ph.D. in International Relations from the London School of Economics. He also writes as Daniel Roman.