In the latest example, the European Union said late Saturday that it had agreed with the U.S., the U.K. and Canada to eject some of Russia’s banks from the global financial system’s payments infrastructure, Swift. The move, if applied to all banks, would be powerful, essentially blocking money transfers in and out of the country. By cutting only some, Western countries are allowing payments, including for energy, to continue through non-sanctioned banks.
Russia is one of the world’s top oil and natural gas producers, and energy exports represent half of the country’s foreign sales. The country, now embroiled in a bitter war in Ukraine, provides around 40% of Europe’s natural gas. The commodity heats the continent, fuels many of its power plants and is a critical input for a range of industrial processes. Russia’s crude production is a major factor in the global oil marketplace.
As the U.S. and its Western allies wage economic war against the Kremlin to coerce it into abandoning its invasion of Ukraine, policymakers have tailored their pressure campaign to protect their energy supply, prevent a surge in oil prices and minimize the damage on their own economies.
“You can’t get away from the fact that Europe still has a dependency on Russia,” said Justine Walker, head of sanctions and risk at the Associate of Certified Anti-Money Laundering Specialists, even as observers argue the exemptions for energy sales dilute the sanctions’ impact.
The U.S. imposed sanctions on Russia’s largest banks—Sberbank and VTB—but provided broad exemptions on payments for purchases of crude oil, natural gas, fuel and other petroleum products. The EU, meanwhile, chose not to sanction them for now. Already-sanctioned banks will be kicked off Swift, but others will be allowed to stay. Swift-banned banks could also find workarounds, including using other—albeit less efficient and more expensive—messaging systems to conduct transactions such as telex.
The exemptions enable European nations and others to continue purchasing Russian gas and oil. That tempers prices, including for oil, which have spiked by roughly 40% over the last three months over concerns of disruption to oil markets from a conflict in Ukraine. Higher oil prices boost the amount of money Russia makes for every barrel sold, and spurs inflation across the world.
“The measures themselves and the exemptions are balanced so that we can deliver overwhelming costs while not having unintended consequences,” said Daleep Singh, the U.S. deputy national security adviser for international economics. “Our measures were not designed to disrupt in any way the current flow of energy from Russia to the world.”
U.S. officials say the exemptions were critical for winning political support for a coordinated and complementary pressure campaign from a broad range of economies including the U.S. and U.K., and the 27 member states of the EU.
“They need to be powerful enough to demonstrate our resolve and the capacity to impose overwhelming costs,” Mr. Singh said last week. “They should be calibrated such that we can maximize coordination with our allies and partners.”
The sanctions essentially cut the two largest state-controlled banks and their customers from access to the U.S. dollar by forbidding U.S. banks from dealing with them. All U.S. dollar transactions must go through U.S. banks. About 80% of foreign-exchange transactions conducted by Russian banks are denominated in U.S. dollars, according to the U.S. Treasury.
But the U.S. sanctions exemptions permit U.S. banks to continue clearing U.S. dollars for energy-related transactions as long as there is an intermediary—a third-country bank—to facilitate. The move ultimately allows energy-related transactions in U.S. dollars to go through.
The exemption runs through June 24 but can be renewed, the U.S. Treasury said.
“We’ve carved out energy payments on a time-bound basis to allow for an orderly transition of these flows away from sanctioned institutions,” Mr. Singh said, “and we’ve provided other licenses to provide for an orderly wind-down of business.”
The Russian banks that aren’t sanctioned include Gazprombank, Russia’s third-largest bank and a key channel for foreign payments for oil and gas. Those banks provide an alternative channel for those payments.
The U.S. Treasury also issued exemptions for agricultural exports such as grain, another significant Russian export, and medical and other humanitarian supplies.
Cutting off countries dependent on Russia’s grain exports would risk political instability in those nations, said Ms. Walker, whose group is composed of compliance officers at banks and companies around the world.
Although many analysts and former officials say the collective action against Russia is unprecedented in its post-Soviet relations with the West, some leaders and lawmakers say the efforts are insufficient. As Russian forces battle to take Ukraine’s capital, Kyiv, the U.S. and its trans-Atlantic allies are scrambling to ratchet up the pressure.
“I will not be diplomatic on this,” Ukrainian Foreign Minister Dmytro Kuleba said on Twitter Thursday. “Everyone who now doubts whether Russia should be banned from Swift has to understand that the blood of innocent Ukrainian men, women and children will be on their hands too.”
If Europe cuts Russia completely off Swift, “there is a high risk that Germany will no longer be supplied with gas or raw materials,” Germany’s Finance Minister Christian Lindner said the same day.