For Russia, Trump’s diesel deal was just the first ask

WASHINGTON—US President Donald Trump has long considered Russia a special case. With most foreign countries, whether they are allies or adversaries, he has approached negotiations by imposing or threatening to impose punitive tariffs or other economic measures. To this day, he maintains that this approach gives the United States a stronger hand. But with Moscow, Trump has regularly argued against economic pressure, and even sought to offer incentives which don’t adhere to existing legislation, creating a compliance dilemma for firms. Although the president instructed the US Treasury’s Office of Foreign Assets Control (OFAC) to issue a sanctions waiver for Russian diesel, saying that he did not “want to do anything that will drive, foolishly, Russia away from the bargaining table,” a shipment which left Russia for the US on Thursday has yet to find a willing buyer, or even a port. The decision was quickly followed by a waiver of Russia-related sanctions under the Lindsey Graham Act, as well as tariffs that would have targeted major importers of Russian energy. And today, the Trump administration has confirmed it is reviewing Moscow’s request to lift sanctions on Russia’s Direct Investment Fund (RDIF), which its CEO, Kirill Dmitriev, has been promoting as a channel to process transactions for diesel shipments. Diesel prices are at an all-time high, so it is politically expedient ahead of the midterm elections for Trump to say that he is addressing them directly through a deal with Moscow. The trouble is that the amount of Russian diesel likely to reach the United States won’t meaningfully affect pump prices. Nor will this incentive make a significant dent in Russia’s budget deficit, for that matter. Instead, the diesel deal—alongside the potential sale of sanctioned Russian oil giant Lukoil’s international assets and several other economic incentives under consideration to bring Russia to the table—adds to a sense of permissiveness toward Russia sanctions, which is useful to Moscow as it grapples with intractable inflation and budget shortfalls. Given this, it is worth looking in more depth at the mechanics of the deal. Does General License 135 make diesel imports legal? The sanctions waiver that the Trump administration issued on October 9, also known as General License 135, authorizes transactions related to the sale, delivery, offloading, and importation of Russian-origin diesel fuel through April 7, 2027. Soon after the waiver was issued, its legality was called into question because of its tension with the 2022 Ending Importation of Russian Oil Act, which bans imports of Russian energy products. In principle, this ban can only be lifted if the president certifies to Congress that Russia has reached an agreement accepted by Ukraine to withdraw its forces and cease hostilities, poses no immediate threat to any NATO member, and recognizes the right of the Ukrainian people to freely and independently choose their own government. The president must also consult Congress at least forty-five days before submitting the certification. These conditions have clearly not been met. However, the 2022 Act doesn’t limit OFAC’s capacity to issue temporary general licenses, and Congress remains limited in its ability to block the imports in practice. Ultimately, the Justice Department is responsible for enforcing this legislation, and the ten-year statute of limitations for sanctions violations means that importers could face scrutiny under a future Justice Department, particularly if a court were to find that the license exceeded OFAC’s authority. But the question remains whether firms will factor that risk into their current calculations or proceed with imports for the right margins. The compliance burden may deter firms even if Russian diesel is legal The more pressing barrier for the private sector lies in the compliance burden and the limited term of the license. Banks will need to determine whether they have the risk appetite to process payments under what is ultimately a temporary arrangement. US banks have had limited exposure to Russia in recent years. Faced with the high cost of due diligence and the risk of penalties, they are likely to continue avoiding business in Russia rather than navigate complex authorizations for transactions that don’t earn them very much revenue and put them at risk. A group of House and Senate Democrats also recently sent several major US banks letters warning them to expect closer legal and congressional scrutiny of the diesel deal. The letters specifically requested that the banks preserve records related to the import of Russian diesel under the waiver. This signals to banks that even if transactions are currently authorized, they may result in a potential long-term liability, reinforcing the likelihood that banks will avoid processing transactions for this deal altogether. The maritime industry will face similar due diligence issues. The European Union (EU) and the United Kingdom maintain prohibitions on Russian diesel, meaning that cargoes legally imported into the United States may stay off-limits for European shipowners, traders, or insurers, which account for a significant share of maritime commerce. This issue has already arisen with Russia’s first shipment of diesel to the United States, which is en route on a Malta-flagged tanker. Although the general license makes no mention of the price cap, that vessel and any future vessels flying the flag of an EU country must comply with EU legislation. This means that the cargo is only lawful to carry if it is sold at or below the $100-per-barrel cap that applies to diesel. Should the EU revisit its proposal for a full-scale maritime services ban on Russian crude oil and petroleum products, EU-flagged ships would no longer be able to ship Russian diesel at all. From an importer’s perspective, the general license does not define the scope of “diesel fuel,” leaving importers and shipping firms to determine whether borderline grades, such as marine gasoil or heating oil, and blended grades are permissible. Vessel due diligence will remain a large challenge, as many Russian-affiliated