President Biden insists that the United States stands unequivocally with Ukraine. “Yes, again and again and again,” he said at last week’s Group of Seven summit in Italy, standing next to Ukrainian President Volodymyr Zelensky.
But when it comes to aggressively sanctioning Russia’s hidden network of oil traders, who provide the Kremlin with large cash infusions, the Biden administration has been very cautious indeed. Despite what officials told me is a strong recommendation from the Treasury Department to impose sanctions last week against what investigators call Russia’s “shadow fleet” of sanctions-busting tankers, the White House balked.
What explains the administration’s caution? The answer involves the most politically sensitive issue of this presidential campaign year: inflation. White House officials fear that sanctions against Russian shadow traders could trigger an inflationary squeeze in the oil market and higher gas prices at the pump.
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“From the start, this has been one of the hardest challenges we’ve had to confront,” explained Daleep Singh, the deputy national security adviser for economic affairs, in a recent speech at the Brookings Institution. “In a tight global market, the impact of quantity restrictions could be offset by price increases that would … drive up global inflation.”
Treasury officials think the White House is being overly wary. They argue that the U.S. sanctions imposed in February on 14 tankers owned by Russia’s big shipping company Sovcomflot didn’t produce inflationary pressure. Russia was forced to offer steeper discounts on its oil, which is subject to a price cap in Western markets. But the price of Brent crude, the global benchmark, didn’t increase.
“The price cap on Russian oil continues to serve its twin goals of limiting Kremlin profits while promoting stable energy markets,” Deputy Treasury Secretary Wally Adeyemo said in announcing the February action. By “dealing a huge blow to their shadow operations,” he explained, the administration was punishing Russia “in a responsible manner to mitigate risks.” Now, officials tell me that Treasury wants to sanction more of Sovcomflot’s roughly 80 additional tankers.
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Treasury is also examining what might be an even more important target: a network of what U.S. officials believe is about 100 ships that transport crude produced by Russian giant Rosneft, which is headed by Igor Sechin, one of President Vladimir Putin’s closest advisers. Sometimes described as the “Rosneft shadow fleet,” this network is directed by three Azerbaijanis who work closely with the oil company, according to one person involved in the investigation.
Treasury and White House officials, who requested anonymity to describe sensitive matters, confirmed that an interagency team of investigators is examining the network and weighing possible sanctions. Rosneft is a big player. One investigator alleged it accounts for about 40 percent of Russia’s crude exports, and that the shadow network transports about half that total. But officials said action won’t be taken without White House approval.
This shadow trading operation was described by the Wall Street Journal in a February article headlined “The Secret Oil-Trading Ring That Funds Russia’s War.” That article claimed that the Azerbaijani executives had worked in the past with a firm called Coral Energy, which is also one of the shorthand terms that Treasury and White House officials informally used to describe the trading network.
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Coral Energy issued a statement after the Journal piece appeared, saying that the company “closed its Moscow office and separated from its Russia-based employees” after Russia’s full-scale invasion of Ukraine in February 2022. Even before the United States announced price caps in December 2022, “we had completely ceased trading Russian oil and ended all contracts with Russian suppliers,” the statement said.
Britain has led its own push to limit Russian oil sales. Last week, it announced that it was imposing sanctions on three Russian crude-oil tankers and one oil-product tanker. “Putin must lose, and cutting off his ability to fund a prolonged conflict is absolutely vital,” Prime Minister Rishi Sunak said.
Though the White House remains hesitant to squeeze a tight oil market, the Biden administration has taken other tough steps to back Ukraine. That starts with the $61 billion military aid package that Biden won in April after months of foot-dragging by House Republicans. The administration also imposed new banking sanctions last week, cutting off any global banks that fund Russian war efforts from dealing with U.S. banks, as well as imposing new export controls to curb Russian purchases of any U.S.-designed technology.
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White House officials recognize that Russian oil exports, totaling about 8 million barrels a day, are critical to funding the Kremlin’s war machine. But those officials fear that the global energy market is now so delicately balanced — with demand of about 100 million barrels roughly equal to supply — that any sharp disruption could trigger a price surge. They also fear that Putin, knowing how damaging inflation could be to Biden’s reelection campaign, might deliberately withhold supplies.
Some foreign policy questions don’t have easy answers, and the trade-off between energy sanctions and potential inflation is a prime example. The best outcome would be for Saudi Arabia, supposedly the United States’ new pal in the Middle East, to pump more oil so that new sanctions against the Russian shadow fleet wouldn’t disrupt the market.
Biden is caught between helping Ukraine and helping himself. That’s not an easy choice. And even Ukrainians might agree that, with Donald Trump waiting in the wings, this isn’t the moment for Biden to do anything that risks reigniting inflation.
