Russian oil major Lukoil said it would sell its foreign assets in a press release yesterday after it was hit with US oil sanctions.

So far, the new US oil sanctions look like the strongest yet – a lot stronger than the Biden administration “toughest oil sanctions ever” released in January this year. Those sanctions hit a bunch of shadow fleet tankers and saw Russia oil exports fall by 15% as a result.

In general, the US has changed its tactics. It went from targeting sectors, to the strangulation sanctions that target individual tankers, companies and banks. That works much better and has scored points, albeit temporarily until the other side finds a way of wiggling out from under the new restrictions.

EU gas

The EU is doing less well as most of its sanctions are ineffective. Brussels has just passed the nineteenth sanctions package, but the EU sanctions have done more damage to Europe than Russia thanks to a boomerang effect and constantly come with loopholes and calve outs: Hungary and Slovakia’s exemptions from the 2022 twin EU oil sanctions are a classic example.

The new EU package also targets more shadow fleet tankers and a total ban on Russian LNG imports has also been moved up to January 1, 2027. But while that sounds tough, in reality the EU remains Russia’s best customer for fuel. The EU currently imports 50% of Russian LNG, China 22%, and Japan 18%. The EU is also the largest buyer of pipeline gas from Russia (35%), followed by China (30%) and Turkey (29%). Meanwhile, despite US sanctions, Moscow has managed to export LNG from the Arctic LNG 2 project, with China serving as an intermediary.

The problem is, as we have reported, Europe remains addicted to Russian gas. However, Brussels has been investing heavily into LNG. Germany hired a bunch of floating LNG terminals, as it had none before the war, and is building its first land-based permanent terminals at Wilhelmshaven, Brunsbüttel, and Stade, which will all come online in the next two years.

All-in-all, European Commission President Ursula von der Leyen says that the EU currently has some 200bcm of LNG import capacity and will bring another 70bcm online in the next year. The idea is that this extra capacity will be enough to reorientate away from Russian gas to somewhere else. At the same time both the US and Qatar have projects in the works that will come online next year that will increase the supply of LNG, so the new Russian LNG sanctions could be made to work.

Whack-a-mole

Approximately a third of Russian oil exports are at risk from Trump’s oil sanctions, and Greek tanker companies in particular – that make up about a fifth of the so-called “shadow fleet” – have begun refusing to work with Russian oil firms due to US sanctions.

The idea of the “shadow fleet” that is made up of “old and out of date” tankers is a myth that has emerged as part of the anti-Russian narrative. In reality modern, young Greek tankers carried 10-20mn barrels of Russian oil monthly and are a key part of the Russian fleet – our ships are working hard for the Russian and Trump’s sanctions have in effect targeted EU ships, as well as Russian ones.

But Greek exports have already sharply declined as October draws to an end. Russia’s open and legal use of EU-registered and -regulated Greek tankers to transport its oil is another gaping hole in the sanctions regime.

Like Biden’s January sanctions, these Trump sanctions will have a negative effect, but it won’t last. Everyone is already looking for workarounds and they will find them. It typically takes several months, but it’s the whack-a-mole problem: to truly sanction Russian oil exports, you have to sanction the entire global energy market and control everything. It’s simply too big and complicated so targeting any bit will simply drive the business to find a route that is not blocked.

Of course, the US is well aware of this and happy about it. Trump gets to look tough and creates a new card to play in his negotiations with Putin over minerals deals, but at the same time he avoids causing a price spike by actually taking 4.4mbpd off the market. The idea of Republicans going into the mid-term elections next summer with oil prices at record levels is anathema and they simply won’t allow that.

The bottom line is cutting Europe off from Russian oil and gas completely makes no sense as all that will happen is the EU will create a new dependency on American LNG. The point was to break Europe’s dependency on Russian gas which used to make up about 40% of the mix. You don’t need to reduce it to zero to do that. 15% will do as you can then swap to, say, US LNG if the Kremlin tries to use energy imports as a weapon. The key point is piped gas is way cheaper than LNG and Europe is deindustrialising as a result of a doubling of energy costs thanks to the change to LNG. With 15% Europe will again enjoy cheap energy and also turn the geopolitical table on Russia: cutting Russia off from the market will become more painful for Moscow than Brussels so it’s the EU that gets an energy level, not the Kremlin.

