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Unpacking Recent Sanctions on Russian Oil · Columbia Energy Exchange

• 0:00
  Richard Nephew: I believe that oil-focused sanctions can work. I think that they can do an awful lot in terms of putting pressure on the people who are trying to sell oil. We've seen it in the past, but I also think that it's just as plausible that it won't if you're not going to enforce this vigorously. There's plenty of ways in which people can, with not much of a veneer, pretend they're not engaged in transactions that are a problem.
• 0:01
  Daniel Sternoff: I think this is first a signal from Trump to Putin. Okay, we've tried to play nice, we've offered carrots. I rolled out the red carpet in Alaska. I've given 30 and 50 day deadlines. They've come and gone. Now, I mean business.
• 0:02
  Tatiana Mitrova: We shouldn't regard all this situation just from the market perspective. It's of course important, but now we are talking about much bigger thing than only oil market. It's the global power game and global alliances and alignments.
• 0:03
  Jason Bordoff: Last week, President Trump announced that he was imposing significant new sanctions on Russia for the first time in his second term. It's an effort to cut off revenue Russia needs for its war in Ukraine and it's targeting Russia's two largest oil companies, Rosneft and Lukoil. This comes at a time when Russia's oil industry is also under pressure from intensifying Ukrainian attacks on refineries, crude pipelines, and export terminals. There are questions about how successfully these sanctions will be enforced and whether they will have major impacts on the market and for countries like China and India that are the largest buyers of Russian crude exports. The step comes at a time when producers have been ramping up output amid signs of cooling demand growth. Yet the sanctions could still bite, especially given that the Treasury sanctions announcement came with the explicit warning that secondary sanctions targeting buyers of Russian crude oil from these companies could be coming next.
• 0:04
  The Russian oil sanctions seemed to signal a major shift in the Trump administration's posture, but critical questions still remain. So why did Trump take this step now? How likely is it that the sanctions will be enforced? What's the point of these sanctions and what does all of it mean for global energy flows, energy markets and geopolitics?
• 0:05
  This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I'm Jason Bordoff. Today on the show we're bringing you a recording of our rapid response webinar with three of our own experts, Richard Nephew, Tatiana Mitrova, and Daniel Sternoff.
• 0:06
  Richard's a senior research scholar here at the Center on Global Energy Policy and a former US deputy special envoy for Iran. Tatiana Mitrova is a global fellow here at the center. She has deep expertise in Russian, FSU and global energy markets, and Daniel Sternoff is a senior fellow at the center who also leads Energy Aspects' executive briefing service.
• 0:07
  I spoke with this esteemed panel of fantastic colleagues about what President Trump is signaling with these sanctions and how effective they might or might not be. We discussed how President Putin is reacting and whether US sanctions might change Russia's export strategy. We explore how China and India might react and we talked about what it all means in terms of great power competition, geopolitics, and global energy flows.
• 0:08
  I hope you enjoy our conversation.
• 0:09
  Great to have all three of you with us today. I always say in these webinars and podcasts, it's always great to talk to the smartest people I know about the things I'm interested in learning more about. I know many people watching and listening to this are as well. It's even better when you get to call those people your friends and colleagues, and we just have some of the brightest minds working with us here at the Center on Global Energy Policy and it's great to turn to all of you to talk about that today. Let's just set the scene for everyone to make sure people understand. They may have seen the headlines about it or read some articles about it, but what actually happened? What, let me start with you Richard. What did the Trump administration do and why is it consequential?
• 0:10
  Richard Nephew: Yeah, good place to start is what's changed since last week, and I think the most significant element is as you highlighted, the fact that Rosneft and Lukoil are now on the US Specially Designated Nationals and Blocked Persons list, the SDN list that everyone knows and probably doesn't love, that essentially applies blocking statute for any of those assets that happen to be in the United States, but probably more importantly threatens anyone who's doing business with those entities with their access to the US market. And those kinds of secondary sanctions have been in effect against a variety of targets for a number of years, but Russia, particularly over the last couple, with the intent of using a listing on the SDN list to try and push people to no longer be able to do business with those entities. And so what's really changed now is those particular companies as well as their subsidiaries, and anyone that may be more than 50% owned by them is now potentially sanctionable and any transactions with them may be potentially sanctionable.
• 0:11
  And that doesn't just include companies but potentially banks and service companies and those sorts of folks as well. So the overall impact if these are enforced, and that's a big if that we're going to end up talking, I think, a fair amount about, is that if you want to do business with those entities, you're running the risk of never being able to do business in the United States again. On top of which we obviously as you mentioned, have EU and UK sanctions as well, and those are also targeting these entities as well as others. So I think the overall effect has been a significant ramp up of at least the sanctions on paper governing Russian oil.
• 0:12
  Jason Bordoff: And people may have heard words like blocking and secondary and just help people understand the difference between the two. Markets seem to have shrugged off a little bit. I mean certainly you don't see a market response suggesting millions of barrels a day are about to come off the market. Is that about enforcement or is there a step that has not yet been taken that would be much more consequential?
