“Don’t sanction Russia’s oil: tax it,” says ex-Naftogaz chief Kobolyev

“Don’t sanction Russia’s oil: tax it,” says ex-Naftogaz chief Kobolyev
Sanctions on Russian oil arn't working, so why not tax it instead, Ukrainian national gas company's former boss argues. Europe already has robust anti-trust legislation and institutions that can do the job. / bne IntelliNews
By Ben Aris in Berlin October 25, 2023

Sanctions on Russia’s oil exports aren’t working. Russia has found too many partners in the global south that are willing to process or re-export its oil, and Moscow has too many ships in its shadow fleet that can operate outside of the sanctions regime to make it effective. As bne IntelliNews recently reported, oil sanctions are a spent cannon.

Then why not tax the oil instead using the well-established and robust international anti-trust mechanism that already exist, suggested Andriy Kobolyev, the former head of Ukraine’s national gas company Naftogaz, speaking at an energy roundtable in Berlin from Kyiv by video link on October 24.

“The EU is winning the energy war with Russia, but the war is not over yet,” said Kobolyev. “European governments have a very efficient instrument in the form of its anti-trust institutions. This is not a sanction but can apply financial consequences like taxes on Russian oil and gas. If there is Russian oil and gas in the mix then you can tax it and reduce its appeal.”

Russian oil and gas are being still being pumped into the EU by various back-door deals, such as Russian exports of crude that are refined in India and then sold in Europe, or the 10bn cubic metres (bcm) gas supply deal European Commission President Ursula von der Leyen signed last July with President of Azerbaijan Ilham Aliyev, who is importing the same 10bcm from Russia to supply his domestic market.

“How can European companies playing by the rules and refusing to buy cheap gas from Russia compete with those that are ignoring the sanctions. They are operating at a commercial disadvantage. By taxing the Russian gas you can level the playing field and make these sort of dodgy deals unappealing.”

Kobolyev points to the fact that exactly these anti-trust rules were used in the past against Ukrainian metals and fertilisers that were being produced using below-market price Russian gas and then exported for huge profits to Western markets. Likewise, there used to be special duties levelled on Russian goods in the 1990s for similar reasons as Russia was deemed not to be a “market economy” by subsidising its industry with very cheap gas. And these penalties worked very well.

The anti-trust laws and mechanisms are already in place and well tried and tested, argued Kobolyev.

“If the EU anti-trust laws can be used to go after Google or Microsoft and fine them, why can’t the same mechanism be used against a country?” asked Kobolyev.

Another advantage of using the anti-trust legislation is that it changes the narrative surrounding sanctions from one of punishment to simply improving transparency.

“Anti-trust is not about punishing anyone for breaking rules. It is about protecting honest companies in a normal and transparent way,” says Kobolyev.

Russia boxing clever

Kobolyev is now the head of Eney, a US-Ukrainian diversified decarbonisation and clean energy company that builds and invests in projects that advance the energy transition in Ukraine and other Eastern European and Central Asian countries.

“Russia has a long history of fighting wars and there is a pattern. Russia does not start very well, and the first two years are a mess… But they get strong in the process at enormous cost. They use natural selection: throw resources into the fight and those that survive become the fist,” says Kobolyev.

“Russia lost the gas war as they had an unrealistic expectation: they thought that Europe would freeze without Russian gas,” says Kobolyev. “That assumption was incorrect. But now they are coming back with a more sophisticated approach.”

Kobolyev highlighted the Turkish plan to set up a gas hub which is fed by Turkey, Azerbaijan, Iran, Russia and others as well as LNG imports. The idea is that by mixing all these feeds any Russian gas loses its identity and so can be sold on to Europe. “In a hub no one knows exactly who the gas belongs to.”

Turkish national gas company BOTAS is already signing gas supply deals with countries around Europe, without having any significant production of its own.

In its most recent deal, Turkey agreed to take over the supply of almost half of Moldova’s gas use, which has been breaking away from dependence on Russian pipeline supplies, at the end of September.

The deal comes as Moldova strives to implement a domestic gas market liberalisation programme and hand operational management of its gas transmission network to Romania’s Transgaz. Moldova is currently supplied by monopoly importer and distributor Moldovagaz, where Russian gas giant Gazprom holds the controlling interest.

“Working with the vision of the Century of Energy in mind, and aspiring to become the “Energy of Turkey and Europe” by transforming our country into a natural gas trading hub, BOTAS introduced a new European country to the list of countries it exports natural gas,” the Turkish company said on its website. “BOTAS and East Gas Energy Trading, a company which plays an active role in the region and especially in the Moldovan energy market, entered into an agreement for the provision of natural gas by BOTAS to Moldova.”

The gas will be imported via pipelines running through Romania and Bulgaria, rather than from Russia and Ukraine and most of it will be directed to Moldova’s largest power and heat generating plant located in the Russian controlled breakaway region of Transnistria, according to the Turkish national champion. BOTAS will supply Moldova with 2mn cubic meters of natural gas per day, starting on October 1, 2023, East Gas Energy Trading.

However, both the Romanian and Bulgarian pipelines are supplied with the majority of their gas by the TurkStream gas pipeline that is supplied by Russia and came online in January 2020 with a capacity of 31.5bcm. TurkStream is jointly operated by BOTAS and Gazprom.

“BOTAS signed a huge deal to supply Transdniestria, which has never paid for its gas,” says Kobolyev. “BOTAS must have people willing to underwrite the deal; to be ready to hedge for if they will not be paid for the gas. And it is not hard to guess who would be interested in doing that.”

The deal follows several other recent significant natural gas export agreements BOTAS has made for the supply of natural gas via pipelines to Bulgaria, Hungary and Romania, BOTAS said.

All-in-all Turkey has been talking about eventually supplying Europe with up to 100bcm of gas a year via the gas hub, or about two thirds of what Russia used to send pre-war, despite the fact that Turkey’s current own gas production is around 380mn cubic metres a year.