As U.S. and European officials began imposing sanctions in their face-off with Russia over Ukraine, Vladimir Putin’s $160 billion in oil and natural gas exports may be his most potent weapon to limit punitive measures.
The U.S. and its European allies have few levers to deter Putin even as they warn Russia not to annex Crimea after a referendum in Ukraine’s southern region yesterday. The European Union today imposed travel-visa bans and assets freezes on 21 individuals and President Barack Obama issued an executive order naming seven Russians for sanctions.
Russia, the world’s largest oil producer, exported $160 billion worth of crude, fuels and gas-based industrial feedstocks to Europe and the U.S. in 2012. While shutting the spigot on Russian energy exports would starve the Moscow government of essential flows of foreign cash, the price may be too high for European consumers and it may not alter Putin’s plans, said Jeff Sahadeo, director of Carleton University’s Institute of European, Russian and Eurasian Studies.
“In the short term, this would be very difficult to do and it’s not clear it would even affect Russian behavior,” Sahadeo said in a phone interview from Ottawa. If the West “puts down the card of energy sanctions, it becomes a question of who blinks first.”
German Chancellor Angela Merkel, leader of the European Union’s biggest economy, said last week her nation is prepared to bear the economic pain that would accompany Russian retaliation to any sanctions.
“If Russia continues to interfere in Ukraine, we stand ready to impose new sanctions,” Obama said in a press conference today.
Analysts from Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley said Europe probably won’t back sanctions that limit flows of Russia’s oil and gas. European members of the Paris-based International Energy Agency imported 32 percent of their raw crude oil, fuels and gas-based chemical feedstocks from Russia in 2012.
Collectively, the EU, Turkey, Norway, Switzerland and the Balkan countries got 30 percent of the natural gas they burned from Russia last year, much of it pumped through pipelines that cross Ukrainian territory, according to the U.S. Energy Department in Washington.
Abstaining from Russian oil and gas would be “off the table” for Europe, said Marc Lanthemann, Eurasia analyst with Stratfor, a geopolitical intelligence company based in Austin, Texas. Europe risks a replay of its failed attempt six years ago to punish the Kremlin for going to war with the Republic of Georgia, when it was unable to impose sanctions after acknowledging its dependence on Russian energy.
“We’re not expecting sanctions with many teeth coming through,” Lanthemann said.
While the ruble, Ukrainian hryvnia and other regional currencies have tumbled as the conflict escalated, global oil markets aren’t reacting to the potential for a sanctions-induced supply disruption.
Brent crude futures traded in London, the benchmark for more than half the world’s oil, traded at $107 a barrel today, a decline from March 3, after Russia’s Parliament approved the use of its military in Ukraine.
U.K. gas for next month, the EU’s benchmark contract traded on ICE Futures Europe, fell 1 percent to 58.44 pence a therm at 2:57 p.m. London time, down from 61.70 pence on March 3.
Crimea, a dominion of Russia and then the Soviet Union for more than two centuries before the Communist empire collapsed in 1991, voted yesterday to join Russia. The plebiscite was called after a popular uprising forced Russian-backed President Viktor Yanukovych to flee the Ukrainian capital of Kiev last month.
“Our partners understand that sanctions are a counterproductive instrument,” Russian Foreign Minister Sergei Lavrov told reporters after meeting with U.S. Secretary of State John Kerry on March 14.
The U.S. and Europeans will likely disagree over any energy sanctions and how much should be curtailed, said Seva Gunitsky, an assistant professor at the University of Toronto’s Munk School of Global Affairs.
“In order to get any traction with sanctions you have to bring the EU in and I think that will be a difficult task because of their dependence on Russian oil and gas resources,” Gunitsky said.
The EU’s bill for Russian oil and gas amounted to $156.5 billion in 2012, 38 times what the U.S. spent for Russian energy, according to the International Trade Centre’s Trade Map, a venture sponsored by the World Trade Organization and the United Nations.
Sanctions that crimp the lifestyles of Putin’s billionaire friends, such as visa restrictions and bank account freezes, might “be more effective and easier for Europe to stomach than sanctions on Russian gas,” Gunitsky said.
And energy sanctions may backfire if cutting off Russian shipments raises prices and triggers a backlash from angry European consumers.
“The sanctions might hurt the current customers of Russia at least as much as they hurt Russia,” said Judith Dwarkin, chief energy economist at ITG Investment Research in Calgary. “It’s a double bind. The European market is very important for Russia and Russia is very important for the European market.”