Why Sanctions on Russia Aren’t Targeting Oil and Gas

There’s an elephant in the room. Since Thursday, when Russian troops stormed into Ukraine, the U.S., the E.U., and their allies have announced a raft of sanctions designed to hurt Russia’s economy and financial system, and make President Vladimir Putin reconsider his invasion. However, the measures targeted at oil and gas exports were approved by President Vladimir Putin. 36% of Russia’s national budget last year, are conspicuously absent from the public discussion.

Some Ukrainians don’t like it. “We need real sanctions, not just some problems for Putin’s friends,” Ukrainian lawmaker Oleksiy Goncharenco said in a videoTweeted Thursday “We need an embargo on Russian gas and oil because every barrel of Russian oil and every cubic meter of Russian gas is now full of the blood of Ukrainians.“
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E.U. Commission president Ursula Von Der Leyen says the bloc will target Russia’s energy sector through an export ban preventing European companies sending technology to Russia that it needs to upgrade its refineries. The U.S. Department of the TreasurySays it will heavily restrict the ability of Gazprom, Russia’s state-owned energy conglomerate, to raise money for projects from the U.S. market. The call to restrict or embargo Russian oil-and gas production has been rejected. Echoed Friday Volodymyr Zelensky, Ukrainian PresidentThis seems far from the realms of possibility.

It’s not hard to understand why. Western energy embargoes would be painful for Putin, but he wouldn’t feel their full effects for several years. In the short term—which is what counts during an invasion—Europe and the rest of the world have more to lose.

E.U. relies on Russia for 35% of its natural gas—though some countries are more dependent than others. Tensions surrounding Ukraine are already aggravating a European fuel price crisis, which began last year after the global pandemic. The cost of a megawatt-hour of natural gas in Europe is nearly 10 times that it costs a year earlier.

Globally, sanctions against Russia would cause prices to rise. But fears about them being introduced already have had an effect: natural gas prices soared on Thursday. 51% in Europe, and crude oil—of which Russia is the world’s second largest exporter—hit a seven-year high of $105 a barrel. When those sanctions didn’t materialize later in the day, prices fell a little,Russia’s gas flow through Ukraine to Europe increased.

Experts aren’t ruling out an aggressive approach by the E.U. to Russian energy. As the conflict in Ukraine continues, both U.S. and U.K. are preparing for it. “In a sense, no one has quite accepted the gravity of the situation, and many are still conducting politics as usual. That will likely change in the days and weeks ahead,” says Michael E. O’Hanlon, director of foreign policy research at the Brookings Institution think tank.

In the medium term at least, the Ukraine invasion is a turning point for Russia’s oil and gas exports. E.U. Officials from the E.U. claim they will present a strategy for reducing dependence on Russian energy as soon as possible, including a goal to cut fossil fuel consumption by 40% by 2030. “The politics and the national security implications of this make it very hard to see how we keep doing business as usual,” O’Hanlon says, “with a guy slicing up large chunks of eastern Europe.”

Here’s what to know about how Russia’s oil and gas factors into the West’s response to the Ukraine invasion.

Is Russia going to be forced to back off Ukraine by imposing an energy embargo?

It is unlikely, due to the amount of time required for Russia’s economy to see the benefits.

Europe does hold sway in Russia’s energy sector. It purchases more than 70% of the country’s natural gas and an embargo by the bloc would have a “very serious” systemic impact on Russia’s state energy companies within several years, says Maria PastukhovaBerlin-based specialist on geopolitics and energy for the climate research group E3G.

However, Russia would be unable to sell its oil and gas in Europe if it were not cut off. not “immediately translate into tangible damage to the Kremlin,” she says. That’s because Russia is home to the world’s largest foreign reserves. $630 BillionDue in large part to rising commodity prices during the past year, as the world emerged from COVID-19 locksdowns. The reserves, combined with Russia’s ultra low sovereign debt, will insulate the state from much of the economic pain the west tries to inflict in the next few months.

Can Europe survive without Russian natural gas

It was for a short time. European leaders attempted to coordinate the increased imports from liquid natural gas, a liquified version of the fuel, that could be shipped far from the U.S. and Qatar since tensions with Russia began to build late last year. Luckily, warmer weather in Asia—which is the normal buyer of these same resources—has reduced demand for gas for heating there, freeing up LNG supplies for Europe. According to Massimo dioardo of Wood Mackenzie, vice president for global gas research, there is still time to get spring started.

A temporary interruption to the gas trade between Europe and Russia—triggered by either side—wHowever, it could turn into an intense tussle among the two nations. “Russia would be losing billions of dollars of gas revenues every month,” Diodoardo says. “But for EuropeThe [price increases triggered by an embargo]This would make it prohibitive. The longer they go without Russian gas, the more they run the risk that by next winter there won’t be enough gas in storage, then they have to start cutting demand.” That would mean rationing gas use in some countries.

Europe’s options to reduce its need for Russian gas are very limited in the short term. Even though LNG exports may seem to be working, Europe might find it difficult to continue imports at their current levels of high demand once Asia’s cold weather passes. Europe’s plans for renewable energy projects, which will replace natural gas and lower greenhouse gas emissions, won’t be realized overnight.

Analysts believe that all of these things could change over the coming three to five year. Europe has had to face up to its dependence on Russia’s energy supply after the Ukraine crisis. On Tuesday, after Moscow formally recognized the independence of two breakaway Ukrainian regions, German Chancellor Olaf Scholz froze the approval process for Nord Stream 2—a recently-completed $11 billion pipeline that was set to double the amount of natural gas sent directly from Russia to Germany. Though the pipeline may eventually go ahead, Scholz’s decision was an about-face for a country that has long sought to frame its energy needs as separate from its political interests.

Their forthcoming strategyE.U. wants to remove Europe from Russian gas. E.U. leaders will likely create new rules that require utilities to stockpile in the summer, to ensure there is no shortage in winter. This will mean that member countries must increase spending on renewable energy and insulation, as well as other efficiency retrofits.

What does the Ukraine invasion and response from Western countries mean for global energy prices in general?

Invasion will cause an increase in energy prices worldwide for months, as the markets feel uncertain over their oil and gas supplies. There are fears that conflict in Ukraine could destroy or disrupt the country’s natural gas infrastructure, which normally carriesA third of the population is affected. of Russian exports to Europe, or that Russia could curtail oil and gas supplies to the west in response to sanctions—though analysts say that is unlikely given the international reputational damage it would do to Russia’s state energy sector.

But even without direct measures targeting energy, current financial sanctions on Russia—including plans by the E.U. and U.S. to restrict Russian banks’ access to their countries’ markets—could have knock-on effects that mean utilities around the world have to pay more to buy fuel from Russia. Oil prices could soar to $130 per barrel According to analysts

If there aren’t energy sanctions or disruptions to oil and gas flows, prices may in the next few weeks fall a little from their current near-record highs, says Di Odoardo. “But they will remain extremely high as long as there’s not any sort of rapprochement or truce between Ukraine and Russia.”


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