Monday, January 8, 2024

It's time to impose Iran-calibre sanctions on Russia

Russia is sometimes described as the world's most sanctioned nation. And while that's true, the long list of sanctions that the G7 coalition has placed on Russia in response to its attack on Ukraine are surprisingly light compared to the fewer but far more-draconian sanctions placed on Iran over the last decade or so.

This ordering of sanctions precedence is a mistake. With its all-out invasion of Ukraine, Russia has moved past Iran into top slot at world's most dangerous nation. Vladimir Putin merits a sanctions program that is at least as onerous as Iran, if not more so, yet for some reason he is getting off lightly. It's time to apply Iran-calibre sanctions to Russia.

What makes a draconian sanctions program draconian?

What makes the Iranian sanctions program so draconian is that many of the sanctions are so-called secondary sanctions, a feature that has been mostly absent in the Russian sanctions program.

When the U.S. or EU levy primary sanctions on an entity, they are saying that American individuals, banks, and businesses (and European ones, too) can't continue to interact with the designated party. This hurts the target, but it leaves foreign individuals, banks, and businesses with free reign to fill the void left by departing American and European actors, thus undoing part of the damage.

Secondary sanctions prevent this vacuum from being occupied. The U.S. government tells individuals or businesses in other nations that they, too, cannot deal with a sanctioned entity, on pain of losing access to U.S. economy. It's either us, or them.

When applied to foreign financial institutions (i.e. banks) secondary sanctions are particularly potent. The U.S. tells foreign banks that if they continue to provide banking services to sanctioned Iranians, the banks' access to the all-important U.S. financial system will end. Since the U.S. financial system is so crucial, foreign banks quickly offboard all sanctioned Iranian individuals and businesses. The sanctioned Iranian entity finds that it has now been completely removed them from the global financial system. This financial shunning effect is much more powerful than the effects created by primary sanctions or secondary sanctions on non-banks.

Notice that I've limited my commentary on secondary sanctions to the U.S. Since it first began to use secondary sanctions in 1996, the U.S. Treasury has become a master of the art, whereas as far as I know they are a tool the EU has long resisted adopting.

The bank-focused secondary sanction placed on Iran over the last decade-and-a-half have been particularly devastating because they target a broad sector of Iranian society, most crucially the Iranian oil sector, the life blood of Iran's economy. Secondary sanctions prevent foreign banks from processing Iranian oil trades on pain of losing access to the U.S., and so most foreign banks have chosen to cease interacting with the Iranian oil companies.

The chart below illustrates the effectiveness of this approach. When President Obama placed the first round of bank-focused secondary sanctions on Iran's oil industry in 2012, the nation's oil exports immediately cratered from around 2 million barrels per day to 1 million barrels. When he removed them in 2016, they quickly rose back up. And when Trump reapplied the same secondary sanctions in 2018, they collapsed once again, almost to zero.

Source: CRS [pdf]

In short, U.S. secondary sanctions imposed huge body blows on the Iranian oil industry. These same forces have not been brought to bear on Russia's oil industry.

A dovish Russian sanctions program

While the Russian sanctions program is often portrayed as being strict, it is far lighter than other sanctions programs, including the one placed on Iran, because it is comprised almost entirely of primary sanctions. (For a good take on this, see Esfandyar Batmanghelidj here). While a small list of secondary sanctions have been placed on Russia, for the most part they have not been of the banking type.*

The second reason why the Russian sanctions program is dovish is that the oil component of the EU and U.S. sanctions campaign has been particularly lenient. Take a look at the above chart of Iran oil exports and you can see very real evidence of damage from sanctions. Scan the chart of Russian oil exports below, however, and it suggests business as usual.

Source: CREA

Sure, the EU and other coalition partners have cut Russian oil imports to almost nil, and that's great. But overall, this effort hasn't done much harm to Putin, since over time the coalition's respective share of Iranian oil exports has simply been taken up by nations like India and China. Both before and after the 2022 invasion of Ukraine, Russia reliably shipped around 1,000 kt/day of crude oil and crude oil products.

