How Washington’s crusade against Russian oil went sideways

Imagine a powerful suitor courting a young lady for months, only to have his advances meet resistance and indecision. With his clumsy attempts at courtship going nowhere, he impulsively kidnaps the girl and promptly announces an engagement. His entourage rejoices at the impending nuptials. 

The suitor is, of course, the United States and the young lady whom it was unable to woo is India. Unable to convince New Delhi – and others for that matter – that it is in their interest to stop buying Russian oil, Washington resorted to coercion in the only way it knows how: sanctions and the threat of secondary sanctions.

Those cheering the Trump administration’s latest foray into trying to strong-arm Russia, by sanctioning oil majors Rosneft and Lukoil, seem entirely unbothered by the coercive and short-sighted nature of the victory – if, indeed, it even ends up being a victory, which is quite doubtful.

The explicit aim of the new sanctions, as articulated by Treasury Secretary Scott Bessent, is to choke off “the Kremlin’s war machine.” Trump believes – or purports to believe – that he can impress Russian President Vladimir Putin enough that the latter agrees to an immediate ceasefire and, presumably, surrenders Russia’s national interests.

It should be apparent by now that Russia will not bow to such pressure. It should also be apparent that what we are witnessing is the latest installment of sanctions theater – although with a deep-level economic consequence of this posturing.

Oil remains the lifeblood of any industrial economy and is thus non-negotiable. Russian oil is fungible but indispensable to the global system. Removing it would require displacing hundreds of millions of barrels per year, which would have severe economic repercussions. As many have pointed out, there is a paradox at the heart of any serious attempt to restrict Russian barrels from reaching the market: doing so would simply push global prices higher, thus indirectly cushioning Russian earnings. 

The effectiveness of the new restrictions will clearly depend on just how zealous the US is in enforcing them through secondary sanctions on entities that deal in Russian oil. But if past experience is any guide, Washington won’t be able to sustain a full-court press – if for no other reason than markets will force its hand for the very reason stated above.

Lax enforcement keeps the global market functioning and avoids a messy price spike. Western politicians are thus able to accrue political points for being tough on Russia while avoiding pressing too hard. Thus a sort of gray-zone equilibrium becomes the fallback position and system-level instability is avoided.

Yes, it is possible to raise the costs for Russia, which has happened before and will be unavoidable now as well. Volumes will likely remain suppressed for a while, discounts will widen, and logistical complexity will rise. But, as past experience has also shown, workarounds will be found. The template for these workarounds is already in place.

Ultimately, this performative endeavor merely creates a pressure valve: Russia feels friction, the Western powers maintain some semblance of credibility – at least among themselves – and, importantly, markets remain orderly.

It is true that reports have emerged that at least one major Indian refiner intends to “recalibrate” its purchases of Russian oil. It has also been reported that several Chinese state-owned oil companies are suspending their inbound supplies of Russian seaborne oil. 

It remains to be seen how India will proceed. It will almost certainly cut purchases, possibly even significantly at first. India has generally been reluctant to directly cross the US and tends to be very cautious about exposing its major banks to sanctions risk. Contrary to the illusions harbored by some dwelling on the fantasy end of the pro-BRICS spectrum, India has no appetite to force the issue to the point of precipitating a major rupture with the West.

However, nobody should be fooled into thinking that these sanctions are the final word on the matter. If a rather revealing exchange at a conference in Berlin on Friday is any indication, New Delhi has no intention of capitulating.

During a round-table discussion, Indian Commerce Minister Piyush Goyal noted that Germany had already requested a sanctions waiver from both the UK (which itself sanctioned Rosneft earlier this month) and the US for its Rosneft-owned refineries, which are legally owned by the Russian company but placed under German government trusteeship in 2022.

British Trade Minister Chris Bryant, who was sitting to Goyal’s left, jumped in to explain that London had quickly worked out an exemption for Berlin from UK sanctions and expressed certainty that something similar with the Americans would also be forthcoming, giving the impression of routine dealing among friends. Goyal, however, persisted: “Why single out India?”

Bryant, clearly lacking the ability to think one move ahead, clarified that the matter was merely a “specific subsidiary in relation to Rosneft.”

Goyal: “We also have a Rosneft subsidiary.”

A visibly uncomfortable Bryant could only stammer: “Come and talk to us.”

The duplicity and hypocrisy of the West has long since been laid bare, but such a cavalier approach to dishing out exemptions to friends while forcing others to scramble for solutions will not sit well in the rest of the world. It is remarkable the extent to which the US and allies are willing to incur the deep resentment of major world powers – not to mention make a mockery of the so-called rules-based order – all for the scant gain of, maybe, putting a dent in Russia’s budget revenues. 

But there is more than resentment and hypocrisy at play. There is a deeper irony to the quixotic fight against Russian energy that is purely economic. In its zeal to punish Russia, the West is essentially blowing wind under the sails of the countries willing to trade with Moscow. Here is how it works.

The sanctions create an artificial price segmentation in the global market. Western-compliant buyers pay a premium because they exclude Russian barrels, making the marginal barrel available to those who refuse to buy Russian oil more expensive to source, and because risk premia become embedded in benchmark prices. Meanwhile, non-compliant, neutral buyers get those barrels at a discount. 

That difference is of course not free. Russia does lose some fiscal revenue because it’s selling below world prices, but the buyers capture the margin – effectively an energy subsidy.

In other words, sanctions don’t remove the oil from the system but rather reallocate some of the rent away from Russia’s previous customers (and from Russia itself to some extent) toward its sanctions-tolerant new ones. Western consumers indirectly pay higher prices (through tighter markets), thus transferring some of their purchasing power to those who choose to buy the discounted barrels. This means lower input costs and a structural advantage for those willing to do business with Russia and higher costs for those who aren’t. 

For Europe, which already has some of the highest energy prices in the world, this is particularly detrimental. Russia, meanwhile, may lose out somewhat in purely financial terms (although not necessarily if overall price levels rise), but it finds itself at the nexus of the new trade networks and non-dollar settlement mechanisms that are emerging. 

This oblique wealth transfer is precisely the moral hazard of wielding sanctions in a resource-tight world. Rather than isolating the supposed transgressor, they simply end up reshaping trade networks, and often in ways that erode the relative position of the sanctioning coalition. The messiness of the reshaping process itself may provide an ephemeral illusion of success, but this is not a winning strategy in the long run.