shadow-fleet vessels are subject to sanctions imposed by the United States, the United Kingdom, and the EU. Firms will need to scrutinize the vessel, along with its ownership and operating relationships, rather than simply the cargo in isolation. Taken together, the added compliance burden and the limited pool of eligible vessels and insurers may push up freight and insurance costs, raising the overall price of Russian diesel or forcing sellers to offer deeper discounts. This has already proven to be the case for two of the vessels transporting Russian diesel scheduled to arrive in the US next week. One vessel, the Talisman, is sanctioned under US, UK, and EU jurisdictions, while another, the Leruo, is sanctioned under UK, EU, and Canadian jurisdictions. The Talisman is sanctioned under the Proclamation 10371 ban on Russian-affiliated vessels entering US ports, meaning it is barred from docking in a US port. Transferring the diesel offshore to a non-sanctioned vessel could be a potential workaround, but such ship-to-ship transfers are often also recognized as a red flag for sanctions evasion. Even if the Talisman is allowed to dock, port operators and other service providers would be relying on an untested reading of General License 135 extending to blocked vessels, which is a significant legal risk given the waiver does not address the issue. The vessel is also unlikely to hold mainstream insurance, which may prevent it from meeting US requirements for tankers entering US waters. Finally, buyers and banks will face legal exposure too, as freight payments would flow to the vessel’s owner, Sovcomflot, which remains sanctioned by OFAC. Essentially, General License 135 shifts a heavy compliance burden onto the private sector. Larger players will be reluctant to engage given the temporary nature of the waiver. Previous sanctions waivers used as part of a negotiating tactic have also demonstrated their unpredictability. For example, General License X, which the Trump administration granted in June of this year, briefly permitted the sale of sanctioned Iranian oil before the administration revoked it in early July when talks broke down. What Russia really wants Neither side stands to gain much economically from this specific deal, particularly given the enduring legal uncertainties. The volumes are limited, averaging roughly 150,000 barrels per day over the span of three months, which is less than 4 percent of the four million barrels the US consumes daily. The revenue won’t come close to solving Russia’s fiscal challenges, either. To make sense of what is at play, it’s important to look at the changes Russia is seeking now that the diesel deal is secured. Moscow will naturally present these changes as innocuous means of getting paid, but the broader message the changes will communicate to global actors is that Washington is willing to make exceptions to its Russia sanctions regime. In its current form, General License 135 upholds one key restriction: the block on transactions servicing Russia’s Central Bank and its National Welfare Fund. But Dmitriev, who is also Russian President Vladimir Putin’s envoy, has already floated the idea of allowing a separate arm, the RDIF, be removed from the sanctions list, which US officials have confirmed is under consideration. This isn’t strictly necessary to make the deal work, as dozens of Russian banks remain unsanctioned and can still receive transactions from the West. But allowing additional channels for processing payments would make it much easier for Moscow to reclaim Russian assets that have been immobilized in the West since the beginning of the full-scale invasion. Beyond the diesel deal, the Trump administration appears willing to use the prospect of economic cooperation as an incentive to bring Moscow to the negotiating table. A range of proposals are rumored to be part of ongoing negotiations, from joint liquefied natural gas (LNG) projects in the Arctic to Russian-US data center projects. While some ideas may seem farfetched, others may gain traction in bilateral discussions. The sale of Lukoil’s foreign assets, valued at $22 billion, appears to be the most advanced, with the leading bid coming from a consortium not only led by a US investor but also including a 15 percent stake for the US International Development Finance Corporation. This sale would generate significant revenue for Russia, although the administration has previously stated that the proceeds would be held in a restricted account while sanctions remain in place.Joint LNG projects have also been floated as an area of potential cooperation, and ahead of the Alaska Summit with Putin in 2025, the Trump administration reportedly discussed including the use of Russian nuclear powered icebreakers to support the development of gas and LNG projects in Alaska as part of a potential deal. In the meantime, it appears that there is already some level of Russian involvement in Alaskan LNG. Polar LNG, which is developing a project on Alaska’s North Slope, has received both technology and financing from Novatek, a partially sanctioned Russian LNG company, which stated this past week that it is moving to acquire a minority shareholder stake in the project. By contrast, other ideas, such as joint data centers powered by Russian nuclear energy, appear to be little more than proposals floated by Moscow to project an image of growing US-Russia cooperation to the world.Several of these proposals raise red flags, but none appears likely to materialize into any meaningful cooperation, not least because the US private sector is likely to be reluctant to take part given the high level of risk. Nonetheless, the proposals and rumors send a clear message to the rest of the world: A third-country financial institution that has refrained from doing business in Russia until now because it fears OFAC punishment and exclusion from the dollar-based global financial system could reasonably question the rationale for its own restraint if the US were to back such projects with Russia. Moscow wants a state of sanctions permissiveness, and its diesel deal, however irrelevant to pump prices in the United States, is an important step to achieving that.