US Intensifies Russia Sanctions May Hit Energy Sector Next

US Intensifies Russia Sanctions, May Hit Energy Sector Next

The United States steps up the severity of its economic sanctions against Russia and opens the door to future sanctions against Russia's oil and natural gas industries.

The United States yesterday stepped up the severity of its economic sanctions against Russia in response that nation's military incursions into Ukraine. President Obama also opened the door to future sanctions against Russia's oil and natural gas industries, which account for a large portion of Russia's exports.

Obama said the prospective energy sanctions are not his "preferred outcome" because they could disrupt the global economy, but he said they might become necessary because of "menacing movements by the Russian military near eastern and southern Ukraine," according to a New York Times report.

Europe in particular depends heavily on imported Russian natural gas that comes to it via a network of pipelines that traverse Ukraine. But Europe's reliance on the Ukrainian pipelines has declined in recent years because Russia has built three pipelines into Europe that bypass Ukraine to the north and south.

At the recent IHS CERAWeek energy conference in Houston, Russian Energy Minister Alexander Novak had been scheduled to speak but canceled due the upheaval in Ukraine. In Novak's absence, IHS held a group briefing titled "Crisis in Ukraine: New Reality for Geopolitics and Energy?" During that session, Matthew Sagers, an IHS senior director with expertise in the Russian energy industry, detailed Russia's bypass pipelines and explained how they have lessened Europe's dependence on natural gas imported through Ukraine.

"Ukraine is still a major transit corridor for Russian gas to Europe," Sagers said, "but it used to be that Ukraine basically had its finger on the equivalent of the nuclear trigger: It controlled 95% of Russia's exports going to Europe and therefore could negotiate favorable terms."

Europe's Reliance Halved

Russia's new bypass pipelines have cut Europe's Ukraine-pipeline dependence in half, Sagers said: "The percentage has dropped from 95% to 50%. So the transit is still important to both Russia and Ukraine; 50% percent is still large on the Russian side, and the transit business generates $3 billion a year in business for Ukraine. On the other hand, it's much less than it was."

On the other other hand, though, while half as much of Europe's imported natural gas is coming through Ukraine, the same total volume still ultimately comes from Russia.

Michael Stoppard, IHS managing director and a specialist in the international gas business, noted that 30% of the natural gas consumed in Europe in 2013 was imported from Russia.

"Thirty percent of Europe's gas—almost one in three molecules that was consumed last year—came from Russia," Stoppard said. "So it's a very important relationship, from both sides. Despite the weakness of European gas demand, that's a really important trade. There's a commonality of interest to protect and promote that trade between Europe and Russia."

Europe: Closer, More Cautious

Due to that commonality of interest, the United States can expect a mixed reaction from European nations if it imposes energy sanctions on Russia. A report today in the U.K.'s The Independent, referring to President Obama's planned visit next week to the Netherlands, notes:

"Next week [President Obama] will travel to The Hague to preside over a specially convened meeting of the Group of Seven leading industrial nations, with the usual eighth chair at the table for Russia taken away.

"European leaders were struggling to find common ground between the more hawkish states that want to hit Russia with the most punishing economic sanctions available and those who fear the fallout for Europe's struggling economies.

"Poland and the Baltic states, wary of their proximity to Russia and with memories of their own Soviet pasts, want to hit Russia as hard as possible with measures such as an arms embargo and bans on gas imports. Nations like Germany, France and Spain with closer business and trade ties are more wary, as are many Eastern European nations which rely on Russia for their energy supplies."

During the CERAWeek briefing on the Ukraine crisis, an exchange between IHS Vice Chairman Daniel Yergin and Michael Stoppard drove home the fact that some European nations would be reluctant to back the United States if it imposes energy-related sanctions on Russia.

Yergin: "Given how integrated Europe is with Russia economically and vice versa—and it's so different for the United States with the talk about sanctions and so forth—can we expect Europe to approach this differently?"

Stoppard: "I think that because of the interests, and the importance of the gas trade, we are going to see a very cautious approach from Europe, yes."

TAGS: The Economy
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