• 0:13
  Richard Nephew: Yeah, it's an enforcement question. So what blocking means essentially is the assets of those companies if they're in the United States, have to be locked up, right? So if they're holding a million dollars in a US bank account, those assets have to be frozen. And any subsidiary that's specifically been named, the same thing. The secondary sanctions are where things get a little bit more interesting. I think there are more questions on enforcement because people kind of expect that US banks are going to freeze the assets of Lukoil, Rosneft enough, no real question there. The issue is there's not a lot of assets they're going to be inside US financial institutions to this point that are potentially going to be ensnared. The real question is whether or not the United States is going to then say to anyone who's doing business with Lukoil, Rosneft, you can't do business here because we've decided that these guys are bad and that you can't do business with them and do business with us.
• 0:14
  That kind of effect in threatening similar sorts of sanctions on foreign companies is it gets them to say, listen, how much is my Russia business worth? If I'm getting $5 million of business from Russia, but I'm getting $50 million in my business from the United States, that math pretty quickly directs what people's responsibilities and choices are going to be. So secondary sanctions are how the United States makes foreign entities, banks, companies, what have you stand up and respect the US sanctions list. And I think the reason why you've seen markets question and markets shrug on this is that they question whether or not enforcement of those penalties abroad is going to be as severe as they potentially could be.
• 0:15
  Jason Bordoff: It sounds like you're saying these are targeting the seller, not the buyer. And does that also matter for evasion opportunities and for enforcement potential?
• 0:16
  Richard Nephew: Yeah, it's naming the sellers, not yet naming the buyers. And that's where everyone's question is, are you going to name some buyers yet? And if the seller changes, and so all of a sudden what was Rosneft is now Bob's Oil, is somehow Bob going to be sanctioned? Now there's some automaticity that's in theory involved in US law. So even if somebody is not a named AKA, also known as type of person, they would already be ensnared in US sanctions. But look, the practical consequences, if you don't know that this oil is now Rosneft oil and you don't know Rosneft's behind it, well that makes it really hard for banks and other corporates, necessarily, to comply. And a lot of them will pretend that they had no idea that Rosneft was involved. They had no idea that gambling was happening here. And so from that standpoint, you might have some people being willing to test the waters and especially if they don't have a lot of exposure to the US market, which is another part of the enforcement question.
• 0:17
  Jason Bordoff: Tatiana, from your standpoint, how effective do you expect these new sanctions to be and how do you expect Moscow to respond?
• 0:18
  Tatiana Mitrova: So Jason, first of all, these sanctions, they look much more serious than anything that we've seen so far because they are directly targeting the heart of the Russian oil industry, two biggest companies, state-owned Rosneft and privately owned Lukoil, which together account for like 6.8 million barrels per day production. It's 5% of the global oil output. That's a lot. But as Richard mentioned, the key question is enforcement of these sanctions because we've seen just recently in January 2025, similar sanctions were imposed on smaller companies like Gazprom Neft and they've ended up with first decline in supplies but then recovered pretty quickly in a couple of months. They've redirected their supplies mainly to China to the second tier companies, not to the state-owned Chinese companies, but to smaller, to the teapot refiners. They became major consumers with non-dollar payments through different intermediaries, through the shadow fleet. Yeah, and that's it. Actually, Gazprom Neft has recently reported a growth in its oil output and exports, so it took some time. The reaction of the market initially was quite strong, but then people realized that without enforcement, actually these sanctions are more a symbolic gesture and in my view, frankly, it's more an invitation for Putin to come back to negotiations, which he has been ignoring actually during the last couple of months. So after the Anchorage summit, there was no real progress achieved and Trump is signaling that, hey guy, we have some enforcement, but also take into account that the sanctions can be actually easily removed. So if Russia demonstrates any appetite for peace negotiations or at least ceasefire negotiations, then it can change. The other way around, there is one month period before they come into force until November 21st. So it could well be that Putin at a certain point during the next three weeks will call Trump again and suggest some new development of cooperation, I don't know, in Arctic whatever, building tunnel from Russia to Alaska and it can be put on hold. And that's for me the key explanation why the markets are still in this uncertainty, not understanding frankly how serious it's going to be because actually we can end up in one month with no sanctions.
• 0:19
  Jason Bordoff: And just a quick follow up, and maybe Richard, you want to comment on this too, what you described, a shadow fleet and the shipping to teapot refineries, the small refineries in China, use of non-dollar payment systems, that suggests not a lack of intent to enforce, you announced sanctions, but you don't really want oil to come off the market and push up prices, just that there are a lot of opportunities for evasion and I'm wondering if that's what you meant to say and maybe Richard, you want to comment on that too, why these might have less impact than we think?
• 0:20
  Tatiana Mitrova: Well, I will start Jason. During the last few years actually, the global situation, the global flows have changed. And so there are several jurisdictions which are not that much dependent on the US. The volumes of Russian oil flowing to China and India, I mean Russia is exporting 80% of its oil to China and India these days. And they've built the whole logistical network. They've built actually the whole parallel financial network. And it's a very important thing to keep in mind that actually the global oil market is now fragmented. There is this whole shadow market which is not transparent. We have very little idea about the volumes, the prices. We can only guess and make some indirect assessments, but when the intermediaries in this market are assessing the risks of getting under the US sanctions and the benefits of trading Russian oil, in the majority of cases, they prefer to keep trading.
