Vladimir Putin’s control over $160 billion in oil and natural gas exports may be his most potent weapon in Russia’s face-off with Europe and the U.S. over Ukraine.
As Crimea prepares to vote Sunday on whether to return to Russian control, the U.S. and its European allies have few levers to deter Putin’s Ukrainian venture. Threats of visa bans and asset freezes haven’t rattled the Kremlin thus far — six hours of face-to-face talks between the top U.S. and Russian diplomats ended yesterday without a deal.
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 EU’s biggest economy, said yesterday her nation is prepared to bear the economic pain that would accompany Russian retaliation to any sanctions.
Analysts from Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley have 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. The most likely penalties are financial sanctions against Russian banks and oligarchs.
Crimea, a dominion of Russia and then the Soviet Union for more than two centuries before the Communist empire collapsed in 1991, votes on March 16 on whether to break away from Ukraine. The plebiscite was called after a popular uprising forced Russian-backed President Viktor Yanukovych to flee the Ukrainian capital of Kiev last month.
Ukraine’s central government said Russia already has taken control of the Crimean peninsula and has massed troops along the border. The defense minister for Estonia, another former Soviet possession, warned that Russian military units are gearing up to invade eastern Ukraine, home to a large minority of ethnic Russians.
Russian Foreign Minister Sergei Lavrov said yesterday the nation has no plans to invade eastern Ukraine.
“Our partners understand that sanctions are a counterproductive instrument,” he told reporters after meeting with U.S. Secretary of State John Kerry. A spokesman for the Russian embassy in Washington didn’t immediately respond to a request for comment on potential sanctions.
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, are little changed at about $109 a barrel since the Crimean regional assembly announced the referendum on March 6.
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 European Union’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.
So-called smart sanctions that would crimp the lifestyles of Putin’s billionaire friends, such as international visa restrictions and bank account freezes, might work better, Gunitsky said.
“If they want to put pressure on the leadership or on Putin directly, smart sanctions 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.”