On the afternoon of February 24 2022 East Coast time, the day Russia launched its full-scale invasion of Ukraine, after a morning of consultation with the G7 governments, President Biden strode to the White House rostrum to announce America’s reaction.

America’s response would take the form of economic sanctions. 

The aim was no longer to deter. It was too late for that. The aim was to punish Putin and his regime and increase pressure for Putin to reverse his extraordinary aggression. 

Biden, furthermore, had to make good on the threats that America and Europe had made ahead of time. 

How far would America go? Would it seek to paralyze the Russian financial system and deal a crippling blow to Russia’s ability to profit from the sale of energy and commodities?

As Javier Blas of Bloomberg outlined for us earlier in the week, that revenue amounts to $700 million per day. 

In the 24 hours after Vladimir Putin signed a decree recognizing two breakaway Ukrainian territories, the European Union, the U.K., and the U.S. bought a combined 3.5 million barrels of Russian oil and refined products, worth more than $350 million at current prices. On top of that, the West probably bought another $250 million worth of Russian natural gas, plus tens of millions dollars of aluminum, coal, nickel, titanium, gold and other commodities. In total, the bill likely topped $700 million.

With surging prices for oil, gas and agricultural commodities Russia’s revenues were only set to rise. 

A lot of folks, myself included, were wondering whether Biden would now move to extend the sanctions already imposed on state-owned VTB, to including Sberbank, by far the largest Russian bank. 

We were half-expecting an announcement that would cut Russia’s banks off from SWIFT, a measure with which the United States had devastated Venezuela and Iran. 

Biden was firm and amiable as ever in the press conference, even scolding himself for being a “wiseguy”. But he was also vague. He did not mention Sberbank. Nor did he mention SWIFT until prompted by a journalist, only then to drop the bombshell that it was the Europeans who were refusing to agree to cut Russia out of the interbank communications network. 

It was only after the brief press conference, when Treasury released the details of the sanctions, that the full range of the measures became clear. 

Treasury is taking unprecedented action against Russia’s two largest financial institutions, Public Joint Stock Company Sberbank of Russia (Sberbank)and VTB Bank Public Joint Stock Company (VTB Bank), drastically altering their fundamental ability to operate. On a daily basis, Russian financial institutions conduct about $46 billion worth of foreign exchange transactions globally, 80 percent of which are in U.S. dollars. The vast majority of those transactions will now be disrupted. By cutting off Russia’s two largest banks — which combined make up more than half of the total banking system in Russia by asset value — from processing payments through the U.S. financial system. The Russian financial institutions subject to today’s action can no longer benefit from the remarkable reach, efficiency, and security of the U.S. financial system.

VTB is to be fully blocked, which means that its assets are frozen. 

Sberbank is to be denied correspondent bank relationships in the United States, which, as well-informed folks on social media pointed out, means that, in effect, it loses the ability to transact in the dollar system. It is, as Biden himself insisted, every bit as draconian as an exclusion from SWIFT. 

By the late afternoon, the general consensus amongst those in the know appeared to be that SWIFT was, in fact, a red-herring. 

But there was a nagging question. What about that moment in Biden’s speech when he spoke about energy. Energy is the really critical issue in the sanctions saga, for both sides. It is what will hurt Russia most. It is also what is most critical for Europe. And, on energy, in the middle of his remarks, Biden had made this aside. 

You know, in our sanctions package, we specifically designed to allow energy payments to continue. We are closely monitoring energy supplies for any disruption.  We have been coordinating with major oil producing and consuming countries toward our common interest to secure global energy supplies.

Yes, you read that correctly.

President Biden announced a sanctions package against Russia that is specifically designed to allow energy payments to continue! What kind of sanctions are those? 

Did he misspeak? 

No. It is there in black and white in the detail text released by the Treasury a few minutes later. 

Specifically, OFAC issued eight general licenses authorizing certain transactions related to:

• international organizations and entities;
• agricultural and medical commodities and the COVID-19 pandemic;
• overflight and emergency landings;
• energy;
• dealings in certain debt or equity;
• derivative contracts;
• the wind down of transactions involving certain blocked persons; and
• the rejection of transactions involving certain blocked persons.

And if you look for clarification of this point you find that “energy” really does mean every conceivable activity related to both fossil fuels and renewables and the exemption reads as follows: 

978. For transactions authorized under Russia-related General Licenses (GL) 6, 7, or 8 what is an example of a permissible funds transfer involving a foreign financial institution sanctioned pursuant to Executive Order (E.O.) 14024? 

Answer

GLs 6, 7, and 8  do not authorize a U.S. financial institution to maintain (or open) a correspondent account or payable-through account for or on behalf of entities subject to the prohibitions of Directive 2 under E.O.  14024 , “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (Russia-related CAPTA Directive).  Consequently, in order for a U.S. financial institution to engage in transactions authorized under these GLs (e.g., a funds transfer related to energy), all such funds transfers must be processed indirectly through a non-sanctioned, non-U.S. financial institution.  

So long as your energy-related transactions are channelled through non-sanctioned non-US financial institutions, for instance a European bank, you are in the clear. 

Biden meant what he said. These are a sanctions designed not to sanction.

Incredulously, I asked twitter for help. This does seem to be the correct interpretation of this piece of legalese. Furthermore, the political pressure for this carve-out comes from a specific source, as explained by this very helpful Bloomberg article from a month ago by Alberto Nardelli and Arne Delfs: 

The German government has pushed for an exemption for the energy sector if there is a move to block Russian banks from clearing U.S. dollar transactions, according to documents seen by Bloomberg. People familiar with recent discussions said other major western European nations hold similar views. One official said that conversations since the documents were circulated suggest the exemption is likely to be part of a final package of penalties agreed with the U.S. that would be deployed in the event that Moscow invaded Ukraine.

Biden has clearly kept his promise. America has introduced sweeping sanctions against all the major banks of Russia that do everything but block the most important transactions that might actually impose severe costs both on Russia and America’s major European allies. 

Nor are the carve-outs limited to energy, they apply to Russia’s agricultural commodity exports too. So long as the transactions run through non-US non-sanctioned banks, the US Treasury raises no objections. 

So, if on “day one” we learned that SWIFT is a red herring, what can one say for the sanctions that the US has actually imposed?