Russian energy sanctions the nuclear option?

3 mins read

Putin is upping the ante as discussions rage within Western capitals to sanction Russia’s oil and gas sectors. Russia has even threatened to block the Nord-Stream I pipeline to Germany.

US president Biden’s Administration is preparing a strategy to convince its backers and European partners to put this in place.

The Russian economy is already falling apart, hit by a long list of other sanctions, but sanctions on its energy exports and revenues would be a major blow.

The exchange rate of the Russian Ruble is down, forcing Russia’s Central Bank to intervene with billions of dollars to prop up or at least mitigate part of the damage.

Russian sites have stated that Putin’s regime has put a new Gold Standard for the Ruble, but that seems to be one of the actions of despair at present.

As long as the Russian military invasion of Ukraine continues and civilians are fleeing to other European countries, the West is looking for additional instruments to quell the Russian military onslaught and undermine the Putin factions in Russia.

While the removal of Russia and its financial institutes from SWIFT is in place, hurting almost all national and international trade of Russian banks and companies, new options are being discussed.

The role of Russia’s energy exports has only been discussed in line with the support of hydrocarbon revenues for the Russian war machine.

It has already resulted in a major sell-off of Western companies in Russia and almost all Western international oil and gas firms.

The Russian economy is hit hard, but unless its main income generator, oil, gas and metals, is still there, a direct fast-track to crushing its power is not yet in place.

The real issue until now constraining a possible full-on Russian energy sector sanctions regime is the current Western dependency on oil and gas imports, which is especially high in parts of the European Union.

Without discussing the major mistakes being made in the last decades during the energy transition implementation and the delays in acting on an increasing dependency on Russian gas imports, the fact is that most of Europe and consumers will suffer from a full-scale blockade of Russian oil and gas.

The reality is also different when looking at the US drive to so-called energy independence. Russian oil has been sailing to American ports.

Moscow’s energy still makes up a significant part of American demand.

In the short term, no political or economic decision-making or strategy will remove the Russian Urals or natural gas from Western economies without feeling real pain.

A total blockade of natural gas and crude oil in Western markets will severely affect the short-to-midterm.

Supply issues

Substituting Russian energy volumes will not be a minor issue, especially in a constrained global market or heading towards severe supply issues.

Most analysts agree that the loss of Russian supplies would push prices to record highs by removing barrels from an oil market left exceptionally tight by rising post-pandemic consumption and tepid supply growth.

Washington’s call on OPEC+ to increase its export volumes to counter growing global demand or assist in a possible energy sanctions regime on Russia has been rebuked.

As Saudi officials have already stated bluntly, any call on OPEC to increase its exports and volumes will not be met at present.

OPEC+ is a Saudi Arabia – Russia -UAE combination, followed by an extensive list of other OPEC producers and FSU member countries.

They will be overly cautious in supporting an anti-Putin strategy, looking at their own regional and internal security situation.

Getting OPEC members on board an anti-Putin strategy is no minor feat.

Left to shiver for over a decade due to Washington’s ill-fated democratisation strategies in the Middle East, leaders in Riyadh, Abu Dhabi, and mainstream North African countries are unwilling to choose sides in the conflict.

To expect an energy solution coming from the MENA region is like expecting Santa Claus to come today.

Other OPEC countries, especially in Africa, are even openly behind Putin, not due to the Russian leader’s amazing support or humanitarian rights profile but to existing and growing military and economic links.

The analysis also should recognise that the theoretical production capacity of OPEC and FSU members is still available; the reality is totally different.

At the same time that discussions have been on the possibility of Saudi Arabia and others already hitting their real production ceilings, other OPEC producers are facing increased production issues or even re-emerging civil war.

Options to open up Venezuelan or Iranian oil volumes in the market are far from the table, even though US and Venezuelan officials have discussed the possibility of easing oil sanctions on Venezuela.

The current Iran JCPOA talks are linked to these discussions.

Iran and Russia are close allies. Strengthening Iran will free up resources to Russia in Syria while further destabilising the Middle East, one of the world’s main oil and gas producing regions.

To confront Russia, where it hurts, should be the main message.

The costs can be confronted, as we have shown before. Bringing down the Russian war machine and Putin’s elite is more valuable than taking the car to the beach or supermarket.

Oil and gas will play there too, but this time with even larger opponents than the relatively small Russian economy and power.

Cyril Widdershoven is a geopolitical and energy analyst