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Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Threat Of Tough Western Sanctions On Russia Unnerves U.S., EU Energy Firms

Three days after Russia annexed the Crimea on March 17, U.S. President Barack Obama announced U.S. sanctions against 20 individuals, including Russian President Vladimir Putin’s chief of staff and close associate Sergei Ivanov, and other influential members of Putin’s inner circle. Also sanctioned was Bank Rossiia, which has close ties to Russian leadership.

Obama told reporters, "Based on the executive order that I signed in response to Russia's initial intervention in Ukraine, we are imposing sanctions on more senior officials of the Russian government. In addition, we are today sanctioning a number of other individuals with substantial resources and influence who provide material support to the Russian leadership, as well as a bank that provides material support to these individuals."

In a statement, the U.S. Treasury characterized Bank Rossiia as, "The personal bank for senior officials of the Russian Federation," with assets of roughly $10 billion and interests in the country’s oil, gas, and energy sectors.

Related Article: Ukraine Standoff Escalates, Could South Stream be in Doubt?

Along with Ivanov, others hit with sanctions include Russian Railways head Vladimir Iakunin and Soviet-born, Finnish oil trader Gennadi Timchenko, co-owner of the oil trading company Gunvor. With a head office in Geneva and a registered office in Cyprus, Gunvor is one of the world’s largest independent commodity trading companies involved in the oil and energy markets.

But Timchenko acted before the sanctions regime took hold. Gunvor issued a statement shortly after the sanctions announcement that said Timchenko, anticipating "potential economic sanctions," had on March 19 sold all of his shares in the company to his partner, Swedish businessman Torbjorn Törnqvist.

The response by the American business community was equally swift.

USA*Engage, a Washington-based coalition of business groups sponsored by the National Foreign Trade Council, issued a statement the day after the sanctions were announced to draw attention to the “real damage” the penalties would exact on U.S. companies and to urge U.S. decision makers to “fully understand the costs thereof and act only in full concert with the EU and other allies.”

For their part, EU leaders at a March 20-21 meeting of the European Council also discussed potential sanctions against Russian individuals, similar to those developed by the Obama administration.

But notably absent from the first EU sanctions list were the CEOs of Russia’s two biggest companies: Alexei Miller of Gazprom, Russia’s state-owned natural gas monopoly, and Igor Sechin of Rosneft, the Russian government’s oil company.

The explanation for their absence seems clear: Russian and EU leaders realize the magnitude of their energy interdependence. For Europe, it comes down to security of supply; for Russia, security of demand.

Related Article: Putin is Losing Eastern European Energy Gamble

European energy companies are even less enthusiastic about possible energy sanctions against Russia than American firms are.

On April 18, Royal Dutch Shell CEO Shell Ben van Beurden met with Putin at his private residence and told him that his company wanted to expand its involvement in state-owned OAO Gazprom’s $20 billion Pacific Sakhalin-2 offshore oil and gas facility. The facility is Russia’s first offshore LNG project and has been supplying East Asian markets since 1999.

(Mitsubishi Corp. and Mitsui & Co. are also partners in Sakhalin-2. Shell’s involvement dates back to 21 December 2006, when Gazprom took control of Sakhalin-2 by signing a 50 percent plus one share agreement with Shell. Shell and Gazprom are seeking to boost Sakhalin-2’s output by 50 percent in a $7 billion expansion before a new foreign LNG projects come online.)

Van Beurden told Putin, “We are very keen to grow our position in the Russian Federation. We look forward with anticipation and confidence on a very long-term future here in Russia.” Putin replied that Shell had a long and good relationship with Russia and is one of the largest investors in the Russian economy, noting, "In the energy sector you work in almost every area, you have your own network of gas stations, and you are one of the largest Russian oil traders; 20 percent of the market is involved, it is a big figure."

Van Beurden’s Moscow visit suggests that, for the Russian government, reaching out directly to foreign energy companies already invested in Russia may be the best way to influence what happens next. If energy CEOS use their considerable lobbying power to pressure the U.S. and EU not to impose further sanctions, they’re not the only ones who will benefit.

By John Daly of Oilprice.com




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