How Sanctions Could Affect Russia's Energy Sector

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The US and Europe are relying on the threat of sanctions to deter Russian escalation in Ukraine. US President Joe Biden has a relatively free hand to apply sanctions, and the US’ still-outsized role in the global economy adds bite to Washington’s measures. The dynamic is different in Europe, which relies on Russia for natural gas and oil, and has broader investment ties. In addition, any sanctions require consensus among all 27 members. Below, Energy Intelligence outlines some of the mechanisms that could be enacted in the event of a Russian invasion — and their impact on the energy sector.

Block Nord Stream 2: Even before the crisis, the fate of the 55 billion cubic meter per year pipeline appeared increasingly uncertain. Officials from both the US and the EU are now threatening to block the start-up of Nord Stream 2 in the event of an invasion. The German regulator has yet to finalize the pipe’s certification, and it needs to consult with the European Commission for final approval. That means either Berlin or Brussels could block approval on geopolitical and energy security grounds. The new government in Berlin is reconsidering its previous support, and Chancellor Olaf Scholz has raised the possibility of stopping Nord Stream 2 if Russia invades Ukraine. Foreign Minister Annalena Baerbock indicated Berlin is ready to suffer a high economic price and said there should be “appropriate consequences” for the pipeline if Russia uses energy as a weapon.

Cut off Russia’s access to the dollar, and possibly Swift: Biden last week threatened to boot Russian banks from the US financial system, blocking their access to the US dollar, a maneuver that could complicate Russian energy trade and operations for foreign firms in the country. The administration has reached out recently to oil and gas firms to get a sense of the potential impact of energy sector sanctions, two sources said. For companies with an upstream footprint, blocking sanctions could make everything from funding workaday operations — if done through a blacklisted Russian bank — to getting paid much more difficult.

If dollar access is cut, currency conversions many of which touch the US financial system through so-called U-turn transactions — become very complicated. That means it may not be possible to convert some non-dollar payments for Russian energy imports into rubles within Russia, to pay contractors and vendors. Blocking Russia from using the financial messaging service Swift is meanwhile seen as unlikely, particularly if Washington doesn't impose a full financial embargo. But if it were to happen, payment for Russian oil and gas could still be arranged via third-party banks or financial intermediaries. It would be "difficult but not impossible," said one trading source.

Limit Russian energy exports: So far, this does not seem to be on the table. To the contrary, US officials this week briefed reporters on contingency plans for a scenario in which Moscow cuts off energy supplies in retaliation for Western financial sanctions. The Biden administration has been deeply concerned over energy supplies in the last six months, and a key worry in the Ukraine crisis has been ensuring European countries have adequate natural gas supplies. Still, Washington’s sanctions have severely restricted both Iranian and Venezuelan crude exports to the US and elsewhere. Russia plays a much larger role in energy markets, but Washington in the past has used waivers and exemptions to keep some Iranian oil flowing.

On the European side, all financial and economic measures imposed on Iran at the height of EU sanctions in 2012-13 are “legally and technically” possible to impose on Russia, according to David O’Sullivan, at law firm Steptoe & Johnson and former EU ambassador to the US. This could even include a ban on Russian oil and gas exports. But there are not currently serious discussions on the topic. “The limit is defined by the economic pain and the risk that by escalating energy-related sanctions, we politicize energy supplies, which is what [Brussels] has always told Russia not to do,” O’Sullivan said.

Hit future Russian development: Washington sanctions imposed after the 2014 annexation of Crimea limited US firms’ participation in shale, deepwater and Arctic developments — with Exxon Mobil forced to withdraw. Europe imposed similar measures but with more flexibility. US lawmakers are already considering legislation that could target upstream oil and gas development more generally.

Make operations harder for Russian energy firms: The US, for example, could target Gazprom as it did state-controlled Rosneft in 2014, limiting its ability to raise financing but with a mind to keeping gas flowing. It is technically possible that the EU could escalate by freezing Gazprom assets in Europe or targeting Gazprom officials. But in practice there is little European appetite to further disrupt relations with Gazprom. To target the company, there would have to be a link between the potential Ukrainian invasion and the Russian gas exporter, a former European official said.

It is more likely Brussels would accelerate the ongoing investigation into Gazprom’s alleged manipulation of the gas market, he added. If it is proven that Gazprom restricted gas flow for political means or to pressure Europe to approve Nord Stream 2, then the European Commission could fine the exporter. Threatened fines in an earlier antitrust case, settled in 2018, stretched to up to 10% of Gazprom’s global turnover.

Limit Russian access to energy sector technology: US officials have repeatedly talked about wielding export controls that would limit Russian access to US-sourced technology. The focus has been on high-tech sectors, with a senior US official specifically mentioning artificial intelligence, quantum computing, defense and aerospace on Tuesday. But Russia’s refining sector relies on imported catalysts and sources US technologies from Exxon and Chevron, according to the companies. Russia has tried to wean itself off of imports in recent years, but the energy sector could be vulnerable — if Washington decides it’s worth the risk of going after operations.

Blacklist government officials: Biden said Tuesday Putin could be sanctioned in the incidence of an invasion, something being contemplated in Congress. Sanctioning high-level Russians associated with Putin — a tactic used by Washington in the past — seems to be beside the point today. “The gradualism of the past is out,” a senior US official said Tuesday.

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