Sanctions strangle Putin’s arctic gas ambitions

Russia’s fortress economy has proved remarkably resilient to an onslaught of Western sanctions. Two years after the Kremlin’s invasion of Ukraine, it continues to fund a costly war and to prop up President Vladimir Putin.

But there’s at least one spot where the pain is very real.

The Novatek PJSC-led Arctic LNG 2 facility, on the icy Kara Sea, is a key part of Moscow’s plans to boost exports and replenish coffers. For months now, it has been ready to ship liquefied natural gas to new markets, alternatives to the once-lucrative European pipeline trade.

And yet, the vast new $25 billion operation is sitting virtually idle, the first piece of Russia’s energy production complex to be effectively curbed by U.S. restrictions.

Russia has long sought to increase its share of the global LNG market, but the war and the subsequent sharp drop in overland exports to Europe have reinforced the importance of these ambitions. Moscow wants to expand LNG output threefold by 2030, adding at least $35 billion in annual revenue.

Thanks to older operations, Russia is currently the fourthlargest LNG exporter globally, but restrictions on the flagship Arctic LNG 2 are crimping its aspirations to go further. More worrying for Moscow, they’ve provided a blueprint for any future Western efforts to rein in the Kremlin’s gas income by targeting operations like Yamal or Sakhalin II in the Far East – still delivering to customers in Europe and Asia.

“U.S. sanctions are working surprisingly well,” said Malte Humpert, founder of the Arctic Institute, who has been monitoring Russia’s expansion in the region for over a decade. “Here, they’re really ahead of the curve. They blocked Arctic LNG 2 before it even started production, blocked the vessels before they could be delivered. With everything else, like oil or the shadow fleet, it’s always reactive.”

Since the Biden administration imposed sanctions on the Arctic LNG 2 facility last year, buyers in China and India – places that have bought and traded Russian oil, working around existing constraints – have refused to buy even discounted LNG.

Lawyers in Singapore and London, meanwhile, have recused themselves from involvement in the project.

Even shipbuilders have been tangled in the curbs, with vessels worth hundreds of millions of dollars currently stuck at dry docks in South Korea. No one can buy or lease them. The gas, meanwhile, remains trapped at the facility.

Unlike oil exports, which have continued to flow despite a price cap and other limitations with help from a vast “shadow fleet,” LNG is trickier to keep moving, in large part because of the more complex technology required to load and ship the super-cooled fuel.

Now the European Union, which still leans on Russian LNG and has been reluctant to restrict imports, is preparing to roll out some measures of its own. Europe isn’t outright prohibiting the fuel, but the bloc’s discussions signal that gas is no longer off limits as the war enters a third year.

Up for debate is a plan to ban the use of EU ports to re-export Russian supplies destined for third countries. That matters because Russian LNG plants in the Arctic region are exceptionally remote, so the fuel is usually first delivered to Belgium or France for re-export to Asia or another European port. Restricting this practice will stretch Russia’s shipping fleet to breaking point.