The West’s big challenge: Depleting Russia's war resources
When it comes to sanctions against Russia, the West is using an "everything but" strategy — doing all they can to cut the country off from the global economy, while still allowing it to make lucrative energy sales to Europe.
The big picture: Against that backdrop, a few of the steps the U.S. and Europe took this week are designed to — at least on the margins — blunt Russia's ability to plow energy revenues into funding its conquest of Ukraine.
What's happening: The Treasury Department on Monday said Russia can’t use its dollar reserves, held in U.S. bank accounts, to make payments on its government bonds. Then on Tuesday, the E.U. proposed banning Russian coal imports (though that may not take effect until August).
Let’s break it down. The first action puts to the test Russia’s resolve to not default on its debt in the international markets (more on why Russia might care about that).
- Up until Monday, the Treasury had been allowing Russia to tap those reserves — which the agency had otherwise frozen — if the funds were being used to pay U.S. holders of Russian sovereign debt.
- Now: If Russia wants to avoid a default, it will have to decide between draining its remaining dollar reserves parked elsewhere, or spending new revenue that comes in.
The impact: “This will further deplete the resources Putin is using to continue his war against Ukraine,” a Treasury spokesperson told Axios.
- Those resources are, of course, primarily amassed by selling energy to the world.
On that note … The European Commission proposed that the bloc at the very least stop buying coal from Russia — though oil and gas make up the lion's share of the continent's Russian energy purchases.
- The coal ban would be a small step — worth about €4 billion per year according to Ursula von der Leyen, president of the European Commission.
And the cost of Russia's debt payments due over the rest of this year — about $2 billion — is also not large in the context of the more than $300 billion the country is expected to earn in energy sales.
- "But it's a way to at least eat away at the profits that they're taking in," from selling oil and gas, says George Catrambone, head of Americas trading at DWS Group.
What to watch: French President Macron said this week he's open to cutting off oil sales from Russia, a move that would echo recent U.S. and United Kingdom decisions. But European heavyweights like Germany remain staunchly opposed to banning Russian natural gas, which amounts to about 40% of the continent's supply, as Reuters reported.
The bottom line: When it comes to effectively sanctioning Russia, the West’s big problem is it can’t quit Russian energy.