How to make the sanctions on Russia really hurt

People walk near St. Basil's Cathedral and the Kremlin's Spasskaya Tower in central Moscow on March 20. (Evgenia Novozhenina/Reuters)

correction

An earlier version of this editorial incorrectly stated the European Union had cut off all Russian crude oil imports. The E.U. has stopped the importation of Russian seaborne crude oil. This version has been updated.

Vladimir Putin’s illegal invasion of Ukraine last year touched off parallel wars. One is the bloody conflict of artillery and infantry. The other is the shadowy, borderless struggle pitting the financial, legal and regulatory might of the Biden administration and its Western allies against Moscow’s sprawling oil- and gas-based economy.

The West’s aim in unleashing the second war — the war of economic sanctions — was to punish Russia and deplete its ability to sustain the ground war in Ukraine. The results of that effort so far are mixed. The sanctions are draining Russian state revenue and shaking the country’s financial underpinnings, gradually isolating Moscow from the global financial system. But they have not sapped its will or capacity to fight — or triggered the Russian economic collapse that some expected.

In the case of sanctions, time should be on the West’s side. With more muscular enforcement and political pressure, including on some U.S. allies, the measures imposed by the United States and European countries can be expected to inflict increasing pain on the Russian president’s regime and the Russian oligarchs who help keep it afloat.

While Moscow has had some success in mobilizing an international army of sanctions-dodging middlemen, that effort has come with considerable costs. Economists note that even as Russian revenue is dropping — largely as a result of Western measures to squeeze the price it can charge for its energy exports — the Kremlin’s spending has spiked as it struggles to import semiconductors and other material needed to feed a war machine operating on overdrive. The toll is starting to mount: The Russian government’s deficit is soaring and the Russian ruble’s value has sharply fallen in the past six months.

That alone will not bring Mr. Putin’s regime to its knees, however. Further steps are necessary, starting with tougher ones to undercut Russian oil revenue.

Under an innovative measure that took effect in December, Washington and its Group of Seven allies banned businesses from servicing the movement of Russian crude oil — including insurance, shipping and trading firms — unless it is sold below $60 per barrel. Similar caps were imposed on refined Russian petroleum products; the 27 countries of the European Union have also cut off imports of Russian seaborne crude.

Those steps were intended to erode Moscow’s energy income, which before the full-scale invasion of Ukraine accounted for 45 percent of Russian federal revenue. While Russian crude oil has found plenty of willing buyers outside the coalition of sanctioning countries, the Western cap has empowered importers to negotiate lower prices, undercutting the Kremlin’s market leverage. Compared to most of the world’s crude exports, Russian oil is now cheap. Mr. Putin’s own Finance Ministry acknowledged that Russian federal government oil revenue in January had fallen nearly 60 percent since last March, the month after the invasion.

Simultaneously, however, there are mounting signs that sanction-busting traders and other middlemen are devising schemes to get around the price cap and other Western restrictions on Russian energy exports. This week, for example, the Financial Times published a detailed account of how a firm based in Switzerland, which is part of the sanctions regime, dropped its trading activity in Russian far east oil last June and shifted it to a nearly identically named company in Dubai, which uses lenders in the Middle East and tankers registered in China, India and other countries that have not signed up for the sanctions. The firm in Dubai, Paramount Energy and Commodities DMCC, says it is complying with all relevant “laws and regulations.”

Western governments should intensify their scrutiny of such stratagems and penalize them where possible. U.S. Treasury Department officials say there is little evidence of widespread sanctions evasion. But independent researchers at Global Witness, an advocacy group, say enforcement of the price cap is lax.

Beyond more aggressive enforcement, there are other ways to tighten the vise on the energy exports Mr. Putin uses to finance his war.

The aim of setting the cap on Russian crude at $60, roughly 20 percent below the main international benchmark price, was to whittle away at Russia’s cash hoard while still providing it with sufficient incentive to maintain exports and keep global oil markets stable. It is now time to lower the Western cap further, in increments, to $40 per barrel or less, in line with recommendations from the Kyiv School of Economics and former U.S. ambassador to Russia Michael McFaul. Even at that level, Moscow would turn a profit on its oil, whose production costs are among the world’s lowest, and would be unlikely to slash output; it has few other reliable revenue-generating options.

The West would be wise to turn up the heat on banks, including ones in the West, that handle Russian energy earnings. That includes Gazprombank and its subsidiary in Luxembourg, the principal channel for ongoing European payments for Russian natural gas, whose flow to the continent has been slashed but not eliminated.

The United States and its allies can also expand individual sanctions against Russian oligarchs who prop up the Kremlin. In December, Canada became the first G-7 country to pursue the forfeiture of frozen assets from a sanctioned oligarch, Roman Abramovich, who has served Mr. Putin for years. Under a law enacted last year, Ottawa said it would use the $26 million from Granite Capital Holdings Ltd., owned by Mr. Abramovich, for the reconstruction of Ukraine and to compensate Ukrainian war survivors.

The broader question of whether to seize some $300 billion in frozen Russian central bank assets in Western and Japanese banks to eventually rebuild Ukraine is trickier. In one way or another, Russia should be made to pay the lion’s share of the hundreds of billions of dollars that will be required for Ukraine’s reconstruction. But seizing central bank funds could damage the international financial system, in which such assets are assumed to be sacrosanct. The E.U. established a working group to study the question, a move initiated by the current Swedish presidency of the Council of the European Union. A smart first step for the working group would be to cast a more transparent light on the assets themselves — where they are held, and in what form and quantities.

Mr. Putin is convinced that time is his ally in Ukraine, and that the West will tire of the cost and commitment required to defend Kyiv and help it win back territory lost to the Russian dictator’s land grab. Bleeding Russia’s economy with tougher sanctions and enforcement is one way of persuading him, along with other Russian elites, that the price of his folly will be higher, last longer and cause more pain than the Kremlin currently imagines.