Underlying this leniency, G7 businesses are still allowed to engage in the Russian oil trade, as long as this doesn't involve bringing the stuff back to the EU. For instance, foreign buyers of Russian oil (say like Indian refiners) are allowed to hire European insurers and shipping companies to import Russian oil.

There is a limitation on this. European insurers and shippers can only be used by an Indian refiner, or some other foreign buyer, if the purchase price of Russian oil is set at $60 or below. This is what is known as the G7 oil price cap.

Because the insurance and shipping industries of the UK, EU, and U.S. have a large share of the market, Russia has had little choice but to rely on coalition intermediaries for selling at least some of its oil at $60. This has come at a cost to Russia; it must sell at below-market prices. And that certainly makes Russia worse off than a world in which there was no oil price cap.

But the very fact that these purchases are occurring at all, compared to a world in which Iran-calibre sanctions would prevent them from ever taking place, illustrates how weak the oil price cap is. 

Russia's oil export income is the life-blood of Putin's war economy. These funds gets funneled directly to the front-line in the form of weapons and supplies. It's time to get serious about Russian sanctions, remove the dovish oil price cap, and apply to Russia the same calibre of secondary sanctions that so effectively crimped Iranian oil exports.

We may have to deescalate sanctions on Iran in order to escalate them on Russia

What has prevented the U.S. and its allies from applying draconian Iran-style sanctions to Russia? One of their main worries is that taking a major oil exporter out of the market will have major macroeconomic impact. 

Russia currently exports around 4 million barrels of crude oil per day, as well as a large amount of refined products such as gasoline. Assuming that half of this were to be removed by secondary sanctions, world oil prices would probably rise. Voters in the EU and US would get angry. Neutral countries dependent on oil imports  China, India, Brazil  would push back against the colation, because they'd have to scramble to replace a major supplier. Secondary sanctions aren't just a nuisance for these neutral parties. Due to their extraterritorial  nature, secondary sanctions impinge on the sovereignty of neutral nations. This creates hostility, understandably so, the negative blowback eventually flowing back to the U.S.

So if the EU, U.S. and the rest of the coalition are going to get serious about sanctioning the Russia's oil industry, and thus removing a few million barrels of oil per day from the world market, they may need to counterbalance that in order to soften the blow. One way to do so would be to free up more Iranian oil exports, which means softening the sanctions on Iran.

That doesn't mean not applying sanctions to Iran. A version of the $60 price cap on Iranian oil probably makes a lot of sense. However, a fully armed financial battleship  i.e. bank-focused secondary sanctions directed at a major crude oil exporter's oil industry  may be something that has to be reserved for one country only: Russia.

Now, I could be wrong about the world being unable to bear draconian sanctions on two major oil exporters. Maybe I'm creating a false dichotomy, and in actuality the choice is less stark and the coalition can actually apply draconian oil sanctions on both Iran and Russia. If so, I stand corrected.

Either way, Russia's oil industry has skated through the invasion and resulting sanctions remarkably unscathed, as the Iranian counterexample illustrates. It's time to cut off Russia's main source of revenues by putting the same set of secondary sanctions that Iran has faced on Russia's oil patch. 

* There are a few bank-focused secondary sanctions placed on Russia. Notably, Section 226 of CAATSA (2017) requires foreign financial institutions, or FFIs, to avoid certain sanctioned Russians or sectors on pain of losing access to the U.S. banking system. (See here, for example.) However, the U.S. must not be enforcing Section 226 very tightly because I haven't found a single case of a bank being punished under 226.

This December, another round of secondary sanctions was imposed on FFIs. Any foreign bank that facilitates transactions involving Russia’s military-industrial base may be cut off from the U.S. financial system. Additionally, any bank that conducts transactions for specially designated nationals who operate in Russia's technology, defense and related materiel, construction, aerospace or manufacturing sectors may face punishment. Note that both rounds of secondary sanctions leave the Russian oil industry untouched.


