Western sanctions against Moscow have hurt the Russian economy and restricted some energy projects, but they have failed their main objective of persuading President Vladimir Putin to change his policy in Ukraine. It will continue to have a limited impact unless they are made tougher, the Atlantic Council argued in study released last week.
Sergey Aleksashenko, former deputy chairman of the Russian Central Bank and former chairman of Merrill Lynch Russia, said in the report that tighter restrictions could include imposing an embargo on the purchase of crude from Russian state-owned companies, banning Western companies from buying or trading Russian LNG, and making it harder for Russian state-owned companies to use Western technology.
“Even if Russia is able to sell its oil elsewhere, it will cost it more to do so, correspondingly reducing the financial resources of Putin’s regime,” Aleksashenko wrote.
The EU is expected to vote this month on renewing sanctions that expire January 31. US president-elect Donald Trump will then be able to decide whether to sign executive orders extending sanctions in March and again next summer.
But uncertainty is building on both sides of the Atlantic. Trump repeatedly praised Putin during the US elections and urged closer cooperation on geopolitical issues like ISIS. French center-right presidential candidate Francois Fillon has called for lifting the sanctions and partnering with Russia to fight immigration and terrorism.
The energy sector sanctions prevent Western companies from providing technology for Arctic, deepwater or shale oil exploration and production. This measure froze six major joint ventures that Western producers ExxonMobil, Total and Shell were pursuing with Russian companies. The restrictions took a costly toll on the joint ventures, with ExxonMobil CEO estimating the hit to its plans at $1 billion.
And yet Russian oil production has not suffered. Output rose 147,222 b/d from 2014 to 10.73 million b/d in 2015, despite an International Energy Agency estimate that it would fall 80,000 b/d. Growth has continued this year, averaging 10.91 million b/d from January-October, S&P Global Platts has reported.
Output grew despite sanctions
Russia’s deputy energy minister Kirill Molodtsov said November 9 that production has the potential to grow to 11.15 million-11.25 million b/d by 2020.
“Russian companies have benefited from the ruble devaluation and managed to ramp up production and exports each quarter since 2014,” Aleksashenko said.
At the same time, Russian refiners have made significant investments to increase refining depth — a measure of efficiency used mostly in Russia — to 75% this year, from 71.5% in 2013, the report said. They aim to reach the EU average of 85% by 2020, which will lead to higher production and more oil product exports.
The sanctions have left plenty of leeway for Russia’s energy sector to find legal workarounds, said Elizabeth Rosenberg, director of the energy, economics and security program at the Center for a New American Security and a former treasury department senior adviser.
“These sanctions were never designed to collapse the Russian economy,” she said. “They’re designed to be narrow and targeted.”
Rosenberg gave the example of the ban on Western assistance in shale development.
“How much of Russian energy production that affects turns on how you understand that term,” she said of shale. “In fact, the way it is defined is very narrow and it could have been defined in a much broader way, which would have had a much bigger effect on Russian energy production.”
So will the US and EU renew these sanctions before they expire early next year? Rosenberg and other sanctions experts who helped the Atlantic Council roll out Aleksashenko’s report predicted they would.
John Herbst, a US diplomat for 31 years, former ambassador to Ukraine and now director of the Atlantic Council’s Eurasia program, said many signs point to the US keeping up pressure on Russia: bipartisan motivation within Congress to enact legislation if needed, Trump’s national security team, and the fact that the issue is of no real importance to the success of Trump’s presidency but could get in the way of its success if things go sour.
Herbst also brushed off predictions that Trump would cave in to Putin’s demands out of an affinity for the Russian leader.
“Keep in mind that he fancies himself a dealmaker,” he said. “What type of triumph is that for Trump the dealmaker?”
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