The White House explored unilaterally easing sanctions on Russia’s oil industry as recently as late March, arguing that decreased Russian oil production could harm the American economy, according to former U.S. officials.
State Department officials argued successfully that easing those sanctions would actually hurt the U.S. energy sector, according to those former officials and email exchanges reviewed by The Daily Beast.
In one email exchange, a State Department official feels the need to explain that lowering punitive sanctions on the Russian oil industry would be rewarding Moscow—without getting anything from the Kremlin in return.
“Russia continues to occupy Ukraine including Crimea—conditions that led to the sanctions have not changed,” the official wrote.
The continued discussion of unilaterally lifting sanctions on Russia came after the dismissal of retired Lt. Gen. Michael Flynn as White House national security adviser. Flynn is now in the crosshairs of congressional and Justice Department investigators looking into whether the Trump campaign colluded with Russia, which the U.S. intelligence community concluded carried out a year-long campaign to influence the 2016 elections in Trump’s favor.
The Obama administration imposed sanctions against Russia for annexing Crimea, invading eastern Ukraine, supporting the Syrian regime, and later, for alleged cyberattacks meant to influence the U.S. election. European nations imposed similar sanctions over Ukraine in 2014 and renewed them late last year.
Just after Trump took office, it sounded like he was going to change all that. “They have sanctions on Russia—let’s see if we can make some good deals with Russia,” Trump said in January to the Times of London. “Russia’s hurting very badly right now because of sanctions, but I think something can happen that a lot of people are gonna benefit.”
True to his comments, NSC officials then working for Flynn considered how they might lift all sanctions on Russia almost immediately, one of the former officials said—a charge first reported by Yahoo News, but denied as false by a senior administration official speaking to The Daily Beast.
But the March NSC request to the State Department, asking its experts to consider the possible damage of U.S. sanctions on the Russian oil industry, came under the tenure of Lt. Gen. H.R. McMaster, long after Flynn resigned because of misleading the vice president about conversations with the Russian ambassador to Washington about lifting sanctions.
It was also before relations with Moscow took a turn for the worse, after Syrian leader Bashar al-Assad used another volley of chemicals against his own people, Trump responded with a volley of Tomahawk cruise missiles at a Syrian base where Russian troops were stationed.
This query was a snapshot of administration thinking in mid-March, according to the emails obtained by The Daily Beast.
A senior Trump administration official said NSC strategist Kevin Harrington was simply examining the sanctions on Russia and trying to determine their impact, as part of the review of overall policy toward Russia.
“He did an economic analysis of what the Russian sanctions are doing. He said according to his analysis, they weren’t causing any significant pain,” the official said, speaking anonymously to provide context on NSC policy. “His view was, if these sanctions are harming our economy without putting any pressure on Russia, what’s the point?”
So that’s why the query was made.
“He got the answer the back and it didn’t go anywhere,” the official said, griping about the U.S. media’s portrayal of the Team Trump being in league with Moscow.
But on the receiving end, in the State Department sanctions office that had originally crafted the punishments, the query seemed suspect—especially given the swirling backdrop of charges of Trump campaign collusion with Russia, the two former U.S. officials said.
According to one of those officials, State argued that such unilateral U.S. government action would discourage other countries from joining the U.S. in tougher sanctions against Iran and North Korea in future.
The State Department’s sanctions office also explained that lowering Russian oil prices would be harmful to the U.S. energy industry, according to the unclassified email exchange reviewed by The Daily Beast.
“He asked us to ‘determine whether U.S. national interests were being harmed by sanctions on Russian oil, which were bad for the world economy and therefore bad for the U.S. economy,’” according to the former U.S. official.
A second former U.S. official confirmed that Harrington “was very aggressively pushing this out of the gate,” from the time he was brought to the White House by Flynn.
“Apparently, there was not only interest from a geopolitical perspective, but also a sense that it would open up major opportunities in Russian energy projects in eastern Russia, post-sanctions,” the former official said.
(The Treasury Department has already nixed one of those possible deals, after the Wall Street Journal reported that Exxon Mobil sought a waiver from sanctions in April to continue a previously signed deal with Russian state energy giant Rosneft.)
Harrington came to the White House without significant government experience, but he did have a powerful patron: Silicon Valley investor and Trump ally Peter Thiel. Flynn and deputy K.T. McFarland found the former hedge-fund director to be intellectually impressive and enthused about what his economics background could add to the NSC's strategic planning office. Harrington also became close with an ally of Flynn's, NSC intelligence director Ezra Cohen-Watnick, whom McMaster and the CIA subsequently sought, unsuccessfully, to oust.
Not all of Harrington's colleagues were as bowled over, finding his work superficial, according to one former NSC official who spoke on condition of anonymity to describe working with Harrington.
But one firm belief Harrington held was that sanctions don't work as instruments of policy, and that they were "hurting us, not helping us,” the former official said. His arguments tended toward saying that if the U.S. was looking for a tool to punish Russia, sanctions were a poor one.
In the March email, the State Department official explained to Harrington why helping Russia’s oil industry would damage the U.S. energy market, in particular, the shale oil industry.
“We explained, you’ve got it backwards. There’s an oil glut. The reason global oil prices originally collapsed is our shale oil,” the former U.S. official said in an interview, speaking anonymously to describe the interagency conversations with the White House.
In the email, the State Department official wrote “Russian production competes with US tight oil production at prices above $50/bbl,” meaning $50 a barrel. He was referring to the U.S. shale oil industry’s ability to make more money as long as the cost of oil stays above $50.
He explained how the U.S. tracked Saudi Arabia’s moves in 2013 to lower the price of oil globally in order to decimate the U.S. shale oil industry by dropping their prices below $90 a barrel, which was roughly the cost to U.S. oil businesses to produce a barrel of oil at the time. Saudi Arabian officials did not immediately respond to requests for comment.
Other energy experts had a slightly different interpretation, seeing the agreement as Saudi Arabia continuing to produce the same amount of oil to maintain relationships with oil distributors, especially in Asia where business is based more on who you know and how long you’ve known them—business relationships that are hard to reproduce if lost.
“The shale industry’s rise really did flatten global oil prices, together with some flattening in demand,” said Samantha Gross, fellow at the Brookings Institution in the Energy Security and Climate Initiative. “It’s not that they got together to drive the shale oil producers out of business. They elected not to drop production but to try to hang on to market share.”
Whatever the reason, the U.S. shale oil industry suffered a massive crash in 2014. But thanks to innovations in U.S. oil technology, manufacturers have been able to lower the cost of producing shale oil to $50 a barrel, putting the pressure back on both Russia, Saudi Arabia and other members of OPEC, Gross said.
Perhaps in response, Russia last year joined with the OPEC countries including Saudi and said all would agree to decrease oil production and work off inventory to push prices back up, an agreement they just extended through 2018, Gross explained.
In any case, Moscow isn’t getting out from under U.S. sanctions in the near future, the senior administration official said.
“There's a consensus that the sanctions aren’t coming off anytime soon until we see some significant improvement in Russian behavior,” the official said.
— with additional reporting by Spencer Ackerman
UPDATE 6/7/17: This story has been corrected to more accurately reflect the U.S. government's tracking of oil prices in 2013.