The Trump administration dealt a blow to Russia’s energy sector last week after it let lapse an exemption allowing Russian banks to use U.S. payment systems for energy transactions.
The move closed an important financial channel for Russian oil and gas exports and comes as Washington looks for ways to pressure Moscow to agree to a U.S.-brokered ceasefire deal in Ukraine. Russian President Vladimir Putin said he was open to a deal, but has demanded concessions from Kyiv before moving forward.
A license put in place by the Joe Biden administration at the start of the full-scale invasion had allowed a number of Russian banks to continue receiving energy payments in U.S. dollars.
The move aimed to prevent sharp increases in energy prices and avoid an energy crisis in countries dependent on Russian energy resources while otherwise maintaining sanctions pressure on Russia’s financial system.
As part of the Biden administration’s most sweeping sanctions against Russia implemented in January at the end of Biden’s term, the license’s expiration date was cut short from the usual six-month period and scheduled to end on March 12.
Allowing the license to expire “is painful for Russia,” said Ihor Burakovsky, head of the Board at the Institute for Economic Research and Policy Consulting. “Oil and gas is the key sector of the Russian economy — its key source of export revenues.”
“Any restrictions that complicate countries’ access to the international financial system create serious problems for their economies,” Burakovsky told the Kyiv Independent.
Although most Russian banks were disconnected from SWIFT in early 2022, certain institutions, particularly Gazprombank, were permitted to process payments for energy exports.
Foreign buyers paid in euros or dollars into special accounts at Gazprombank, after which the currency was converted to rubles to comply with Putin’s demands for “ruble payments” for gas.
“This makes it harder for Russia to get paid for their energy,” said James Angel, associate professor at the Georgetown School of Business.
“They have to go to more trouble to feed their war machine. Until they find an alternative way to get value for their energy, they will have less to spend on bombing Ukraine. Eventually, they will find a less efficient way to get paid.”
Burakovsky also noted that Russia is adept at finding ways around sanctions. Russia has created a large shadow fleet of approximately 800 vessels to evade sanctions put in place after the start of the full-scale invasion.
Many of the fleet’s ships — poorly maintained and with murky owners that pose security and environmental risks — are already under U.S. and EU sanctions.
Limiting Russian oil money
The new restrictions on payments undermine the Russian economy by significantly complicating energy exports — the country’s main source of income, experts say.
“The banking sector and access to international finance is currently the Achilles’ heel of the Russian economy,” said Burakovsky.
Traditional sanctions against Russia’s oil and gas sector included restrictions on equipment supplies and extraction technologies and setting a price ceiling of $60 per barrel for oil. The new restrictions complicate a key aspect of Russia’s energy sector — conducting settlements between buyers and Russian exporters.
Russia will be forced to seek alternative routes by using shadow schemes to circumvent restrictions or conducting payments in national currencies, Burakovsky said. This creates additional hurdles, especially with countries like India and China.
“Since the Indian rupee is not a freely convertible currency, it is very difficult to take it out of India. This creates a situation where Russia supplies oil to certain countries, but the money remains there,” said Burakovsky.
To circumvent Western sanctions, Russia has also begun using cryptocurrencies in oil transactions with China and India.
Burakovsky notes that although the U.S. cannot completely stop Russia due to small volumes of bilateral trade, restricting access to the international financial system is “an extremely painful issue.”
That could explain Russia’s demands in lifting sanctions on oil exports as part of a ceasefire agreement.
What the decision means for U.S.-Russia relations
As Trump looks to negotiate a swift end to the war, his team has increasingly ramped up pressure on Kyiv and President Volodymyr Zelensky while making few demands of the Russian side so far.
This has led to speculation that Trump could try to force Kyiv into an unfavorable peace deal that would effectively amount to Ukraine’s surrender.
The new sanctions could, however, be a signal from the Trump administration that it is ready to use sanctions to exert pressure on Moscow to agree to both a ceasefire and a peace deal.
“Closing this loophole now is a way to demonstrate greater resolve in the fight against Russian aggression and that the U.S. has not turned into Putin’s puppet,” said Angel.
The new sanctions close what he describes as a critical “loophole” in the previous sanctions regime, he said.
While Trump may be looking for a quick resolution to the war and granting Russia sanctions relief as part of any deal, sanctions are a joint effort by a coalition of 47 countries, including the EU, Australia, Japan, and Canada.
“Trump understands that the U.S. is an economic, military and political power, but in today’s world its dominance is not absolute,” Burakovsky said.
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