Inflation Fears Could Limit U.S. Sanctions on Russia

America’s rapid inflation could constrain the blistering package of sanctions that the Biden administration is preparing to unleash on Russia, forcing U.S. officials to weigh how much economic blowback consumers are prepared to endure.

Prices are rising at their fastest pace in 40 years, and sanctions, depending on how they are structured, could exacerbate inflation, particularly in energy and commodities.

White House officials said this week that the administration was considering releasing more oil from the Strategic Petroleum Reserve to stabilize global energy markets, which have been roiled by the conflict. The United States is also coordinating with other countries to minimize the impact that any sanctions could have on Americans who are already struggling with rising prices.

Those concerns, analysts say, are likely to shape how far the United States is willing to go to punish Russia for its invasion of Ukraine.

“Sanctions are not cost free,” said Alex Zerden, a former Treasury Department official in the Obama and Trump administrations. “To the extent that they are adding to inflationary pressures, that’s a distinct possibility.”

Global markets can be extremely sensitive to sanctions. In 2018, when the United States imposed sanctions on the Russian aluminum giant Rusal and its billionaire owner, Oleg Deripaska, the move led to a spike in aluminum prices around the world.

“The Biden Administration and its allies are absolutely tracking metals, grain and energy prices as a variable tied to next steps,” said Daniel Tannebaum, a partner at Oliver Wyman who advises banks on sanctions. “We all remember what happened with one of the 2018 oligarch designations, where there was a brief destabilization of the global aluminum sector.”

Oil prices have been the biggest concern this time around.

Economists have released varying estimates of how much an oil price shock could bolster inflation.

If oil increases to $120 per barrel by the end of February — past the $95 mark it hovered around last week — inflation as measured by the Consumer Price Index could climb close to 9 percent in the next couple of months, instead of a projected peak of a little below 8 percent, said Alan Detmeister, an economist at UBS who formerly led the prices and wages section at the Fed.

Economists at Goldman Sachs wrote in a research note that a $10 per barrel increase in the price of oil boosts U.S. headline inflation by about a fifth of a percentage point, and lowers gross domestic product growth by just under 0.1 percentage point.

The Biden administration has signaled that it is treading carefully when it comes to imposing sanctions on Russia’s oil and gas sectors despite calls from some analysts to blacklist Russian energy exports.

After the Crimea crisis in 2014, the United States tried to limit the impact of Russia sanctions on energy markets by targeting its medium-term oil production with limits on access to financing.

Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, said that strict sanctions on Gazprom or Rosneft, the Russian energy giants, would be a surprising escalation and that even sanctions on financial institutions are likely to have carve-outs for energy transactions.

“It’s not just an inflation risk,” Ms. Ziemba said. “They’re worried about a major supply shock that could trigger a recession or meaningful slowdown in the global economy.”

Jeanna Smialek contributed reporting.

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