President Biden has stressed that the United States stands unequivocally on Ukraine's side. “Yes, over and over again,” Biden said while standing next to Ukrainian President Volodymyr Zelensky at the Group of Seven summit in Italy last week.
But when it comes to aggressively sanctioning the hidden Russian network of oil traders that are funneling huge amounts of money to the Russian government, the Biden administration has been very cautious. Even though officials told me last week that the Treasury Department had strongly recommended imposing sanctions on what investigators call a “shadow flotilla” of sanctions-busting Russian tankers, the White House has balked.
What is the reason for the administration's caution? The answer has to do with inflation, one of the most politically sensitive issues in this year's presidential campaign. White House officials worry that sanctions against Russian shadow traders could trigger inflationary pressures in the oil market and raise gasoline prices.
“From the beginning, this has been one of the most difficult challenges we have had to face,” Deputy National Security Advisor for Economic Affairs Daleep Singh explained in a recent speech at the Brookings Institution. “In a situation where global markets are tight, the impact of quantitative restrictions could be offset by higher prices, which would accelerate global inflation.”
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Treasury officials believe the White House is being overly cautious. They argue that U.S. sanctions imposed in February on 14 tankers owned by Russian shipping giant Sovcomflot did not create inflationary pressures. Russia was forced to offer steep discounts to its oil, which is price-capped in Western markets. But the price of Brent crude, the global benchmark, did not rise.
“The price cap on Russian oil continues to serve the dual purpose of promoting energy market stability while limiting Kremlin profits,” said Deputy Treasury Secretary Wally Adeyemo, who announced the measure in February. By “dealing a major blow to Russian shadow activity,” he explained, the administration was “mitigating risk in a responsible manner” to punish Russia. Now, officials tell me, the Treasury Department wants to impose additional sanctions on Sovcomflot's roughly 80 tankers.
The Treasury Department is also investigating a potentially larger target: a network of about 100 ships transporting crude produced by Russian oil giant Rosneft, led by Igor Sechin, a top aide to President Vladimir Putin. The network, also known as the “Rosneft Shadow Fleet,” is led by three Azerbaijanis with close ties to the oil company, according to one of the people familiar with the investigation.
Treasury and White House officials, speaking on condition of anonymity to discuss the confidentiality of the matter, confirmed that an interagency team of investigators is looking into the network and considering possible sanctions. Rosneft is a big company — one investigator argued that the company accounts for about 40% of Russia's crude oil exports, and that the shadowy network transports about half of them — but the officials said no action would be taken without White House approval.
The shadowy trading operation was described in February by The Wall Street Journal in a story titled “Secret Oil Trading Ring That Financed Russia's War,” which alleged that Azerbaijani officials had previously worked with a company called Coral Energy, one of the acronyms informally used by Treasury and White House officials to describe the trading network.
Coral Energy released a statement after the Wall Street Journal article was published, saying the company “closed its Moscow office and quarantined its employees based in Russia” following Russia's full-scale invasion of Ukraine in February 2022. Even before the U.S. announced its price cap in December 2022, “we had completely stopped trading Russian crude oil and terminated all contracts with Russian suppliers,” the statement said.
Britain has led the push to restrict Russian oil sales. Last week, Britain announced it would impose sanctions on three Russian crude oil tankers and one petroleum product tanker. “Putin must lose. It is imperative that we cut off his ability to fund a protracted conflict,” Chancellor Rishi Sunak said.
While the White House remains hesitant to tighten the tight oil market, the Biden administration is taking other tough steps to help Ukraine, starting with a $61 billion military aid package that Biden won in April after months of stalling from House Republicans. The administration also imposed new banking sanctions last week, cutting off U.S. banks from doing business with global banks that fund Russia's war efforts, and imposed new export controls to curb Russian purchases of U.S.-designed technology.
White House officials acknowledge that Russian oil exports, which amount to about 8 million barrels per day, are essential to support the Kremlin's military. But officials worry that a sudden disruption could cause prices to soar, as global energy markets are currently in a very delicate balance with demand and supply roughly equal at about 100 million barrels per day. They also worry that Putin, knowing how much of a blow inflation would be to Biden's reelection campaign, could purposely withhold supplies.
Some foreign policy questions have no easy answers, but the trade-off between energy sanctions and potential inflation is one such example: The best outcome would be for America's new supposed ally in the Middle East, Saudi Arabia, to pump more oil to prevent new sanctions against Russia's Shadow Fleet from upsetting the market.
Biden is caught between helping Ukraine and helping his own country. It's not an easy choice, and even Ukrainians might agree that with Donald Trump in the wings, this is not the right time for Biden to take actions that risk reigniting inflation.