• 0:21
  Okay, even if their company gets under sanctions, they will open 10 new ones next day. It's quite fast. People have learned how to bypass these sanctions. That's why I think that even if they are strictly enforced, which is a big question mark, but even if they are, the companies will find the ways how to bypass it. It will take time. It will impose additional transaction costs on the Russian oil producers, definitely they will have to provide bigger price discounts because otherwise nobody wants to take this risk, but the oil will keep flowing after a certain period, rather short period of disruption. And I would say it could be like for one or two months maximum, seven, 800,000 barrels per day, it's maximum and then I'm sure they will readjust.
• 0:22
  Jason Bordoff: Richard, do you agree with that? Tatiana's view seems to be that Russian oil is going to continue to flow after maybe some short disruptions regardless of the Trump administration's intentions with regard to enforcement?
• 0:23
  Richard Nephew: Yeah, I do. And look, I think that there's two issues here. One, anytime you have any kind of law or any kind of regulation, but there's a financial interest to get around it, people are going to try and get around it and for the same reason why you have laws against robbery, but you have lots of people willing to give it a go anyway. It's because there's benefit that potentially comes along with that. And that's part of the reason why the systems that we designed to enforce sanctions, they not only deal with security measures. If you're thinking about, again, a bank, you're talking about vault doors and similar where you're telling people the kinds of business they're not allowed to do, but you also have the mechanism to go after everyone involved in that robbery, right? And to go up the ladder and list, and this is the part of the implementation that's a question.
• 0:24
  You might find ports and shadow fleets and others that don't have a lot of connection to international financial markets. But somewhere along the way there is going to be an interaction with a bank that is going to have an interaction with another bank that can absolutely be leveraged. And this is part of the question on enforcement. It's not just about naming ships and ports and those sorts of things, and some of them might be very small and not terribly consequential. It's about continuing to identify everyone in the value chain associated with sanctions evasion, and giving them all the incentive in the world to stop by threatening that access. And that's how you turn what otherwise is a lucrative opportunity, a bank robbery if you will, into a real consequence and to make them say, Hey, it is just not worth it. It's not worth the kinds of consequences I can face here.
• 0:25
  But the problem is that that takes a lot. It takes a lot of enforcement time, it takes a lot of effort and frankly it takes a lot of political will and it takes a lot of willingness to be willing to threaten other economic interests. And I think this is part of the reason why you could say the Trump administration has all the right intent here. And I think that's a question, but you could say it, but you don't necessarily know at this point are they having the same level of willingness to continue to enforce these measures, especially if it's costly and confronting China, let's say where we've got discussions ongoing about a trade deal.
• 0:26
  Jason Bordoff: Daniel, the oil market response seems, I think, to be consistent with that view, that concern is low that large volumes of Russian oil supply are going to be disrupted. Can you comment a little bit on what the oil market looks like right now, what the response has been and why?
• 0:27
  Daniel Sternoff: Well, yes, I think that's what the response has been. I think there may be complacency in that response as well. Clearly we had about a $4 or $5 jump when the sanctions were announced and on Friday we've had no follow through. Today we've seen a little bit of strength in Dubai spreads. That's a sign that in the physical markets people are scrambling to find alternative barrels, Middle Eastern or other comparable grades. There's a lot more of that activity that is going on in the market than is apparent in what you see in terms of prices on screen. The reason why I think there might be some complacency in the market is while it is definitely the case that the market assumes maybe Trump will taco or we haven't seen the follow through or he favors low prices or if prices spike he'll back off. I mean all of these reasons that people assume we won't see a follow through.
• 0:28
  I think what's maybe a little bit different here and that we're going to test here is what will the reaction of Indian refiners be? So while there's a lot of scope for Chinese or other entities to have a fully fragmented chain through banks and ships and logistical channels and through ports, that's not necessarily the case for Indian refiners that are a little bit more lawful, both in terms of the legal advice that they're getting in terms of their banks and in terms of their exposures to the US system. And what we're hearing in the market right now is right now everyone is hitting the pause button in order to stop and assess.
• 0:29
  Jason Bordoff: In India you mean?
• 0:30
  Daniel Sternoff: Well, India as well as state-owned Chinese refiners. So we've got about 500,000 barrels per day that come from the Chinese SOEs that have exposures to the US system and who are also at least pausing to check out the lay of the land. And then of India, there's 1.7 million barrels per day of Indian imports from Russia. I'd say about 300 of that is from one refiner, Nayara, that's already sanctioned. They will continue, if they're already sanctioned, why not? They might have room to pick up a little bit more, but we're looking at about 1.4 million barrels per day worth of Indian purchases that at least for the moment have stopped. That probably stops for a cycle, a monthly cycle, one or two months until everyone understands. This is where the enforcement question absolutely will matter a lot. But this is potentially a big deal and I think that what Trump has done that is different. Recall he put in place this 25% penalty tariff on Indian imports to try to push the Indians to stop taking Russian oil. And for a lot of reasons that was a poor use of the tool because those who would be affected by it were not those that are actually involved in the oil market and it did nothing to Indian purchases, it just damaged US-Indian relations.
