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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Uncomfortable Truth About Sanctioning Russia

  • Russia’s decision to recognize the independence of two cities in Ukraine and send troops over the border has triggered a slew of sanctions from the West.
  • These sanctions include the suspension of the certification of Nord Stream 2 and the freezing of assets associated with some banks and wealthy individuals.
  • The reason this first round of sanctions is relatively light is two-fold, the West wants to maintain some leverage over Russia and has very limited options.

This week, Germany’s Chancellor Olaf Sholz ordered the suspension of the certification process for Nord Stream 2, the Russian gas pipeline that would’ve significantly boosted the supply of Russian gas to Germany.

The move came in response to Russia’s decision to recognize the two breakaway Ukrainian regions of Luhansk and Donetsk as independent republics and following the decision to send Russian troops there, which the Kremlin claimed was for peacekeeping purposes.

All EU governments, the UK, and the United States denounced the move and threatened sanctions. The UK and the U.S. later declared some, but, oddly enough, none of the sanctions targeted Russia’s massive energy industry.

The UK, in its sanction drive, froze the assets of five Russian banks and three Russian individuals. The UK parliament also said it would target with sanctions the Russian MPs who voted in favor of the recognition of Luhansk and Donetsk and said it would ban British companies from doing business in the two regions. The EU targeted politicians with punitive action.

U.S. sanctions, as announced by President Joe Biden, include putting two big Russian banks and what he termed Russian elites and their families on the U.S. Specially Designated Nationals List, which effectively cuts off access of these individuals to the U.S. financial system.

The other target was Russian sovereign debt. As Biden told reporters on Tuesday, the sanctions against Moscow basically prevent it from borrowing abroad—a move that sent shock waves across the debt trading industry.

So, apart from Sholz’s suspension of Nord Stream 2, not a single sanction shot was fired against Russia’s energy or commodity industry. It is highly likely that such sanctions are on the agenda for later. But given the pain such sanctions are going to inflict on European countries and maybe even the United States itself, they might become a last resort.

For starters, the suspension of Nord Stream 2 will be a lot more painful for Germany than for Russia if the pipeline remains suspended over the longer term. The point of Nord Stream 2 was to increase gas flows to Germany as the country shuts down its nuclear and coal power plants. So if there is no pipeline, Germany would have to replace the cheap pipeline gas with costlier LNG.

As for Russia’s pain, Gazprom recently sealed a deal with China to double the capacity of its Power of Siberia gas pipeline that delivers gas to northern China. Over the short term, the stranding of the $12-billion Nord Stream 2 project would be unpleasant, but it won’t be the end of Gazprom.

But why did nobody sanction Russian oil or gas or metals? First, there are a lot of big, important Western companies working in Russian oil and gas and metals. Second, Russia is a major global commodity supplier and sanctions would disrupt an already shaken global economy.

Shell, BP, and Exxon are the biggest oil majors with Russian businesses. BP is the most intimately linked to Moscow, with a 25-percent stake in state oil major Rosneft. Commodity trading leaders including Vitol, Glencore, and Trafigura are also among Moscow’s business partners, the Financial Times wrote in an overview of the implications that Western sanctions could have on Russia’s economy and on its partners.

“Extensive sanctions would be really problematic for the energy sector, even if they don’t directly target exports,” the FT quoted the head of political risk at GPW, a consultancy, as saying.

The least that these Western companies could expect in the event of sanctions targeting their sectors would be “to down tools while they worked out their exposure,” Livia Paggi also told the FT. The most, judging by how sanctions unfolded in Venezuela, would be to leave the country—something that BP, for one, would be loathed to do given its pretty lucrative participation in Rosneft.

Reuters published a factbox about Russia’s weight in international commodity trade this week, according to which, as of last year, Russia supplied some 6 percent of the world’s aluminum, 4 percent of the world’s cobalt, and 3.5 percent of the world’s copper.

Nornickel, the metals giant, is the world’s largest nickel miner, supplying 7 percent of global output but also the world’s largest palladium miner and one of the top platinum miners.


That’s not all, either, because Russia also produces 4 percent of global steel output and a tenth of global gold output. Sanctions against its mining industry would, in all likelihood, lead to even higher commodity prices.

Yet besides metals—and oil and gas, which are the most obvious and most problematic sanction targets—Russia is also a major producer of fertilizers, accounting for 13 percent of the global total. It is also, critically, the world’s largest producer of wheat.

