Trump's sanctions lapse: Symbolic move against Russia's oil trade

The administration of President Donald Trump did not decide to extend the sanctions exemption, which allowed transactions with Russian banks related to the trade of Russian energy carriers. The decision to let the loophole expire was made on 10 January, still by Joe Biden's administration, and it simply took effect on 12 March. Trump did not have to take any action, but as noted by the American station Fox News, it was a conscious choice by the White House.

The global community learned that the United States is adopting a stricter approach toward Russia. Marc Thiessen, a journalist for The Washington Post, stated on the X platform that Trump had blocked Russian oil sales to the EU, preventing European countries from purchasing it. Meanwhile, former U.S. ambassador to Poland Daniel Fried pointed out that Biden made the decision but underscored that it dealt a significant blow to Russia's energy sector at a critical moment.

Experts have significant doubts about whether closing the sanctions on Russian banks will truly be an effective tool for pressuring Vladimir Putin.

The fact that Trump allowed the exemption to expire can be used politically. However, it will not be a blow that could significantly harm Russia at this moment - tempers enthusiasm Dr Szymon Kardaś from the European Council on Foreign Relations.

Meanwhile, Dawid Czopek, manager of Polaris FIZ and fuel market expert, reminds that "Russians have perfected the art of circumventing sanctions and settling transactions through third countries."

In the final days of his term, Joe Biden decided to close the loophole in sanctions on the Russian banking and energy sector. This gave some Russian banks access to the American financial system to process transactions related to oil and gas trade.

The loophole allowed European countries—especially those dependent on Russian supplies—to settle with Russia in American currency. The second reason for maintaining it was the fear of a drastic increase in oil prices if Russian financial institutions were utterly cut off.

Although the annulment of licences for Russian banks is seen as another element of pressure on Moscow to engage in serious peace talks with Ukraine, it may not have a significant impact.

In Europe, Hungarian and Slovak companies buy Russian oil. Czechia prematurely terminated its contract, suspending deliveries. Today, only a small portion of Russia's oil exports go to Europe as contracted deliveries. The rest are primarily shipments to China and India (which do not settle in dollars—editor's note). Therefore, this action has symbolic significance, states Dr Kardaś.

He emphasises that timing is also crucial. The decision was announced at the beginning of January and matured in March, so there was ample time to prepare. Besides, the European Council on Foreign Relations analyst adds that countries cooperating with Russia previously renegotiated agreements, introducing mechanisms that protect both parties against such eventualities.

Let's remember that before Russia invaded Ukraine, the EU covered one-quarter of its oil demand and 40 percent of its gas demand with imports from Russia. However, this dramatically changed when the EU agreed to ban importing both products in 2022. Only countries whose economies were strictly dependent on Russian supplies were exempted from the sanctions, and for now, liquefied natural gas (LNG) is not included.

Szymon Kardaś points out that the situation has also changed concerning the trade of Russian natural gas (at least the kind delivered via pipelines, as Europe still takes a considerable amount of LNG from Russia).

Regarding gas, we remember Putin's decree "gas for roubles" and the settlement mechanism proposed by Moscow. Even then, some countries agreed to payments in Russian currency. Besides, pipeline gas is purchased by only a few EU countries. The largest client is Hungary, and they also agreed to settlements in Russian currency in 2022. Even if someone still settles in dollars, it does not fundamentally impact the overall export of Russian raw materials - highlights Dr Kardaś.

As the analyst recalls, Europe is no longer a key client for Russia; now, Asia is. Russia's largest gas markets currently are India and China. However, they predetermined conditions to minimise the risks of dollar settlements. These transactions are settled in national currencies: rupees, yuan, and roubles, he summarises.

Moreover, as Reuters reports, Moscow uses cryptocurrencies when selling oil to these countries to bypass sanctions.

Dr Kardaś notes that a genuine blow to Putin's raw materials interests would involve dealing with trade with these countries. However, the White House has yet to venture into this.

To seriously impact Russia's exports, they must target China and India. The question is whether the USA would be ready for this. A more practical solution would include adding more ships from the shadow fleet to the sanctions list, eliminating loopholes in the insurance sector, or lowering the upper price limit for oil, for example, to €38. The analyst argues that even starting such a discussion would be a form of pressure.

According to CBS, the tightened sanctions eliminated the loophole and significantly hindered Russia's ability to trade commodities in dollars. However, the result might be a €4 increase per barrel of oil.

Oil markets reacted indeed, but slightly. On Wednesday, there were moments when the price of Brent oil exceeded €66.50 per barrel, only to later drop to €65.30, then start rising again, currently costing €66. Similarly, the slightly cheaper West Texas Intermediate behaved, and its current price is €63.

- Typically, after every change in sanctions, the oil price reacts by rising, but after a few days or weeks, it returns to those levels, with a tendency to decline. Russians learned how to circumvent sanctions over three years of war, so further restrictions are likely to have a short-term effect - comments Dawid Czopek. - At the end of January, Biden's strong sanctions brought about a significant change. Oil rose then but is below those levels again - he adds.

As the expert notes, Donald Trump's signals to Russia are ambiguous. Recently, reports have suggested that the USA might cooperate with Gazprom regarding gas for Europe, consequently causing an 8 percent drop in the resource. The market increasingly attaches less importance to individual "events" of Trump and his associates. The US President has already said a lot and backed out of several things, our interlocutor evaluates.

According to Dawid Czopek, the key topics for oil prices will be a slowdown in the US economy, the real threat of recession, and OPEC's potential increase in production limits.