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What might the invasion and incoming sanctions mean for the Russian energy sector?

The war on Ukraine explained: Hear from our experts
Kalina Damianova

PhD candidate at King’s Russia Institute; Teaching Assistant, International Politics of Energy, Department of Political Economy

28 February 2022

The EU has joined the US, UK and other major nations in imposing sanctions on the Russian energy sector in response to Vladimir Putin's invasion of Ukraine. International pressure is already mounting on the Russian economy but what impact are sanctions likely to have in the longer term? Here, KALINA DAMIANOVA examines the sanctions, what they may mean for Russia's dominant energy sector, and the global consequences.

Revenues from oil and gas exports are central to Russia’s budget. Since 2014, Russia’s energy sector has been subject to an international sanctions regime led by the US and the EU. Both the US and the EU, however, have been treating the energy realm with caution.

On the one hand, the oil market is highly interconnected. Thus, any disturbance (or even mere speculations of such) concerning a leading oil producer and exporter, such as Russia, could trigger global turbulence with wide-ranging consequences. Such consequences may include the opposite of the intended ones (e.g., a resource prices spike that benefits Russia financially). On the other hand, despite the EU’s continuous efforts to diversify its gas supplies, its internal divergences on the topic of Russia are still nuanced by some EU member states’ dependence on Russian gas imports. Moreover, Europe’s energy vulnerabilities have been exacerbated further by the current tight gas supply and high prices in the regional energy market environment.

Further sanctions affecting Russia’s LNG and hydrogen initiatives would inevitably challenge Russia’s place on the global energy stage– Kalina Damianova

With the exception of the recent freeze of the Nord Stream 2 – Russia’s direct gas export pipeline to Germany that circumvents Ukraine – so far, the sanctions have aimed at a delayed, rather than an immediate impact on Russia’s energy. In particular, by restricting Russia’s energy actors’ access to exploration technology, foreign capital, services and information exchange and other forms of involvement from Western companies in some of Russia’s technologically demanding energy projects, they have posed challenges to Russia’s potential to increase its energy (especially oil) output. If the West continues to follow a strategy aiming at a delayed impact on Russia’s energy sector development, it might try to further hamper its ability to adapt to the global energy changes by targeting Russia’s liquefied natural gas (LNG) and hydrogen programmes.

It is difficult to monitor and measure the effectiveness of the sanctions on Russia’s energy sector: energy dynamics are sensitive to a wide range of factors, such as resource prices fluctuations, multi-lateral arrangements (e.g., OPEC+) and the global clean energy transition initiatives. Additionally, Russia’s energy sector can suffer from indirect consequences of non-energy sanctions that make doing business with Russian oil and gas risky for shipping and insurance companies.

Nevertheless, in combination with the existing energy market pressures, further sanctions affecting Russia’s LNG and hydrogen initiatives would inevitably challenge Russia’s place on the global energy stage. However, they could also affect the interests of foreign companies involved in Russian LNG projects and hamper Russia’s attempts to transition towards potentially cleaner energy exports, such as hydrogen. 

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Kalina Damianova

Kalina Damianova

PhD Candidate

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