• 0:31
  This is something different. Now you have those Indian refiners either that have direct contracts with Rosneft as in the case of Reliance or have banks and lawyers who are saying watch out. So I think that this is something that will be put to the test and maybe is a reason why there shouldn't be complacency that it will just be easily — that the market will easily reorient itself into sanctioned and unsanctioned channels. So I think we need to watch India really closely here and if even half or three quarters of those Indian volumes are disrupted, that is a big revenue effect and it's a big deal for the oil market because you'll need to go find alternative barrels of comparable grades. And so I think the immediate reaction that you've seen in physical markets and in prices is complacent as to what the potential effects could be.
• 0:32
  Jason Bordoff: You're describing a situation where something in the order of what, a million barrels a day has a higher possibility of being disrupted than people seem to feel today. Is that right? Am I hearing you right?
• 0:33
  Daniel Sternoff: Well, I mean if all Indian, so non-Nayara Indian volumes would stop, that's 1.4. If half a million barrels per day of Chinese SOEs stop, there's another 500,000 barrels per day. We also have Turkey take some waterborne volumes. That's three to 400,000 barrels per day. And then there's also some flows that are going through the Druzhba pipeline into Hungary and we've got another two to 300,000 that are there. So that actually is a lot of oil when you add it all up depending on what the responses will be. And so how much of that could potentially be disrupted? Definitely it's a question of enforcement, but it might not take a lot to get a lot of players to be risk averse. So even before Trump announced these sanctions on Lukoil and Rosneft, we had been seeing earlier in the week when the UK announced a bunch of sanctions, one thing that they did is they named, for example, one Chinese refinery Yulong.
• 0:34
  They were put on the UK list because they had accepted crude from a tanker that had been designated by the UK. Indian refiners even before Rosneft and Lukoil had been hit, saw this and went, oh, somebody is enforcing this question of crude carried by the shadow fleet and we already started to see some purchases being redirected. So I think that there is some real susceptibility if you would just pick out one or two examples to be made an example of for secondary sanctions enforcement, it might potentially have a chilling effect that could be more powerful and it wouldn't necessarily need to be that strong.
• 0:35
  Jason Bordoff: And help people listening understand sort of the state of the oil market today. If there was a broader belief that one to 2 million barrels a day was potentially disrupted, maybe some of it comes back, but something in the numbers you just described, we're in an oil market where people seem to think we're in an oversupply situation, balances are building, we have more oil than we know what to do with, what happens to prices in the scenario you're describing?
• 0:36
  Daniel Sternoff: Well this is absolutely the best time to announce something like that. I would say up until we got into the fourth quarter, there had been lots of expectations of a big oversupply given that demand is so-so, and OPEC has been bringing back a lot of oil. Everyone on paper seems to expect that there would be a really big surplus. It hasn't materialized so far. Or put another way, most of the surplus has been absorbed into China that has been building strategic stocks. Now, however, the sheer volume of the new OPEC supply that's coming on, even if it's not as high as what they say they'll bring on because of some capacity limits, we still have seen the market loosen quite a bit. So we have been in a backwardated market. So that is just something that is telling you that there are signals to players to be drawing inventory because there is still tightness. That backwardation has basically gone away.
• 0:37
  And we are flirting with contango, which again, without being too technical, it's just a sign that we're moving from deficit into surplus and given where OPEC is and given where we are seasonally, the expectations are that we could have a surplus. The market is all over the map, but somewhere between two to four and a half million barrels per day on a Q4 '25 and Q1 '26 basis. And so reality is probably at the lower end of those numbers, but nonetheless that would be absorbable at least for a couple of quarters if we would have a million, million and a half disruption. That would not be the case if we're projecting further into next year, but it might be over the next couple of quarters, it might be absorbable.
• 0:38
  Jason Bordoff: You're describing a market, if I hear you're right, where for those who think there's no way Trump wants to cause an oil price spike, he has spoken so often about keeping energy prices low. This might be a scenario where you can do both.
• 0:39
  Daniel Sternoff: I think that's right, at least in the short term.
• 0:40
  Jason Bordoff: Okay. Tatiana, I'm curious and also Richard, if you kind of agree with Daniel's take on why maybe we should be a little less complacent about the potential for those who are looking at how much Russian supply could be disrupted. You were talking, Tatiana, about lots of opportunities for evasion, get around enforcement and Daniel's like, actually we might lose more barrels than people think. I'm curious your reaction.
• 0:41
  Tatiana Mitrova: Yeah, I'm sure that companies, and I mean market participants making their strategies should definitely keep in mind that there is this downside risk that suddenly the sanctions could be enforced, not like those for Arctic LNG 2, but all that I know about Russian oil companies which have been preparing for these sanctions. I mean it wasn't just a sudden shock. They knew from the very beginning that it's coming and they were actually surprised that it came like three and a half years into the war already. They had plenty of time to create all the intermediary chains. They are very smart in these shadow fleet logistics. And now Russia has the biggest shadow fleet in the world. Of course, they can always restructure the companies, they can establish new entities just to export this oil. And that could be actually, I mean the CEO of Rosneft would be absolutely happy to take over the other smaller market players in order to provide a single export channel whatever. So there are also some power games inside Russia which will force a sort of restructuration, but even without this, they can register companies in all jurisdictions with different names and just start the same old game. And I mean for the Indian refineries as well, if they can show to their bank compliance officers that it's not Rosneft but another company, that's it.