  1. You do realize that there is a huge difference between cancelling 2 million vs. 10 million barrels daily production, don't you?
    And what makes you so sure the Russians would not respond with countersanctions of enriched Uranium exports on which US the nuclear industry is heavily dependent?
    I am also not sure Israel shares your view that Iran is less dangerous than Russia

  2. correction: the 2 million bpd refers to exports whereas the 10 million is production. It should be (roughly) 3.5 billion vs. 10 billion - the argument, of course, remains.

    1. The secondary sanctions wouldn't be on oil production, they'd be on oil exports. Sure, Russia produces 10 million or so barrels per day, but it keeps a lot of that for the purposes of domestic consumption, leaving a smaller chunk for exports. By putting sanctions on the 4-5 million barrels of crude oil Russia exports per day (and leaving oil products like gasoline out of the equation for now), the G7 would move the amount of sanctioned Russia crude close to the same range as the 2-3 million barrels/d of Iranian crude oil export capacity.

      The sanctions could be further narrowed to target seaborne Russian crude oil exports, leaving pipeline crude exports intact. Russian seaborne crude oil exports amount to around 3-3.5 billion barrels per day.

  3. Anyway you put it, I think it is clear that this is by far different from sanctioning Iran. (Which is why it hasn't happened, despite loosening the sanctions on Iran already in 2023)
    The internal consumption is so high, because Russia also is a major exporter of destilates (pre-2022 about 30 percent of Diesel in Europe was supplied by Russia) which would also be affected by your desired sanctions regime, i.e. not entirely clear which figure is the correct one.
    My point: Not only is the impact on the oil market huge, the sole focus on crude oil misses the global impact on sanctions.
    Just because Russia's budget (by design) depends on oil production taxes, doesn't mean Russia's other exports are not material for the affected industries (I gave you the Uranium example, wheat comes to mind as well, etc.).

    1. "...which would also be affected by your desired sanctions regime"

      No, diesel exports needn't be affected by the secondary sanctions, at least not at the start. The idea is to focus on Russia's 4-5 million in crude oil exports, leaving the 1 million or so in diesel exports intact.

      For reference, here's a chart showing the makeup of Russia's oil exports:

      "... this is by far different from sanctioning Iran."

      Disagree with the adjective "far" in your comment. The principles and tactics are all the same. The difference is in scope. Russia has almost twice the population as Russia, and its GDP is maybe 7-8x larger. But counterbalancing this, the weight of the sanctioning coalition against Russia (comprised of the US, EU, and other G7 countries, as well as Switzerland, Australia, Korea, Taiwan) is also much more significant than the current US-only Iranian sanctions.

  4. "...No, diesel exports needn't be affected by the secondary sanctions, at least not at the start. The idea is to focus on Russia's 4-5 million in crude oil exports, leaving the 1 million or so in diesel exports intact..."
    and how would anybody control whether diesel or crude is beeing shipped on the tanker in question? anything can be written on a bill of lading.
    "...Disagree with the adjective "far" in your comment. The principles and tactics are all the same. The difference is in scope..."
    Not sure I understand: the difference in scope is exactly why I believe "far" is adequate. Russia is simply far more important than Iran for a smooth working of the global economy (not adequately reflected by GDP differences). The targeted crude oil cut, would definitively move crude prices in a way Iran's tiny amounts would not AND Russia exports other products that are critical for strategically important global industries (Uranium, food etc.), i.e. the scope of Russia's retailiatory measures (and potential harm) are far larger than Iran's - that's my point. Those advocating sanctions never figure retailatory measures into the equation and the potential harm this can have. Ask any European how travelling (and doing business) in Asia has become more combersome just because some airlines cannot use Russia's airspace.

    Food for thought: the scope of sanctions already dwarfs anything ever imposed on Iran, they are still running a budget surplus (!) and the war effort is undisturbed...

