US vows to maintain pressure on Russian energy sector for decades to come

US vows to maintain pressure on Russian energy sector for decades to come
Senior US diplomat says US ambition is to halve revenues by 2030 that Russia makes from exporting oil and gas, so as to deny it the financial muscle to launch further military ventures. / bne IntelliNews
By Newsbase December 6, 2023

The US ambition is to halve Russia’s revenues from oil and gas by the end of the decade, a senior US diplomat told The Financial Times last week, while adding that Western sanctions on Moscow would need to be continued “for years to come.”

The comment by Geoffrey Pyatt, US Assistant Secretary of State for Energy Resources, would seem to negate hopes of near-term rapprochement in relations between the West and Russia, even if there was a peace deal or ceasefire reached to end the conflict in Ukraine. Instead, Pyatt told the FT that those sanctions must be maintained so that Moscow can never again launch such an invasion on one of its neighbours. He also implied that that peace deal is unlikely to materialise in the near term.

“This is something that we’re going to have to stick to for years to come, as long as Putin persists in this war,” Pyatt, formerly the US ambassador to Ukraine and Greece, told the newspaper.

Russian natural gas exports have plummeted as a result of political fallout from the war, but not as a result of Western sanctions or any other efforts by the US. Primarily, that political fallout has meant the Kremlin cutting pipeline gas exports to Europe in an attempt to force EU governments to roll back their support for Ukraine. Russian pipeline gas flow to the continent is now at around 10-15% of the pre-war level. 

In the long term, Russia may be able to offset this to a limited decree with increased exports to Turkey and other countries in the Former Soviet Union, but “limited” must be stressed. Longer term, Russia is counting on the development of the Power of Siberia 2 pipeline to China, but flow via this route is unlikely to reach a meaningful level until post-2030. Meanwhile, Russia’s LNG ambitions have been undermined by a lack of access to Western technology, equipment and expertise as a result of sanctions, though this does not significantly affect already-operational plants such as Novatek’s 17mn tonne per year (tpy) Yamal LNG facility.


Russian oil revenues stay firm

Regarding oil, the story is different. The West has actively sought to reduce purchases of Russian oil, with the EU+G7 banning most imports from the country and imposing a $60 per barrel price cap on supplies sold anywhere. The cap works by preventing Western companies from providing shipping, insurance or any other services for Russian oil cargoes sold at a price above the threshold. Similar measures have been put in place targeting Russian petroleum product exports.

While Western leaders initially hailed the price caps and embargoes as a success, those voices have got quieter as evidence continues to mount that they have failed to significantly curb Russian revenues. Russia has responded to the embargoes by simply diverting oil supplies to non-Western-aligned markets such as India and China. Moscow has also successfully found alternatives to Western providers of services for cargoes.

This has in part involved the Kremlin developing a new network of traders and vessels in order to circumvent the sanctions and continuing selling oil to buyers at market prices. A lot of this oil is now transported to markets via a “shadow fleet” of ships, whose true ownership is hard to determine, making it difficult to target them with sanctions. But some oil is still delivered via Western-owned vessels covered by Western insurance.

This said, the sanctions regime has still taken a toll, forcing Russia to pay additional costs for every barrel that it exports in order to ensure its export levels remain robust.


The outlook ahead

Over the longer term, the International Energy Agency (IEA) has forecast that Russian oil exports could drop by as much as 40-50% by 2030 if Western sanctions on the Russian energy sector are maintained.

“We’re going to do everything we can to help make that true,” Pyatt said. “The goal of these sanctions is to change Russia’s behaviour and to ensure that Putin is not in a position, whenever some kind of peace is achieved . . . to use three or four years to rearm and prepare himself and prepare his military for stage three of the Ukraine invasion,” he added.

In the meantime, Washington is considering “ways to make that shadow fleet less effective.” In October, the US placed sanctions on two companies found to be violating the price cap – its first act of enforcing the rules. There are expectations that many more companies could also be targeted. Washington also imposed sanctions in November on Novatek’s Arctic LNG-2 project, which is weeks away from starting up production. It is unclear whether its launch schedule will be affected by the move.

“Thwarting Russia’s future revenue” is as crucial as targeting its current finances, Pyatt said. “That has enormous geopolitical implications in terms of how the Kremlin is able to behave internationally and Russia’s ability both to use its energy as a strategic asset but also the Kremlin’s ability to continue engaging in revanchism against its neighbours.”

That would appear to rule out any prospect of sanctions being removed, at least according to Washington’s current thinking. However, the 2024 US presidential elections could result in a shift in policy. Donald Trump has notably said that if he was elected, he would end the war in Ukraine “in one day.” That could mean making concessions to Russia – including the lifting of some sanctions.

This said, sanctions notoriously can be introduced very quickly but take a very long time to remove, even after political relations between countries have recovered. And the US has clear economic incentives to keep the restrictions in place. After all, it is the country that has gained the most from Europe’s loss of Russian pipeline gas, greatly expanding US LNG exports to the continent to replace them. The US has also gained less directly by the relocating of some manufacturing from Europe to the US as a result of high gas prices.

But another question is whether any amount of sanctions can really make a significant difference, in light of Russia’s ingenuity so far in circumventing them. Decades of sanctions on Iran, for example, have not prevented the country’s crude from continuing to reach markets.