• 0:42
  It's again, the temptation to bypass these sanctions is so strong. And for Russia actually, if you balance the two options, one option is just to cut production and to wait until the global prices will go up and thus compensate for the loss of the volumes. It's an option, and this is something that Russia’s energy ministry keeps repeating. The other, it's not a good option because they've tested it basically during COVID back in 2020 and they saw that then recovering this production in Russian geology is very difficult and costly. So they would most likely prefer to keep the volumes, they might decrease the level of utilization of the wells, keeping them at 20, 30%, but not stopping them, being ready to increase production as soon as there is a window of opportunity to push this oil to the market and they are betting on the fact that Urals, it's difficult to overnight replace this blend. So most likely buyers in non-OECD countries will be ready to take some risk through the intermediaries not naming Rosneft and Lukoil in order to have Urals blend coming at discounted price, which is also nice. Yeah, so it seems that interests of the Russian companies and of the buyers are more aligned here. So keeping in mind Daniel's scenarios, I would rather bet on 1 million barrels per day, realistically short term disruption. But yeah, we never know.
• 0:43
  Jason Bordoff: Richard, where do you come down on all the reasons why there are a lot of opportunities to find other ways for oil to go to the market as history would suggest? And Daniel's comments about risk aversion and you made a comment I think in one of our conversations. I recall we were like, if I really wanted to take Russian oil off the market and I was in my old job, meaning you, this is not what I would do. Say more about what you meant and does that kind of give reason to support Tatiana's view that it might be a little less than the scenario Daniel described?
• 0:44
  Richard Nephew: Yeah, I mean look, I believe that oil-focused sanctions can work. I think that they can do an awful lot in terms of putting pressure on the people who are trying to sell oil. We've seen it in the past and I think it certainly could work. And that's part of the reason why I think that some of the scenarios that Daniel is outlining, yeah, I mean those are plausible, but I also think that it's just as plausible that it won't for some of the same reasons Tatiana laid out. And this is where it comes down to what comes next. It's not about what's done now. What's done now is significant. It was a signal if nothing else and it potentially followed up on could do a fair amount in terms of putting pressure on Russia as a way of getting back to the central question about by hurting their oil exports.
• 0:45
  But ultimately we've seen in the past that if you're not going to enforce this vigorously, there's plenty of ways in which people can with not much of a veneer, pretend they're not engaged in transactions that are a problem. I mean there was a time in which Malaysia was exporting more oil to China than it was producing, and there's a little reason for that. And the big fat sticker that they put on top of the Iranian flag says a lot about it, but the only reason why that worked and why Iran's been able to do that is because of the enforcement posture that's taken where people are not willing to push on those sorts of issues. So this goes back to the question of what comes next and look, if we're ranking what we've done thus far this year, the tariff idea on India was a mistake.
• 0:46
  It was a bad use of tariff policy, it was a bad use of sanctions policy to try and put pressure on India. The fact that it's still in place remains surprising to me. I'll acknowledge that. But the fact that it's not had the effect that it was supposed to have doesn't surprise me in the slightest in part because it's just the wrong tool to be used in this scenario. This is closer to the right tool by going after the specific entities that are involved and putting pressure on those doing business with them. That's about the right angle. But as we're all talking about the fact that you can rename companies and you can find evasion paths and you can put those stickers on barrels, makes it really more straightforward to evade it unless you are going to very religiously enforce. And that means every day potentially having to come out with designations saying we found another front company, on the list, we found another entity on the list, we found a bank involved on the list.
• 0:47
  But this is where you get to the question you had about what would I do? Look, part of the reason why in the end we went with a broader approach in addressing Iran's oil exports is because we found that individual designations just had too many leaks. And so instead we went after the ability of Iran to export in general by going after their overall banking relationship and by going after the actual amount that they were exporting and demanding that people make those cuts that we did throughout 2012, 2013. You and I spent a lot of time doing that kind of work together and insisting on those 20% reductions that we did every six months and we paired that with an effort to go after the banks. And I want to really kind of foot stomp this point. At the end of the day, there are plenty of financial institutions that are involved with the entities that are still receiving this oil. They're still engaged in these transactions.
• 0:48
  And by going after both exports and going after the banks in 2012, 2013, we restricted assets going back to Iran. We restricted those revenues while at the same time provided for an organized departure from Iran. There is a way to re-engineer that same sort of approach here where you could go to the banks that are involved, get them to restrict access to those assets and those revenues while at the same time again in an organized fashion trying to wean people off of Russian oil. The problem with just doing designations is that it tends to be very abrupt and then you don't necessarily adjust to the day after. That's why you need a much more integrated strategy to try and deal with this.
• 0:49
  Jason Bordoff: I mean if I synthesize what you're all saying, tell me if I'm hearing this right, Richard or anyone else, the opportunities for evasion may mean that the supply comes back, there's less of a disruption and spike in global oil prices as a result, but those barrels would come back at a steeper discount and the price cap that the Biden administration put in place was intended to achieve that outcome, allow Russia to sell oil but get less revenue for it. Is this a more effective way to do what Biden was trying to do?
