Sanctions stymie Russian energy projects
A year and a half after the United States and its European allies imposed economic sanctions on Russia’s energy sector, major Russian projects that were to carry oil and natural gas to customers in China, Turkey and Germany have stalled.
And though President Barack Obama’s administration is seeking Russia’s cooperation in Syria, there is no sign that the U.S. is planning to let up on sanctions that were designed to get Moscow to withdraw from its occupation of Crimea and eastern provinces of Ukraine.
On Tuesday, the Treasury Department barred business dealings with dozens of people and companies in Russia that were reportedly trying to circumvent the earlier economic restrictions. The announcement came a day after the European Union extended sanctions against Russia for another six months.
The Treasury Department also imposed sanctions on six people in the self-proclaimed people’s republics of Donetsk and Luhansk in eastern Ukraine, two former officials in the government of ousted Ukrainian President Viktor Yanukovich, and a dozen companies operating in Crimea.
“Today’s steps support the U.S. commitment to seek a diplomatic resolution to the crisis in Ukraine by maintaining our sanctions on Russia,” the Treasury Department said in a statement. “Those sanctions will not begin to
be rolled back until Russia fully implements its commitments under the Minsk Agreements, including the return to Ukraine of control of its side of the international border with Russia.”
The sanctions have coincided with a plunge in oil and natural gas prices that have hurt the Russian economy. A World Bank update this month said Russia’s inflation rate is running around 16 percent, meaning that after adjusting for inflation, pensions contracted 4 percent in the past year. Overall, the economy is shrinking, with manufacturing off 5.9 percent, retail services down 11.7 percent and fixed capital investment down 5.2 percent, the World Bank said.
To cover its budget, Russia’s government has been forced to dip into its reserve fund, built up when oil prices were high.
Among the projects stalled by the energy sector sanctions was a plan for three natural-gas pipelines to China. The Russian pivot to China was supposed to open up a major new market for Russia, which relies heavily on exports to Europe. Although the deals haven’t been scuttled, they have been postponed, perhaps for years.
An increase in worldwide natural-gas supplies and liquefied natural gas facilities has cut the global price of
natural gas in half during the past year, further undermining the plan for the pipelines.
“The project was always economically challenged to begin with,” said Edward Chow, an international energy expert at the Center for Strategic and International Studies. “You need to develop two new technically difficult gas fields in eastern Siberia, then build new long-haul pipelines. And then the price of the commodity went down the month after the deal was struck and the Russian country risk went up.”
The big Chinese commercial banks that were supposed to provide $25 billion in financing for the project — some in the form of advance payments for the gas — have balked. Many of the Russian companies that were to build large portions of the pipeline are on the U.S. sanctions list, including companies controlled by Gennady Timchenko and the Rotenberg brothers. Any Chinese bank doing business abroad could be harshly punished for dealing with those companies.
“They are afraid of U.S. sanctions,” Anders Aslund, an economist and senior fellow at the Atlantic Council, said of the Chinese banks.
Chow said China might still press ahead, but slowly. China’s economy has slowed and the government has instituted pricing measures for natural gas that have dampened demand. “It doesn’t mean that the Chinese don’t want Russian gas, but they figure time
is on their side,” he said.
Another casualty for Russia’s energy sector has been Moscow’s proposed natural-gas pipeline to Turkey, announced by Russian President Vladimir Putin in December 2014. Like the Chinese pipeline, the Turkstream pipeline had a strategic rationale: It would give Russia a way to cut off gas supplies to Ukraine without cutting supplies to the rest of Europe. Currently, the pipelines through Ukraine are major routes for Russian gas sales to central Europe.
Chow said, however, that “the Turkish project always seemed like improvising by Putin to begin with” after the abandonment of another pipeline project called South Stream. When he announced the Turkish project, “the project had no name, no route, and no price agreed to by the Turks.”
The pipeline plans with Turkey were abandoned after Turkey shot down a Russian fighter jet that Ankara alleged was flying over Turkish territory. Russia has responded with sanctions on Turkey, a major trading partner.
Russia’s plans for building a pipeline to Germany, called Nord Stream 2, have also been facing opposition. Nord Stream 2 would be built with international partners, including BASF and Royal Dutch Shell. The pipeline would run from Russia to Germany through the Baltic Sea.
But Aslund said that only half of the capacity of Nord Stream 1 is being used and that, if anything, Europe should be diversifying its sources of gas so it is less dependent on Russia. The State Department has sent an envoy to urge European countries to reject the plan.
“This project makes no sense and should be stopped,” Aslund said.
The dim export prospects for Gazprom, the main Russian natural-gas company, along with low prices has knocked the market capitalization of the company down from $369 billion in May 2008 to $43 billion. In the past year alone, the stock price has tumbled 25 percent.
At the end of the Soviet era, Gazprom annually sold about 170 billion cubic yards of gas to Ukraine, then one of the least energy-efficient countries in the world. This year, after lowering energy subsidies, Ukraine will use about 45.8 billion cubic yards and produce 26 billion of that itself, Aslund estimates. Ukraine can buy two-thirds of its import needs from Europe, leaving it much less vulnerable to political pressure from Russia.
Gazprom also faces legal problems. In April, after four years of investigation, the European Commission officially advised Gazprom that its practices violate EU antitrust laws. Earlier this month, Gazprom dismissed as “groundless” the allegations that it had engaged in monopolistic practices by threatening the supply of gas to Poland and seven other EU states.