Russian Energy Sector Struggles as U.S., Europe Tighten Sanctions

(The Washington Post) -

A year and a half after the United States and its European allies imposed economic sanctions on Russia’s energy sector, major Russian projects that were to carry oil and natural gas to customers in China, Turkey and Germany have stalled.

And even though the Obama administration is seeking Russia’s cooperation in Syria, there is no sign that it is planning to let up on sanctions that were designed to get Moscow to withdraw from its occupation of Crimea and eastern provinces of Ukraine.

On Tuesday, the Treasury barred business dealings with dozens of individuals and companies in Russia who were allegedly trying to circumvent the earlier economic restrictions. The announcement comes one day after the European Union extended sanctions against Russia for another six months.

The Treasury also imposed sanctions on six individuals in the self-proclaimed People’s Republics of Donetsk and Luhansk in eastern Ukraine, two former officials in the government of ousted Ukrainian President Viktor Yanukovich, and a dozen firms operating in Crimea.

“Today’s steps support the U.S. commitment to seek a diplomatic resolution to the crisis in Ukraine by maintaining our sanctions on Russia,” the Treasury said in a statement. “Those sanctions will not begin to be rolled back until Russia fully implements its commitments under the Minsk Agreements, including the return to Ukraine of control of its side of the international border with Russia.”

The sanctions have coincided with a plunge in oil and gas prices that have hurt the Russian economy. A World Bank update this month said that Russia’s inflation rate is running around 16 percent, meaning that after adjusting for inflation, pensions contracted 4 percent in the past year. Overall, the economy is shrinking with manufacturing off 5.9 percent, retail services down 11.7 percent and fixed capital investment down 5.2 percent, the World Bank said.

To cover its budget, Russia’s federal government has been forced to dip into its Reserve Fund, built up when oil prices were high.

The biggest victim of the energy sector sanctions so far has been a plan for three natural gas pipelines to China. The Russian pivot to China was supposed to open up a major new market for Russia, which currently relies heavily on exports to Europe. Although the deals haven’t been scuttled, they have been postponed, perhaps for years. An increase in worldwide natural gas supplies and liquefied natural gas facilities has cut the global price of natural gas in half during the past year, undermining the rationale for the pipeline.

“The project was always economically challenged to begin with,” said Edward C. Chow, an international energy expert at the Center for Strategic and International Studies. “You need to develop two new technically difficult gas fields in eastern Siberia, then build new long-haul pipelines. And then the price of the commodity went down the month after the deal was struck and the Russian country risk went up.”

Moreover, big Chinese commercial banks that were supposed to provide $25 billion in financing for the project – some in the form of advance payments for the gas – have balked. Many of the Russian companies that were to build large portions of the pipeline are on the U.S. sanctions list, including firms controlled by Gennady Timchenko and the Rotenberg brothers. Any Chinese bank doing business abroad could be harshly punished for dealing with those firms.

Another casualty for Russia’s energy sector has been Moscow’s proposed natural gas pipeline to Turkey, announced by Russian President Putin in December 2014. Like the Chinese pipeline, the Turkstream pipeline had a strategic rationale: It would give Russia a way to cut off gas supplies to Ukraine without cutting supplies to the rest of Europe. Currently, the pipelines through Ukraine are major routes for Russian gas sales to central Europe.

Now the pipeline plans have been killed after Turkey shot down a Russian fighter jet that Ankara alleged was flying over Turkish territory. Russia has responded with sanctions on Turkey, a major trading partner.