• 0:50
  Richard Nephew: Well, so I'll jump in on this. I mean, look, I think maybe there are four options from the ones I mentioned. We have tariffs, we have designations, we have price cap, and then we have something more targeting the revenues. The idea of targeting the price and trying to drive that down to reduce the amount of revenues getting back to Russia did make sense from a standpoint of avoiding market disruption. But the problem is it still results in lots of money still getting back to Moscow, right? At the end of the day, that's still a lot that is getting back into Putin's hands to be able to continue to prosecute the war. What I am suggesting is that there is still a way to try and put pressure on the financial institutions to not allow assets and revenues generated from going back or being used to purchase goods abroad. And that requires a much more aggressive approach being taken towards the banks. So yes, this is a way of helping execute the price cap. By the way, just complying with the lower price cap, driving the price cap down lower would also be more effective here too, although that's been rejected thus far. So all of those are potentially contributing to it, but it's worth just coming back to they all still involve revenues getting back to Russia. So if you're asking me what would I do, make sure the revenues aren't getting back to Russia.
• 0:51
  Jason Bordoff: Tatiana, and I'll come to Daniel, just help put this for me and everyone listening in the broader geopolitical context, the relationship between the US and Russia, between Trump and Putin, should this be interpreted as a signal that the Trump administration is really quite serious about bringing an end to this conflict and this is a step change in the efforts to do so? Is there something else, Tatiana, you think about why this action was taken now and are these sanctions primarily about Russia or part of a wider US strategy to kind of reshape trade relations broadly with China, with India, with the global south?
• 0:52
  Tatiana Mitrova: I think Jason, it's both. So first of all, obviously Trump is becoming impatient because it's already like half a year that he has calls, regular calls with Putin. He's promising that we are approaching some solution of the Russia-Ukraine conflict and nothing happens. And obviously he wants to see the result. He doesn't want to feel that he's fooled by Putin and the team. So this was predictable. At the same time, Putin is very smart. I mean he's a professional secret service guy. He knows how to negotiate, he knows how to charm and he's using all the psychological tricks he can find. But right now it seems that he overestimated his charisma and this time he has received a very clear message from the US. He has responded with a rather consistent nuclear weapon, military checks. So just yesterday he announced this Budnik missile. Nobody has seen it, but he says that it's the most tremendous stuff.
• 0:53
  So he started also to send negative messages to Washington that Russia is not just a power, it's a nuclear power and it has to be treated properly. Again, I'm not sure how these dances will evolve further. They are both quite unpredictable. So these negotiations, they can end up in many different ways, but I believe that this episode with Rosneft and Lukoil is just part of these negotiating strategy between those two.
• 0:54
  At the same time, as you've mentioned, we shouldn't miss a broader context with the global geopolitics because it turns out that there is also an important messaging to India specifically, which was the first target with the tariffs like a victim of this tool, but now also with China. And as we've mentioned at the very beginning, suddenly Russian oil appeared as a part of the broader US-China trade agreement negotiations framework, which was quite strange. And it's also like China is requested to choose the position, whether it is with the US or with Russia. It's a very difficult, if not impossible choice. So we will see how it will evolve further. But anyway, we shouldn't regard all this situation just from the market perspective. Of course it's important, but now we are talking about much bigger thing than only oil market. It's the global power game and global alliances and alignments.
• 0:55
  Jason Bordoff: Daniel, can you sort of comment on what you see as the broader geopolitical signal here and in the context of great power competition rivalry, US, China, Russia, and also for the dynamic within the Gulf and the countries in OPEC and their role in managing global oil markets?
• 0:56
  Daniel Sternoff: Yeah, absolutely. I mean, just to amplify what Tatiana just said, I do think a lot of this is bilateral Trump to Putin. He's looking for leverage. He didn't adopt the toughest package that was put in front of him. So sanctioning Rosneft and Lukoil was kind of the middle package. He's left himself room to escalate if needed. And I think the same is true when it comes to the supply of long-range weaponry that the Ukrainians have for striking inside of Russia. That is the other part of this policy. We have been seeing US intelligence support reportedly along with at least a loosening of Ukraine's rules of engagement of using with some effect long-range missiles for striking deep inside of Russia. And we have not yet done everything — the US, the Trump administration —has not supplied Tomahawks and there's room to escalate here. So I think this is first a signal from Trump to Putin.
• 0:57
  Okay, we've tried to play nice, we've offered carrots. I rolled out the red carpet in Alaska, I've given 30 and 50 day deadlines. They've come and gone. Now, I mean business, but he hasn't gone all the way. And I think that if the Russians just say we're a nuclear power and we're not going to give anything but resort to nuclear blackmail and we're stuck at an impasse, the logic to me is the next step up might be more enforcement. And that's why I think the ball is currently in Putin's court here on how he responds and whether we have any kind of a negotiation or whether we're just going to feel some impact on revenue, some impact on flows, and some impact of the Ukrainians continuing to hammer Russian refineries. So that I think is the main context. But to your question around the Gulf and so forth, Mohamed bin Salman, the Saudi Crown Prince is coming to Washington on November 18th.
