What's in a US Senate draft bill to impose stiff sanctions on Russia and its trading partners?

Summary of YouTube Video: Russia Sanctions and the War in Ukraine

Key Concepts:

• Secondary Sanctions: Sanctions imposed on entities that do business with a sanctioned country.
• Escrow Accounts: Accounts where funds are held in trust and can only be used for specific purposes.
• Glide Path: A gradual reduction in purchases over time, allowing for adjustment.
• Humanitarian Transactions: Transactions related to essential goods and services like food and medicine.
• American Energy Dominance: The goal of the US becoming a leading energy producer and exporter.

Trump's Reluctance to Impose Harder Sanctions

• Donald Trump believes that imposing more sanctions on Russia will hinder negotiations with Putin, a stance inconsistent with his approach to other countries like China and Iran, where he combines coercion and diplomacy.
• Edward Fishman argues this policy has not yielded significant results.

Learning from the Obama Administration's Iran Sanctions

• Fishman draws parallels between the current situation with Russia and the Iran sanctions during Obama's presidency.
• Obama initially pursued negotiations with Iran, but when those failed, a bipartisan effort in Congress led to tougher sanctions.
• Key Example: Iran Sanctions (2011-2012)
  • Secondary sanctions were imposed on banks transacting with Iran, cutting them off from the US financial system.
  • A critical sanction targeted transactions with the Central Bank of Iran for oil sales.
  • Exception: Countries reducing Iranian oil purchases every 6 months and paying into escrow accounts for humanitarian trade were exempt.
  • Impact: Iranian oil sales dropped by 60% in 18 months, locking up $100 billion in overseas escrow accounts.

Critique of the Graham-Blumenthal Bill and Alternative Suggestions

• Fishman acknowledges the Graham-Blumenthal bill as a welcome effort to pressure the administration but believes it's unlikely to be implemented in its current form.
• Problem: The bill threatens 500% tariffs on countries importing any energy from Russia, which Fishman deems not credible, citing Trump's inability to sustain even 45% tariffs on China.
• Likely Outcome: Trump would likely invoke a national security waiver to avoid implementing the bill.
• Alternative Suggestion: The Trump administration should negotiate a more practical approach with Congress, drawing inspiration from the Iran sanctions model.
• Proposed Strategy:
  1. Glide Path for Reducing Purchases: Instead of immediate cessation, countries should gradually reduce Russian energy purchases every 6 months.
  2. Escrow Accounts for Payments: Payments for Russian oil should be deposited into Russian bank accounts in China, restricted to purchasing consumer goods from China.
  • This prevents funds from being used for military equipment or supporting Putin's war machine.

Potential Reactions from China and Europe

• Europe: Compliance is expected as they already aim to cut off Russian energy by 2027.
• China: Compliance is more complex, but Fishman believes it's possible, drawing parallels to China's compliance with Iran sanctions.
• Reasons for Potential Chinese Compliance:
  1. Threat of Secondary Sanctions: Chinese banks are cautious about violating US secondary sanctions due to their reliance on the dollar for cross-border payments (70%).
  2. Positive Incentive: Restricted payments for Russian oil would boost Chinese exports to Russia, benefiting Chinese companies.

Managing Risks and Market Dynamics

• While Russia's oil production is more than twice that of Iran during the 2011-2012 period, Fishman argues the risks are manageable due to current market dynamics.
• Factors:
  • Looser oil market with Brent crude in the $60s.
  • Oil supplies growing faster than demand, potentially leading to an oversupplied market.
  • OPEC increasing production.
• Cutting Russian oil sales by 1-2 million barrels should not significantly impact prices.

Russian Uranium

• The US imports enriched uranium from Russia, which is used to create nuclear fuel.
• The US has the capability to produce enriched uranium at production grade.
• While cutting purchases of nuclear fuel from Russia is beneficial, it's less critical than targeting oil revenues, as uranium sales generate lower single-digit billions of dollars annually compared to oil's hundreds of billions.

Europe's Role and Potential Leadership

• Fishman argues that Europe should take the lead in imposing harder sanctions on Russia, rather than waiting for the US.
• He acknowledges the historical tendency for Europe to coordinate with Washington but suggests that European determination could spur action from Trump and Congress.
• Example: The European oil embargo on Iran in 2011 pushed Congress to pass stricter sanctions.
• Europe has shown resolve in the Ukraine conflict, providing substantial assistance and imposing significant sanctions, including central bank sanctions.

Seizing Frozen Russian Assets

• Fishman advocates for seizing the nearly $300 billion in frozen Russian assets in Western bank accounts and using them to fund Ukraine.
• He argues that this is long overdue and would provide Ukraine with a significant financial runway.
• The US, Canada, and the UK already have the legal authority to do so, but European action is crucial as most assets are located in Europe.
• Seizing assets would change Putin's calculus by demonstrating that time is not on his side and that Ukraine will have long-term financial support.

Prospects for the Graham-Blumenthal Bill

• Fishman believes there's a 50/50 chance of a softened version of the Graham-Blumenthal bill being signed by Trump.
• He emphasizes the need for Trump to signal his approval for Republicans to act against his wishes.
• He hopes his recommendations in the Foreign Affairs essay will provide a framework for the Trump administration to negotiate a compromise that is less draconian on paper but more impactful in practice.

"Drill Baby Drill" and the US Oil Industry

• Trump's "drill baby drill" slogan and focus on American energy dominance could be aligned with sanctions on Russian oil.
• The US oil industry has been upset with Trump's policies of pushing Saudi Arabia to increase oil production, which has lowered prices and hurt shale producers.
• Sanctions on Russian oil could lead to a temporary price increase, benefiting US shale producers and allowing them to take advantage of regulatory loosening.

Timeline for Impacting Putin's Calculus

• Fishman believes it will take a long time to influence Putin's calculus and end the war.
• There is no "magic bullet," and Putin is determined to conquer Ukraine.
• The goal is to persuade Putin that he cannot achieve his maximalist objectives.
• Sanctions are a crucial part of this, putting Russia in a tougher economic position.
• Support for Ukraine, particularly seizing Russian sovereign assets to fund Ukraine, is also critical.

Conclusion

The video discusses the potential for increased sanctions against Russia, drawing lessons from the Obama administration's approach to Iran. Edward Fishman argues that while the Graham-Blumenthal bill has merit, it's unlikely to be implemented in its current form. He proposes a more nuanced strategy involving a gradual reduction in Russian energy purchases and the use of escrow accounts, combined with potential benefits for the US oil industry. He also emphasizes the importance of European leadership and the need to seize frozen Russian assets to provide long-term support for Ukraine, ultimately aiming to shift Putin's calculus and create conditions for a negotiated resolution to the conflict.