How Will New Russia Sanctions Affect Energy?

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The latest round of US sanctions against Russia target state-owned energy companies but include exemptions to allow energy transactions to move through heavily sanctioned Russian banks.

US President Joe Biden said Thursday that the new measures were “specifically designed to allow energy payments to continue.” Biden also reiterated concerns about potential global energy supply disruptions and said the US is coordinating with major oil producers and consumers.

Below, Energy Intelligence explores some of the details relating to the new sanctions and how they could affect energy trade and other related activities.

What do the new sanctions cover?

The sanctions announced Thursday restrict access to US financial markets for five large Russian banks — Sberbank, VTB, Bank Otkritie, Sovcombank OJSC, and Novikombank — as well as dozens of their subsidiaries. Additionally, a handful of Russian elites, including Rosneft CEO Igor Sechin and his son, Ivan Igorevich Sechin, were slapped with new sanctions.

New restrictions on access to US debt and equity markets were imposed for state-owned Russian energy companies Gazprom, Gazprom Neft, Transneft and RusHydro, as well as energy lender Gazprombank.

What did Biden mean when he said energy payments can continue under the new sanctions?

The new sanctions include a license exemption for “transactions related to energy,” meaning those payments will be allowed to move through the five sanctioned banks until Jun. 24.

“We've carved out energy payments on a time-bound basis to allow for an orderly transition of these flows away from sanctioned institutions," Daleep Singh, US Deputy National Security Advisor for International Economics, told reporters on Thursday.

Without such a license, the banking sanctions could have widespread ramifications for energy trade and for Western companies with business interests in Russia. Blocking access to the US dollar could impact the companies’ ability to finance trade, fund workaday operations and get paid for products.

Uncertainty over the new Western sanctions has already caused demand for Russian crude to wane, even with the carveouts.

What is an “energy payment” in this context?

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) has broadly defined allowable transactions “related to energy” to include the “extraction, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, transport, or purchase" of essentially all hydrocarbon and agricultural products that can be used to produce energy, as well as uranium. It also includes the "development, production, generation, transmission, or exchange of power, through any means, including nuclear, thermal, and renewable energy sources.”

Three sanctions attorneys note that the definition is broad enough that companies operating in Russia should be fairly unconcerned about funding local operations or getting paid.

"As a legal matter, there is not much of an obstacle for companies to continue operations,” one Washington-based attorney and former OFAC counsel notes.

However, there is always the fear that simply the threat of sanctions will mean that banks’ de-risking practices will lead them to avoid business in Russia. And a second sanctions lawyer said that anything outside the scope of the listed activities could potentially be vulnerable — for example, "petroleum products" is not clearly defined.

What about U-turn transactions, which are often relevant in energy trade?

US sanctions against Iran in the lead-up to the 2015 nuclear agreement included a similar embargo of Iranian banks and companies from the US financial system, and explicitly prohibited so-called "U-turn transactions" that are common in currency conversions.

The Russian sanctions appear to sidestep that concern with clear authorization for “a funds transfer related to energy,” which would also permit U-turn transactions.

What are the limits of the energy exemption?

The carveout doesn’t allow US banks to maintain or open a correspondent account or payable-through account for Sberbank. That means any fund transfers would need to go through a non-sanctioned bank outside the US system, creating another wrinkle of complexity for transactions involving Russia’s biggest bank.

However, qualifying language from OFAC seems to indicate that U-turn energy-related transactions would still be allowed, even with a nexus to Sberbank.

How long is the exemption good for? Is this a wind-down period?

The current license expires on Jun. 24 but can easily be extended. One sanctions source suggests the relatively short window may be aimed at incentivizing consumers of Russian energy to insist on payments being routed elsewhere.

The first sanctions attorney, however, notes that Biden’s remarks on reducing collateral effects on fuel prices in the US indicates that the administration favors the optics of lowering impediments to energy supply , and therefore is likely to renew the license in June.

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