• 0:58
  I think that's a very interesting timing simply because if in fact we do start to see some things biting in the oil market, I think many people ask, what if oil prices spike $10? Won't Trump just back off because he doesn't want that? Well, maybe, but would he be more likely to just back off or would he call on MBS to say, Hey, help us out here and put a little bit more in the market. And obviously that is something that's incredibly difficult for the Saudis who have a good oil relationship with the Russians who are a trusted member of OPEC Plus with whom they have cooperated for years in managing the oil market. And Saudi has a lot of reasons to maintain a very professional and technocratic oil relationship with Russia to be thrust potentially into a geopolitical oil diplomacy that he doesn't want to be. That will be something tricky for MBS to navigate.
• 0:59
  Jason Bordoff: And just quickly, how much additional capacity do you think Saudi Arabia, OPEC have given that they've brought a lot of supply back already in the scenario you just described?
• 1:00
  Daniel Sternoff: Right. Well, I mean that's of course the million dollar question is how much is true Saudi capacity and how much could it sustain? I think that clearly there's an expectation that from current levels they could sustain another million, million 2, million 3. I think there's general confidence around there that would take them into the low elevens. Their nominal nameplate capacity is 12 to 12 and a half. That's never really been tested. And maybe they can surge there, but to sustain it is another matter altogether. Even though we have a kind of comfortable oil market balances right now, one interesting backstory is even though OPEC has been unwinding its cuts, what we have seen is that OPEC supply has only risen by about half of what they said they would be increasing. And the reason for that is because most of the members of OPEC don't have the spare capacity to rise up to meet those quotas, and that may very well include Russia in that bucket.
• 1:01
  It's a little bit hard to ascertain what's going on with Russian production on a real time basis because there've been disruptions to refineries. You have maintenance, there's a little mismatch in some of the data, but it does look like Russia is falling short of its OPEC quotas. And that's certainly the case for many members of OPEC. If we look at Algeria, Nigeria, et cetera. So there is room from the Saudis, from the Emiratis, maybe a little bit with the Kuwaitis, maybe a little bit with the Iraqis, but when we get beyond that group, it's not clear that there's much spare capacity within OPEC. And so if we would have some sustained disruption pushing into next year and we have US shale production flattening out, then that sets the seeds potentially for a tighter market. But I think that's three, four quarters from now, not today, but it's certainly there in the background.
• 1:02
  Jason Bordoff: There are some great audience questions. I want to bring a couple in. Richard, there's one about that article we saw in The New York Times on cryptocurrency, stablecoin, Venezuela, and what impact that has on utilizing the banking system and do actions like this have much less effect as a result?
• 1:03
  Richard Nephew: Yeah, no, it's a great question. It's part of a bundle of questions that we tend to get looking at sanctions of, does any of this stuff matter anymore? If you can just do it via crypto, it really doesn't matter. And that's kind of the hypothesis. Look, I can only speak from what we've seen thus far. We have seen greater use of cryptocurrency in that entire suite of activities over the course of the last few years, but we still haven't seen it displacing the traditional financial system. And the reasons for that basically come back to the size and scale of the kinds of financial transactions that people want to do. And the fact that a lot of this still needs to be rendered in some kind of usable form for governments in particular to be able to do what governments need to do in terms of buying arms in the Russian case or other places too.
• 1:04
  We've also seen that a lot of sanctions evaders and intermediaries, they may be willing to use cryptocurrencies, but they're also incredibly nervous about them because there's both valuation issues where if the value fluctuates significantly, which might not happen with dollars or euros or other more stable currencies, they potentially lose out in the middle of a transaction. And then of course, there's always the issue of theft. Yes, it is possible for someone to steal greenbacks and to be able to take money out of a bank. At the end of the day, cryptocurrency comes with some advantages to smugglers, also comes with risk that smugglers just pocket the money and off they go. So all that adds up to is there a potential here for sanctions evasion using cryptocurrency to deflate the value of going after the financial system? Yes. Have we seen that happen to the degree yet that these measures don't have an effect? No. And I think we're still kind of in that space for a while, especially as issues around what you can use crypto, and again here I'm speaking generally, those kinds of currencies can be used for and how they can move around.
• 1:05
  Jason Bordoff: Tatiana, another question is whether Lukoil, Rosneft will be forced to sell assets and whether there's spillover effect to large IOCs who may have joint projects with Lukoil and Rosneft and whether they will be forced to divest assets in those projects?
• 1:06
  Tatiana Mitrova: So Lukoil has already announced today that it is stepping out from its projects overseas, and I believe that it was a difficult decision for them because from the very beginning, Lukoil was like international ambassador of the Russian oil industry and their overseas arm is really big. It's like a third of their production. They are active in Iraq, in Egypt, in many countries. They have refineries, they have gas stations in the US. So it's quite a big network. I'm still surprised why they didn't step out in 2022. So they were waiting until the very end. Probably they will sell it to the other companies established with the Russian roots, let's call it this way. So these can be just affiliated, not directly affiliated companies, something like that at the same, or they will just sell it to anyone who is ready to buy. But anyway, we see already that there were certain exemptions like CPC for example.
