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The West's Counterpunch
Are Energy Sanctions Hurting Russia?

It’s a simple question, but there’s plenty of disagreement on how to answer it. The International Energy Agency (IEA), for one, seemed to downplay the impact of recent US and EU sanctions on Russia’s oil industry, saying in a monthly report released earlier this week: “Neither set of sanctions will have any tangible near term impact on supplies. Even for the medium term, their impact appears questionable.” A recent piece in the New York Times seemed to echo that sentiment, concluding from the failure of the EU to press a separate anti-trust case against Gazprom: “So far the sanctions war may be more about symbolic actions than imposing far-reaching economic pain on either side.” But if Western sanctions lack bite, how do you explain Russian oil firm Rosneft’s recent request for $42 billion in state aid to help it weather these measures?

It is in Russia’s best interest to act as if Western sanctions on its energy industry, on which Moscow relies for more than half of its budget, aren’t being felt. And, from the West’s perspective, there are some sectors of Russian energy interests that they would like to leave untouched, for fear of hurting their own supplies of energy. (Europe is especially reliant on Russian oil and gas.) Between those two forces, one can understand why some might see Western sanctions as toothless.

That isn’t the case, as Rosneft’s supplication demonstrates. By design, US and EU sanctions targeted Russia’s long-term energy interests, including offshore and shale drilling, which rely heavily on Western technologies. As the FT reports, that strategy could prove painful for Moscow:

Production from the ageing workhorses of the country’s oil industry—the vast conventional oilfields of western Siberia—is dropping off sharply. Moscow is determined to offset that decline by pushing beyond frontiers, such as into the oil-rich Arctic oceans and Siberia’s vast Bazhenov shale, and by investing in multibillion-dollar liquefied natural gas ventures in the Yamal peninsula and Sakhalin island. Such ambitions are crucial for Russia’s economic health, with proceeds from oil sales accounting for 44 per cent of budget revenues. It is a cash cow Moscow cannot do without.

But branching into such areas requires access to western technology, capital and expertise. Russia does not need western kit to produce conventional oil – it has been pumping crude from its onshore fields for more than a hundred years. But it is unclear how it can exploit its shale oil reserves without sophisticated western fracking equipment. And it does not build the kind of offshore platform that will be required in places such as the Kara Sea, where Rosneft and ExxonMobil started drilling their first well on Saturday. (Exxon’s well is unaffected because its rig was contracted before the latest sanctions were announced.)

Russia will no doubt look east to China for assistance, but Beijing’s track record with extracting its own shale gas reserves—the world’s largest—is as poor as Moscow’s. With production from Russia’s conventional reserves rapidly depleting, blocking the transfer of technology necessary to unlock new, unconventional reserves looks to be an effective measure indeed.

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  • PKCasimir

    The last thing any sane nation would do is base its policies on a report or study from the IEA which still is promulgating the theory of peak oil and has been so far behind the curve when it comes to fracking that it has lost whatever credibility it once had.

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