Fix the Russian Sanctions Legislation

Mark Green
Posted July 6, 2017

Sanctions are a valuable tool of American foreign policy, but U.S. Senate legislation intended to increase sanctions against Russia could harm the competitiveness of a range of U.S. energy companies working around the world, posing risks to U.S. jobs, the economy and individual Americans – and possibly benefiting Russian interests. The House of Representatives should make critical modifications to avoid these unintended consequences while strengthening the legislation to advance U.S. interests.

The legislation passed by the Senate last month would extend the current ban on U.S. companies’ involvement in oil projects located in Russia to those projects worldwide that involve Russian energy firms. In trying to ratchet up sanctions against Russia, the legislation could effectively sanction U.S. companies – and could ultimately benefit Russia. API President and CEO Jack Gerard:

“This has far-reaching impacts to a variety of companies and industries. It has the potential to penalize U.S. interests and advantage Russia. … If the United States is involved in any energy project across the globe, according to the expanded scope of the sanctions, the involvement of a Russian entity at any level on that project could exclude U.S. companies from partnerships and allow competitors to gain competitive advantages.”

Gerard refers to the fact that energy companies typically form partnerships for big, deepwater oil projects. This often is required by host governments, which see multi-partner collaborations as a way to more efficiently and cost-effectively develop their resources.

Under the Senate legislation, U.S. companies could be barred from oil projects anywhere in the world that include Russian entities, potentially costing billions in jobs and economic activity. U.S. companies of varying sizes could be affected, including service companies that play key roles in energy development and production.

Ultimately, there could be the perverse effect of actually helping Russia while penalizing U.S. firms Richard Sawaya of the National Foreign Trade Council writes in an opinion piece for The Hill newspaper:  

Russia could even strategically bid to get even a small piece of every oil field and thereby block their greatest competitors — U.S. firms — from participating. This would drive Americans out of the international market, allowing Russia the means to dominate that market along with EU and other non-US oil companies. 

Chinese oil firms could gain an edge as well, Sawaya explains, because China hasn’t sanctioned Russia and is free to partner with Russian entities. Even if the Russians didn’t capitalize on the absence of competition from U.S. companies, he writes, Sinopec and other Chinese companies could.

Meanwhile, sanctions by the European Union are limited to deepwater investments in Russia – another reason U.S. companies could be disadvantaged. The Financial Times reports (subscription publication):

While US energy groups stepped back from Russia in response to a sanctions regime that Washington lawmakers moved to tighten [last] month, rivals in the EU have held fast, ducking through loopholes in Brussels’ restrictions to keep joint ventures running. Elizabeth Rosenberg, a sanctions expert formerly at the US Treasury and now with the Center for a New American Security, points to the “regulatory arbitrage” between the EU and US sanctions. “US firms see an uneven playing field,” says Ms Rosenberg.

The ability of U.S. energy companies to compete fairly around the world is in the United States’ national interest. It means jobs and supply-chain and other support activities here at home. As it currently reads, the Senate’s sanctions legislation could put U.S. oil and natural gas companies at a clear disadvantage relative to their global competitors – and could even end up helping Russia.

Again, we recognize the importance of sanctions as a useful instrument of foreign policy. But the Senate bill could harm U.S. oil and gas companies, setting up cascading negative impacts in the process. The House should fix this flawed bill.