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The Impact of Western Sanctions on Russian Energy Companies

Energy Sanctions 2As a response to the Crimean crisis, in March 2014 the United States and the European Union, followed by Albania, Australia, Canada, Iceland, Montenegro and Norway, initiated sanctions on several Russian citizens and businesses.

In August 2014 the Russian government responded by ordering an entry ban on several American and Canadian citizens and a total ban on food imports from the European Union, the United States, Australia, Canada, and Norway.

What Are the Energy Sanctions All About?

The European Union and the United States have imposed a number of sanctions targeted at the restriction of Russia’s energy sector’s access to equipment and technology for unconventional exploration and production. In particular, this relates to oil and gas exploration in deep water (deeper than 150m) and in the offshore area north of the Arctic Circle. Apart from that, the sanctions halted joint oil production projects in shale formations with the use of hydraulic fracturing.

Surprisingly, the sanctions against Russian energy companies did not purport to compromise Russia’s current supplies of oil and gas. On the contrary, the sanctions rather intended to hamper Russia’s ability to develop long-term, complicated exploration projects. The less severe degree of energy sanctions could be easily explained by the substantial role of Russian gas on the European energy market. European economies could suffer a devastating effect should the ongoing gas supply be compromised.

Do the Sanctions Actually Harm?

As three years passed though, one cannot assert that Russian energy companies have been gravely hit by the sanctions in the short-term period. The Russian energy supply to Europe has not been compromised so far. Yet, the sanctions have restricted Western investment into the Russian energy sector as well as the flow of the necessary technology for oil and gas exploration. The long-term implications of the sanctions are yet to come.

The increasing depletion level of oil and gas fields remains a sensitive issue for the Russian gas industry. The Russian energy sector has been indicated with an average 50 % of a reduction rate; however, certain regions such as the Urals, Volga, and the North Caucasus possess critically higher averages (from 60 % to 80 %). In order to improve its long-term oil and gas production, Russia has to develop the exploration of new prospective fields in the Arctic Circle (including various shale projects, deep water and Arctic offshore drilling).

However, Russia lacks the required investment and technologies to undertake such industrial steps. In this regard, the Western sanctions have prevented Russian energy companies from developing challenging exploration projects. Therefore, even though the sanctions do not affect the ongoing Russian gas trade, they definitely compromise future Russian gas supply obligations.Another painful consequence of the Western economic sanctions is the restriction on foreign investment. The restriction on attracting Western capital for the Russian energy sector has not only halted the implementation of infrastructural energy projects but also jeopardised future investments. Apart from that, several companies, such as Rosneft, lost an opportunity to borrow from foreign sources and had to appeal to the Russian government for the repayment of their loans.

Will Europe Also Suffer?

As a result of the sanctions, Russia started to diversify its international gas supplies by turning into Asian markets. In 2014, Gazprom and Chinese CNPC signed a major gas pipeline deal after 10 years of negotiation. Since 2019, the first flows of Russian natural gas will be pumped to China through the new pipeline “The Power of Siberia”. The first major Asian deal in the contemporary history of the Russian energy sector might signify the upcoming shift of balance in the global energy trade.

In fact, the Western sanctions have pushed the Russian energy business into the Asian markets. Russian energy companies, devoid of Western cash, have started an urgent search of potential Asian investors. Among the most notable deals is the agreement between Rosneft and India’s ONGC for the sale of a 15% stake in the Rosneft’s subsidiary Vankorneft alongside the agreement between Rosneft and the consortium of Indian firms for the sale of a 29.9% stake in the Srednebotuobinskoye gas field.

Conclusion

The sanctions against Russian energy companies have already jeopardised European energy security. Deprived of Western investment, Russia is turning towards Asian markets. The sanctions have created remarkable opportunities for Asian investors, particularly Chinese, for opening joint ventures in the Russian energy sector.

From the Russian perspective, Asian investors are particularly useful, as they provide cost-effective deals and do not engage themselves in matters of Russian foreign policy.

The Asia turn combined with the negative effects of a decrease of European investment in the new exploration fields in the Russian Arctic may hamper the maintenance of Russian energy supplies in the long-term. It is quite possible that one day, being tied by Sino-Russian energy deals, Russia will be unable to fulfil its obligations on European energy contracts.

About the Author:

Olga Hryniuk, born in Minsk (Belarus). Education: European Humanities University (Vilnius, Lithuania) — LLB (International and European Law), Coventry University (UK) — International Relations. Currently works as a legal consultant for several logistics companies in Minsk.

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