    1. Can you thread your comments please? :)

      "how would anybody control whether diesel or crude is being shipped."

      Enforcement. And the threat thereof.

      "...the scope of Russia's retailiatory measures"

      I think you're wrong on that. Russia has very little ability to resort to robust retaliatory measures because secondary sanctions aren't part of its tool box. Putin can say that he'll cut off the west from Russian grain, but the west will work around this by getting Russian grain via India, much like how Russia is currently getting European industrial products via Kazakhstan. The coalition can use secondary sanctions to plug this hole. It is much larger than Russia, and controls the global financial system. But Russia can't use secondary sanctions to close the grain workarounds, because it doesn't have enough leverage.

      "Food for thought: the scope of sanctions already dwarfs anything ever imposed on Iran"

      I've seen that chart and it's silly. Most of the sanctions on Russia are targeted on individuals, so there are many of them, whereas there are fewer sanctions on Iran but those sanctions are much more powerful and comprehensive, targeting entire industries and imposing secondary sanctions.

      It isn't the number of sanctions that matter, but the nature and quality of those sanctions.

    2. sorry, will try

    3. "...Enforcement. And the threat thereof..."
      I think it is clear that all parties will have a huge incentive to cheat. Therefore enforcment has to be arbitrary and unspecific to a large extent. This is exactly what causes hostility and anger against the US as you mention above (but maybe that's a good thing)

      I did not mean to imply that Russia can retaliate with secondary sanctions - clearly no leverage in that.
      The can retailiate with similar "severity", by cutting of the supply of refined uranium to US and French nuclear industry - potentially huge effect.
      Wanna mess with North american nuclear security?
      This ain't Iran...

    4. " This is exactly what causes hostility and anger against the US as you mention above."

      I agree, which is why I suggested lightening the Iran sanction in order to cap the hostility.

      "...cutting of the supply of refined uranium to US"

      From the US's perspective that's fine, though. There will be some short term hiccups. But Russia will have to sell its uranium to someone in order to fund its war, and maybe India will step in because it is getting a good price from Russia, which means India will buy less from its current sources, which means the US can now buy from the sources India stops using. The best Russia can do is redistribute the flow of uranium.

    5. "...The best Russia can do is redistribute the flow of uranium..."
      I am talking about cutting the overall supply of refined uranium - the Indians and Chinese get what they have got so far, the US none - not a nuclear expert, but this doesn't sound like a hiccup.
      But I am sceptical it will come to this, according to this Forbes article the US even has started buying crude ABOVE the ceiling in November...
      But let's see what happens...
      Another question: are you going to write something about the Bitcoin ETF? If I remember correctly, a while ago you argued that an ETF is unlikely to be approved. Don't remember the exact argument, but I thought it very convincing. Would be interesting to hear from you what has changed. Would be greatly appreciated!

    6. "I am talking about cutting the overall supply of refined uranium..."

      Sure, that's a possibility. At that point the US would have to count on the rationing powers of markets to free up supply.

      "Would be interesting to hear from you what has changed."

      Long story short, the SEC started to approve bitcoin futures ETFs a year or two ago, but continued to reject bitcoin physical ETFs. When the SEC was taken to court by Grayscale (which wanted to convert their trust to a physical ETF), this became a major point of logical contradiction, one that the judges focused on. Approving a bitcoin futures ETF but not a physical one doesn't make much sense, especially since the SEC's favorite reason for rejection has always been market manipulation, which both a futures and a physical ETF are equally subject to.

      So the SEC got caught up in a contradiction of its own making and threw in the towel.

    7. Thanx.
      I wonder about the counterparty risk these ETFs must be taking. Isn't it the case that in order to be able to meet redemption requests in time, they must keep substantial coin on the exchanges? Also by shorting ETFs, one can now theoretically force Bitcoin into an illiquid market dominated by HODLers. That's new, isn't it?