The Uncomfortable Truth About Sanctioning Russia, It Would Hurt West’s Struggling Economies – Oilprice.com

  • Russia’s decision to recognize the independence of two cities in Ukraine and send troops over the border has triggered a slew of sanctions from the West.
  • These sanctions include the suspension of the certification of Nord Stream 2 and the freezing of assets associated with some banks and wealthy individuals.
  • The reason this first round of sanctions is relatively light is two-fold, the West wants to maintain some leverage over Russia and has very limited options.
This week, Germany’s Chancellor Olaf Sholz ordered the suspension of the certification process for Nord Stream 2, the Russian gas pipeline that would’ve significantly boosted the supply of Russian gas to Germany.

The move came in response to Russia’s decision to recognize the two breakaway Ukrainian regions of Luhansk and Donetsk as independent republics and following the decision to send Russian troops there, which the Kremlin claimed was for peacekeeping purposes.

All EU governments, the UK, and the United States denounced the move and threatened sanctions. The UK and the U.S. later declared some, but, oddly enough, none of the sanctions targeted Russia’s massive energy industry.

The UK, in its sanction drive, froze the assets of five Russian banks and three Russian individuals. The UK parliament also said it would target with sanctions the Russian MPs who voted in favor of the recognition of Luhansk and Donetsk and said it would ban British companies from doing business in the two regions. The EU targeted politicians with punitive action.

U.S. sanctions, as announced by President Joe Biden, include putting two big Russian banks and what he termed Russian elites and their families on the U.S. Specially Designated Nationals List, which effectively cuts off access of these individuals to the U.S. financial system.

The other target was Russian sovereign debt. As Biden told reporters on Tuesday, the sanctions against Moscow basically prevent it from borrowing abroad—a move that sent shock waves across the debt trading industry.

So, apart from Sholz’s suspension of Nord Stream 2, not a single sanction shot was fired against Russia’s energy or commodity industry. It is highly likely that such sanctions are on the agenda for later. But given the pain such sanctions are going to inflict on European countries and maybe even the United States itself, they might become a last resort.

For starters, the suspension of Nord Stream 2 will be a lot more painful for Germany than for Russia if the pipeline remains suspended over the longer term. The point of Nord Stream 2 was to increase gas flows to Germany as the country shuts down its nuclear and coal power plants. So if there is no pipeline, Germany would have to replace the cheap pipeline gas with costlier LNG.

As for Russia’s pain, Gazprom recently sealed a deal with China to double the capacity of its Power of Siberia gas pipeline that delivers gas to northern China. Over the short term, the stranding of the $12-billion Nord Stream 2 project would be unpleasant, but it won’t be the end of Gazprom.

But why did nobody sanction Russian oil or gas or metals? First, there are a lot of big, important Western companies working in Russian oil and gas and metals. Second, Russia is a major global commodity supplier and sanctions would disrupt an already shaken global economy.

Shell, BP, and Exxon are the biggest oil majors with Russian businesses. BP is the most intimately linked to Moscow, with a 25-percent stake in state oil major Rosneft. Commodity trading leaders including Vitol, Glencore, and Trafigura are also among Moscow’s business partners, the Financial Times wrote in an overview of the implications that Western sanctions could have on Russia’s economy and on its partners.

“Extensive sanctions would be really problematic for the energy sector, even if they don’t directly target exports,” the FT quoted the head of political risk at GPW, a consultancy, as saying.

The least that these Western companies could expect in the event of sanctions targeting their sectors would be “to down tools while they worked out their exposure,” Livia Paggi also told the FT. The most, judging by how sanctions unfolded in Venezuela, would be to leave the country—something that BP, for one, would be loathed to do given its pretty lucrative participation in Rosneft.

Reuters published a factbox about Russia’s weight in international commodity trade this week, according to which, as of last year, Russia supplied some 6 percent of the world’s aluminum, 4 percent of the world’s cobalt, and 3.5 percent of the world’s copper.

Nornickel, the metals giant, is the world’s largest nickel miner, supplying 7 percent of global output but also the world’s largest palladium miner and one of the top platinum miners.

That’s not all, either, because Russia also produces 4 percent of global steel output and a tenth of global gold output. Sanctions against its mining industry would, in all likelihood, lead to even higher commodity prices.

Yet besides metals—and oil and gas, which are the most obvious and most problematic sanction targets—Russia is also a major producer of fertilizers, accounting for 13 percent of the global total. It is also, critically, the world’s largest producer of wheat.

What all this means is that for all the sanction threats the U.S., the UK, and the EU have considered in the past couple of months, their hands are, to a pretty significant extent, tied. Unless, of course, Washington, London, and Brussels are ready and willing to add more price pain for industries they are prioritizing in their economic plans, such as renewable energy and EV manufacturing.

Read More

Oilprice.com

Leave a Reply