President Trump ratcheted America’s economic war with Russia to a higher level on Wednesday by moving to cut off its two largest oil companies from the global financial system, signaling a new willingness by the United States to cripple the Russian energy sector despite the risk of higher oil prices.
The decision to impose sanctions on Lukoil and Rosneft went beyond previous efforts to hamper Russia’s economy and demonstrate the extent of Mr. Trump’s frustration with Russian President Vladimir V. Putin after months of failed talks to end the war in Ukraine. Although the sanctions hit just two companies, they have the potential — if strictly enforced — to strike a major blow to the Russian economy by sapping it of energy revenues.
The move represents a striking shift in strategy from Mr. Trump, who has largely refrained from punishing Russia and has questioned the effectiveness of sanctions.
After the Biden administration imposed sanctions on about 5,000 Russian targets from 2022 to 2024, Mr. Trump until this week had imposed none.
Those that were in place when Mr. Trump took office have been loosely enforced by the United States this year, essentially giving Mr. Putin a reprieve. Mr. Trump has instead shifted to using tariffs and “secondary tariffs” as leverage against Russia. However, the use of such of trade measures to get countries such as India to stop buying Russian oil has so far been unsuccessful.
With violence in Ukraine continuing and a planned summit between Mr. Trump and Mr. Putin in Budapest suddenly called off, Mr. Trump turned to sanctions to step up the pressure.
“I just felt it was the right time,” Mr. Trump said at the White House on Wednesday.
To many observers, it appeared that there was little left for the United States to sanction in Russia. The Biden administration rolled out Russia 140 different sanctions packages from 2022 to 2024. Its targets included Russia’s central bank and its financial sector. It also coordinated with allies to cap the price of Russian oil and blacklisted oligarchs.
But the United States and its allies have treaded carefully around energy.
“Remember the multiple significant rounds of G7 sanctions issued after the invasion of Ukraine in 2022 largely spared Russia’s energy sector because of the dependence on Russian oil by Russia’s neighbors in Europe and Asia,” said John E. Smith, a former director of Treasury’s sanctions agency from 2015 to 2018 who is now a partner at Morrison Foerster. “Now the gloves are off.”
As inflation gripped the global economy in 2022 and 2023, the United States was concerned that a move to take Russian oil off the markets by blacklisting Lukoil and Rosneft would create more problems than it would solve, including by raising gas prices at home. Instead, the Biden administration tried to keep Russian oil flowing at reduced prices by threatening sanctions on tankers, banks and insurers that allowed Russian oil to be sold above a cap of $60 per barrel.
That approach had limited success as Russia managed to evade those restrictions with a “shadow fleet” of unmarked tankers.
Ben Harris, who served as assistant secretary for economic policy in the Biden administration’s Treasury Department and helped craft its sanctions strategy, said that the macroeconomic situation is much different now given that inflation has eased. That has made it possible to directly target Russia’s energy sector.
“Our strategy had been all along to preserve the flow of oil but try to control the price,” said Mr. Harris, who described the Trump administration’s sanctions as “really significant.”
Oil prices were down 18 percent this year to about $59 a barrel but jumped higher on Wednesday after the new sanctions were announced.
Russia earns about $600 million per day from oil sales, which it uses to keep its shaky economy afloat and fund its military. Analysts estimate Lukoil and Rosneft account for about half of Russia’s crude oil production and that blacklisting them could cut deeply into their sales. Russia’s central bank might have to intervene to prop up the ruble, and the Russian government’s already depleted budget is likely be further stretched.
“This is going to directly affect the hard currency generation for the war machine,” said Marshall Billingslea, a Hudson Institute fellow who served as served as Treasury’s assistant secretary for terrorist financing during the first Trump administration. “The situation was already bad and it’s going to get markedly worse for the Russian economy.”
Forecasts from the International Monetary Fund earlier this month projected that Russia’s economic output will slow to 0.6 percent this year from 4.3 percent in 2024.
Unless there are exemptions put in place, assets of Lukoil and Rosneft in the United States will have to be divested. Since the Trump administration threatened to impose the sanctions with “secondary sanctions,” banks around the world that finance transactions with Lukoil and Rosneft could be subject to penalties and cut off from much of the global financial system.
The Trump administration has tended to act unilaterally when it comes to economic diplomacy, but in this case the sanctions appeared coordinated with allies. Britain announced sanctions on the same companies last week and the new European Union sanctions package also targeted Russian energy.
There are other tools at the Trump administration’s disposal. It could blacklist additional Russian banks and impose a blanket ban on Russian energy exports. The United States and Europe have also been discussing seizing Russia’s $300 billion of frozen central bank assets and using those funds for Ukraine’s reconstruction.
Although Mr. Trump used sanctions aggressively against Iran during his first term, he has been a longtime skeptic of their merits. The president expressed a preference for using tariffs to force other nations to change their behavior and expressed concerns about the erosion of the dollar’s status as the world’s reserve currency.
Speaking at the Economic Club of New York last year, Mr. Trump said that excessive use of sanctions “kills your dollar” because countries shift to using other currencies to evade them. Russia has turned to cryptocurrencies to avoid U.S. sanctions and has encouraged the idea of a BRICS currency that would let countries such as Brazil, Russia, India, China and South Africa to reduce their reliance on the dollar.
“I want to use sanctions as little as possible,” Mr. Trump said, adding that he likes to impose them and then remove them as quickly as possible.
Edward Fishman, a senior research scholar at Columbia University, argues that sanctions are more powerful than tariffs because the dollar is used for about 90 percent of global foreign exchange transactions. Tariffs are easier to avoid and impose higher costs on American consumers.
The success of the sanctions, Mr. Fishman said, will depend on Mr. Trump’s commitment to punishing Chinese banks and Indian oil refiners that allow purchases from Lukoil and Rosneft to go forward.
“It really comes down to secondary sanctions,” said Mr. Fishman, author of “Chokepoints: American Power in the Age of Economic Warfare.” “I worry that some entities within these countries are going to say, ‘I don’t really believe Trump is going to sanction me.’”
Alan Rappeport is an economic policy reporter for The Times, based in Washington. He covers the Treasury Department and writes about taxes, trade and fiscal matters.
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