What all this means is that for all the sanction threats the U.S., the UK, and the EU have considered in the past couple of months, their hands are, to a pretty significant extent, tied. Unless, of course, Washington, London, and Brussels are ready and willing to add more price pain for industries they are prioritizing in their economic plans, such as renewable energy and EV manufacturing.

By Irina Slav for Oilprice.com

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Leave a comment
  • Robert Berke on February 23 2022 said:
    Solid and thorough reporting.
  • Lee James on February 23 2022 said:
    I sense that Putin may be so reckless as to widen the conflict beyond simply occupying the areas previously occupied by his proxies.

    It seems like only yesterday that Putin was complaining about Ukraine having a thing about NATO. Today, it's that Ukraine is illegitimate. Putin has declared that the Ukrainian government does not represent all Ukrainians, especially Russian speaking ones.

    To Putin I say, if only Ukraine could be so lucky as to have an authoritarian leader who makes sure everyone agrees with the government and the central government itself can do no wrong.

    Well, OilPrice is about oil and prices, so I'll redirect to stay on task. We all hate high oil prices. But sometimes you just have to pay the freight, if that's what you've got to do. A dollar paid to Russia right now is a dollar on its way to becoming military hardware.
  • Robert Berke on February 24 2022 said:
    Do you think it's just coincidence that Putin makes his move at the moment when Biden's polls are collapsing, inflation and oil prices are soaring, with Europe in the midst of an energy crisis, while still absolutely dependent upon Russin energy?
  • Mamdouh Salameh on February 24 2022 said:
    Global experience shows that sanctions generally don’t work. They are at best irritants but with hardly any bite. Cases in point are sanctions imposed on Russia in 2014 in the aftermath of its annexation of the Crimea and those against Iran and Venezuela.

    Despite the most intrusive US sanctions, the Russian economy continued to grow hitting 4.7% in 2021 with GDP reaching $4.32 trillion, the world’s 6th largest economy based on purchasing power parity (PPP).

    Moreover, US sanctions have neither managed to stop Iran’s and Venezuela’s crude oil exports nor were they able to effect a regime change in Venezuela.

    Any new sanctions against Russia aren’t going to fare better than existing ones particularly with support from China who will help Russia mitigate the impact of any new US sanctions exactly as it has be doing in Iran and Venezuela.

    Moreover, Russia isn’t only a major exporter of oil, gas and coal. It also exports many strategic commodities vital to the global economy as a whole and to the food situation in the world.

    Germany’s suspension of Nord Stream 2 gas pipeline is cosmetic since the pipeline has been sitting idle since its completion in September 2021. If, however, Germany decides to stop it completely, it will be the biggest loser since this will sink more than 150 German companies who have contributed more half of the cost of building Nord Stream 2 amounting to $5 bn. Furthermore, it will be a major blow to Germany’s future energy security since it depends on Russian oil and gas for 65% of its needs.

    Any sanctions against Russian oil and gas exports will harm the global economy and those who are imposing them since the United States and the European Union (EU) are among the world’s largest importers of oil and gas. Russia will continue to export its oil and gas to China, the world’s largest energy market.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Hugh Williams on February 27 2022 said:
    Dr. Salameh,

    "Global experience shows that sanctions generally don’t work. They are at best irritants but with hardly any bite." To make such a statement your must be looking at the big picture. Sanctions have ruined many businesses and many individual´s income.

    Sanctions are an act of war and the US used them to get involved in WW2 .
  • Bill Tomlinson on February 28 2022 said:
    "So if there is no [Nord Stream 2] pipeline, Germany would have to replace the cheap pipeline gas with costlier LNG."

    More important than the cost is that shipping LNG requires specialist ships, which simply doesn't exist.

    As for building more, only a few shipyards are capable of building them, and they couldn't get it done in anything even aproaching the time scale required.
  • independence01776 d on March 01 2022 said:
    Looks like Germany is going to move faster to electric cars and green energy. The risk political and financial risk associated to fossil fuels and the instability of govts from which most of the fossil fuel energy flows just adds to the cost of this already overly expensive energy solution. It will take a decade or two to completely get off of fossil fuel energy across the globe, but it will only take a few more years to put enough green energy in place to completely replace the energy Russia supplies to Europe.

    It was going to happen anyways, Putin's actions just forced the timeline cutting his own throat in the process. That's what happens when you go all in with a pair of deuces.