That’s the economic argument. The political argument – don’t give Russia any money to pay for the war – has primacy at the moment. You can do this, but you have to be honest with your citizens and explain to them that this comes with a big drop in the standard of living in Europe, and no one is talking about that other than the far-right all across Europe, who are hammering the point home to great effect.

When VDL met with US President Donald Trump in March she agreed to triple imports of US gas and oil to €750bn over three years in a deal that some analysts called delusional. To be blunt, under Trump, America is no longer Europe’s friend. He is determined to wring as much money out of his “partners” as possible and screw their national interests – as per the one-sided 15% tariffs on EU exports to the US – and screw the environment in the process. US production and exports of hydrocarbons are a’soaring as the planet is a’warning: hurricane Melissa is about to Jamaica and has escalated into a Category 5 storm, the most powerful ever to hit the island paradise.

Lukoil caught in the middle

In all this Lukoil is struggling to cope. It has already been forced to sell its refinery in Sicily in 2023 and now it has a couple of other big refineries in Europe that it plans to dump.

I used to go and see them regularly when I lived in Moscow as the Daily Telegraph building was not far from the corporate HQ at Chistye Prudy on the Boulevard Ring road. It is privately owned by Vagit Alekperov, a dyed in the wool oilman, who was the former Minister of the Oil and Gas Industry of the Soviet Union before setting Lukoil up.

The Lukoil executives were constantly terrified of being taken over by the Kremlin that was slowly renationalising all the oil assets after the landgrab by the oligarchs in the 1990s: Mikhail Khodorkovsky’s capture of what became Yukos, and Roman Abramovich and Boris Berezovsky’s Sibneft being the leading examples.

Alekperov is not an oligarch, although he is super rich of course. He didn’t play any of the government connections games that made the others rich. He didn’t participate in Yeltsin’s notorious loans-for-shares scheme in 1995 where the oligarchs robbed Russia for its industrial crown jewels. Lukoil was already up and running by that time.

Lukoil has been working hard all these years and providing useful services to Europe in general where it has several important refineries and a large network of petrol stations amongst other things. It’s a professionally and well-run oil company (with Soviet legacy quirks) that was listed in Frankfurt and on the LSE until the war started.

Indeed, the Lukoil executives told me they stayed as far away from politics as they possibly could, although the company’s size and importance to the sector was such it was impossible to cut themselves off completely. One of the quirks of this anxiety was the whole Lukoil building was cloaked in an electronic jamming net so your mobile phone doesn’t work inside to prevent spying. That meant it was really hard to get hold of anyone there. No one picks up the phone in Russia. You need people’s mobile phone numbers to get anything done.

The irony of the US sanctions is Alekperov has been caught out in the end after all; not by the Kremlin, which amazingly left Lukoil alone for three decades, but by the Trump administration. Of course, the goal here is to hurt the Russian budget, not play sides by deciding who are the good guys in the Russian oil industry and who are the bad ones.

As an aside it should be pointed out that Igor Sechin who runs the state-owned Rosneft, which was also sanctioned, is absolutely fair game in my book. Rosneft became Russia’s biggest oil company after the state expropriated Khodorkovsky’s Yukos assets in 2003. Sechin is also Russian President Vladimir Putin’s former deputy when they were both still in St Petersburg and a vicious empire-builder. He trapped and had jailed the deputy Economics Minister Aleksei Ulyukayev on bribery charges for trying to block Sechin’s Bashneft takeover plans. Sechin simply defied a court order to testify as a key witness at the hearing as the man who actually handed Ulyukayev the bag of “sausages.”

I met Ulyukayev many times and he is a very nice man; one of the good guys in the Russian administration that was trying to make a change for the better. But he ended up in a Siberian prison at the end of his career, although he was paroled after six years and released in 2022. He was my neighbour on Mosfilmovskaya and lived in a nice apartment in a new building, but by Russian senior official standards he lived in very modest circumstances.

 

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