• 1:07
  So international projects where the US IOCs are engaged, they've got this protection right now. German government is discussing exemption for the former Rosneft assets, which were taken over by the German government, but still formally belong to Rosneft. So they are asking for another exemption. I believe that there will be more requests and more negotiations with the US authorities for the international projects. For example, Sakhalin, which is Rosneft's biggest gas producing fields, and it's quite important for the European gas supplies, Lukoil participates there. So for them it's also an issue. I think it will be fixed.
• 1:08
  Jason Bordoff: And Daniel, and maybe this is a question Tatiana for you as well. If sanctions do succeed in curtailing oil sales to Russia's traditional customers, where else do you see those barrels going? What's plan B for Moscow?
• 1:09
  Daniel Sternoff: Well, I mean, I think the first answer will be who in China has scope to pick up extra barrels? So here is where enforcement's going to matter a lot. So we do have Sinopec and PetroChina among Chinese SOEs. If we don't have good enforcement or if the Trump administration would enforce elsewhere, but China is too big a fish to go after, then they may continue to take Russia without consequence and then they could increase that. I think there are Chinese refiners like Yulong that have room to increase a little bit. They're kind of limited on a grade basis. And then you have all of the Chinese teapot refiners. In the very short term, I don't expect we will just see, let's say Indian refiners stop in the next two months and this oil sloshes around and has to go somewhere. I don't think we will see teapots picking that up in the short term because they're subject to crude import quotas that Beijing doles out and they're basically done for the year.
• 1:10
  So unless the Chinese government will say, okay, you all have quotas to import more, I think that won't happen. There also are very big stockpiles of Iranian crude that is in storage in China that is cheap and waiting to clear. I think that those Chinese independents that don't have exposures to the US financial system and would be happy to take cheaper sanctioned barrels, I think sanctioned Russian oil will have to get in line. So in the short term, no, but if we wait 3, 4, 5 months and then there's new batches of import quotas, then I think that's the logical place where this could start to flow.
• 1:11
  Jason Bordoff: Anything you'd add to that Tatiana?
• 1:12
  Tatiana Mitrova: Well, maybe the other Southeast Asia consumers. So I'm talking about Indonesia, Malaysia, Vietnam, I mean Cambodia. So smaller countries which need cheap oil and which will be probably more open for these. I mean not buying directly from Rosneft, from Lukoil, definitely building it through the chain of suppliers, hiding all the roots, but still temptation is very high.
• 1:13
  Jason Bordoff: A quick follow up, Richard, to the response you gave earlier about whether Treasury can sanction stablecoin providers through their US treasury holdings.
• 1:14
  Richard Nephew: Yeah, so look, bottom line is that Treasury has defined pretty broadly everything you would count as a service that would potentially be involved in sanctions evasion here and frankly, the terms that we don't often use. But material support is even broader than that in terms of the kinds of services you could target. So the way Treasury usually does that is by imposing an asset freeze or by going after banking connections and correspondent accounts. That's typically the way this would be done, but there's no reason why Treasury couldn't get more innovative if they found that that was the particular leverage point that was vulnerable to them there. But this comes back to the degree to which this is still an evolving space and how we actually see what is the vulnerability for those kinds of providers. What's the most efficient way of doing so right now? It might just be by making it very hard to interact with the normal banking system, which again, as I keep coming back to still remains a key part of all of this.
• 1:15
  Jason Bordoff: And just very quickly, because we mostly talked about US sanctions, just the import, Richard, of what Europe has done. Is that different, significant beyond what the US has done? And there was a question about European based reinsurance and whether that can be a tool of leverage as well.
• 1:16
  Richard Nephew: I'm glad you came back to that because we've been focused for obvious reasons on oil, but there's a lot in that European package frankly, by moving up the deadlines on LNG for instance, and when Europe is going to be cutting itself off from that by a year and really by adding to the list of additional entities, individuals that they have there. Frankly, I think the EU demonstrated a considerable amount of political skill in terms of putting themselves together and a willingness to do so by targeting for its 19th time, a significant suite of activities for Russia. So there's a lot there. On the insurance question, I'll just say insurance sanctions obviously can have an impact. It's one of the necessary services. We've also found that some companies or ports are willing to say, ah, we'll take the non-traditional insurance mechanisms. So it's not necessarily a silver bullet here. But then again, none of this is in the sanctions world. It's all about finding unique leverage points and focusing on trying to put that pressure on the target as to what it considers to be the most vulnerable space.
• 1:17
  Jason Bordoff: Thank you again, Tatiana Mitrova, Richard Nephew, and Daniel Sternoff. And thanks to all of you for listening to this week's episode of Columbia Energy Exchange.
• 1:18
  The show is brought to you by the Center on Global Energy Policy at Columbia University. The show is hosted by me, Jason Bordoff and by Bill Loveless.
• 1:19
  Mary Catherine O'Connor, Caroline Pitman, and Kyu Lee produced the show. Gregory V. Frank engineers the show.
• 1:20
  For more information about the podcast or the Center on Global Energy Policy, please visit us online at energypolicy.columbia.edu or follow us on social media @ColumbiaUEnergy. And please, if you feel inclined, give us a rating on Apple, Spotify, or wherever you get your podcasts. It really does help us out. Thanks again for listening. We'll see you next week.