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OFAC “smart sanctions” target turbine lubricants and additives in an effort to stop Russian military production

OFAC has started rolling out
OFAC has started rolling out "smart sanctions" that target Russia's biggest industrial weaknesses in the hope of bring military and energy production to a standstill.

Two days before Christmas the US Treasury’s Office of Foreign Assets Control (OFAC) quietly released new sanctions on what at first glance appear to be an esoteric product group: turbine lubricants and their additives. But banning the sale of these essential industrial products could have a devastating effect on Russia’s ability to make and maintain its arsenal of weapons, as well as hobbling its entire power industry.

The point is that Russia doesn’t make high-tech lubricants and is entirely dependent on imports. And using cheaper versions makes a big difference to a factory or power plant’s ability to make or do anything.

As the economic war between Russia and the US escalates, Washington is increasingly acting on its own and rolling out what could be called “smart sanctions” – the economic equivalent of the smart and highly accurate missiles that the US military is so famous for.

OFAC has authorised the sanctioning of any foreign financial institution that has conducted or facilitated the supply, sale or transfer to Russia of a range of chemicals considered critical to Russia’s military-industrial base.

On the list are things like nitrocellulose, high-precision ball and roller bearings, turbine lubricants and turbine lubricant additives, and internal navigation systems and fibre-optic gyroscopes.

OFAC has also belatedly banned the sale of precision tools, including computer numerical control (CNC) machines, which bne IntelliNews highlighted was Russia’s sanctions soft underbelly a year before the war started.

While these smart sanctions are not as dramatic as capping oil prices, freezing billions of dollars of reserves assets or throwing Russia out of the global financial system, which have caused Russia’s economy surprisingly few problems, the new smart sanctions target some of Russia’s biggest industrial weaknesses.

The smart sanctions are a change in tactics, switching from targeting the things that make the Kremlin money to things that strike directly at industrial production resources.

Lubricants are another sanction soft underbelly. Despite Russia's abundant oil reserves, the production of advanced mechanical lubricants relies heavily on specialised additives that are almost all imported from US and European companies.

Russian industry is already suffering from shortages of lubricants following the self-sanctioning, with gaps only partially filled by Asian suppliers. The crucial additives and other chemicals, such as lithium used in greases, are directly employed in military production. By cutting off access to these specialised components, the US and its allies hope to cripple Russia's military production.

LNG and turbines

A similar smart sanction has already targeted Russia’s LNG production at the end of last year, when all sales of the highly sophisticated and specialist technology needed to super-cool gas to turn it into a liquid was banned. These sanctions directly affected Russia’s LNG champion Novatek that was halfway through completing its Arctic LNG-2 project to expand its exports to the global market.

The new unit had been due to come online this month and had already signed supply contracts with customers around the world. But Novatek declared force majeure in December, saying it will miss its delivery obligations.

The freezing components targeted by the sanctions are produced by only a handful of companies, almost all American. Novatek has been trying to make its own Russian analogues, and while these work, they “don’t work very well,” the company admitted in January.

Russia doesn’t have the technology or experience to make these very precise components and with a ban on the equally sophisticated CNC machines the task of making them becomes even harder. As a result of the collapse of the Soviet Union, Russia missed out on two revolutions in the machine-building world and today remains hopelessly far behind the world’s leading manufacturers of these tools.

Russia has other industrial vulnerabilities. The reluctant withdrawal of Siemens in 2022 has also struck a heavy blow at Russia’s power industry, as it remains almost entirely dependent on Siemens state of the art high-efficiency gas turbines, for which there is no Russian analogue.

Siemens Energy formed a 65% joint venture with a Russian turbine manufacturer, Silovye Mashiny, part of a large conglomerate owned by a Russian oligarch, Alexey Mordashov, who has been lobbying for state support to develop equivalent Russian technology, but the effort never got off the ground. Likewise, numerous state-backed attempts to develop a domestic precision tools industry have made little progress.

Siemens also holds the monopoly over Russia’s production of high-speed trains, which were supposed to criss-cross the country, linking the most important cities in European Russia, but are now also impossible for Russia to make.

OFAC's targeting of lubricants and LNG equipment suggests potential future sanctions targeting various highly specialised aspects of Russian military production, exploiting vulnerabilities in the chemicals sector, such as lithium and other specialised chemicals.