    China's going to have to step in. And of course that will not play well in the west. My guess is China marginally buys a bit more oil and gas from Russia. That's not going to stop the Russian economic implosion that is just around the corner for a nation that has misued its fossil fuel profits just as those autocrats in the Middle East, Venezuela and others have done around the globe. As the demand goes away, the money no longer flows to support this poorly run regimes.

    It's going to get ugly.
  • Noah Edelson on March 02 2022 said:
    Hugh Williams is correct about WW2, but in the USA at least most people don't know that. We think that Pearl Harbor was a random and crazy act of the Japanese, and just think of it as a sign of their immense arrogance. (Well, it was a bit arrogant and stupid. But there is some nuanced history there. ) The US State Department does a fairly decent job in describing it:

    Between 1937 and 1941, escalating conflict between China and Japan influenced U.S. relations with both nations, and ultimately contributed to pushing the United States toward full-scale war with Japan and Germany.

    At the outset, U.S. officials viewed developments in China with ambivalence. On the one hand, they opposed Japanese incursions into northeast China and the rise of Japanese militarism in the area, in part because of their sense of a longstanding friendship with China. On the other hand, most U.S. officials believed that it had no vital interests in China worth going to war over with Japan. Moreover, the domestic conflict between Chinese Nationalists and Communists left U.S. policymakers uncertain of success in aiding such an internally divided nation. As a result, few U.S. officials recommended taking a strong stance prior to 1937, and so the United States did little to help China for fear of provoking Japan.

    U.S. likelihood of providing aid to China increased after July 7, 1937, when Chinese and Japanese forces clashed on the Marco Polo Bridge near Beijing, throwing the two nations into a full-scale war. As the United States watched Japanese forces sweep down the coast and then into the capital of Nanjing, popular opinion swung firmly in favor of the Chinese. Tensions with Japan rose when the Japanese Army bombed the U.S.S. Panay as it evacuated American citizens from Nanjing, killing three. The U.S. Government, however, continued to avoid conflict and accepted an apology and indemnity from the Japanese. An uneasy truce held between the two nations into 1940.

    In 1940 and 1941, President Franklin D. Roosevelt formalized U.S. aid to China. The U.S. Government extended credits to the Chinese Government for the purchase of war supplies, as it slowly began to tighten restrictions on Japan. The United States was the main supplier of the oil, steel, iron, and other commodities needed by the Japanese military as it became bogged down by Chinese resistance but, in January, 1940, Japan abrogated the existing treaty of commerce with the United States. Although this did not lead to an immediate embargo, it meant that the Roosevelt Administration could now restrict the flow of military supplies into Japan and use this as leverage to force Japan to halt its aggression in China. After January 1940, the United States combined a strategy of increasing aid to China through larger credits and the Lend-Lease program with a gradual move towards an embargo on the trade of all militarily useful items with Japan.

    The Japanese Government made several decisions during these two years that exacerbated the situation. Unable or unwilling to control the military, Japan's political leaders sought greater security by establishing the "Greater East Asia Co-Prosperity Sphere" in August, 1940. In so doing they announced Japan's intention to drive the Western imperialist nations from Asia. However, this Japanese-led project aimed to enhance Japan's economic and material wealth so that it would not be dependent upon supplies from the West, and not to "liberate" the long-subject peoples of Asia. In fact, Japan would have to launch a campaign of military conquest and rule, and did not intend to pull out of China.

    At the same time, several pacts with Western nations only made Japan appear more of a threat to the United States. First, Japan signed the Tripartite Pact with Germany and Italy on September 27, 1940 and thereby linked the conflicts in Europe and Asia. This made China a potential ally in the global fight against fascism. Then in mid-1941, Japan signed a Neutrality Pact with the Soviet Union, making it clear that Japan's military would be moving into Southeast Asia, where the United States had greater interests. A third agreement with Vichy France enabled Japanese forces to move into Indochina and begin their Southern Advance. The United States responded to this growing threat by temporarily halting negotiations with Japanese diplomats, instituting a full embargo on exports to Japan, freezing Japanese assets in U.S. banks, and sending supplies into China along the Burma Road.

    Although negotiations restarted after the United States increasingly enforced an embargo against Japan, they made little headway. Diplomats in Washington came close to agreements on a couple of occasions, but pro-Chinese sentiments in the United States made it difficult to reach any resolution that would not involve a Japanese withdrawal from China (frozen assets, embargo, etc.)

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