Western Energy Sanctions against Russia: The Next Steps
The West must consistently punish sanction violations, lower the price ceiling for Russian oil and make itself independent of the Russian nuclear industry — Sergiy Petukhov on the effect and future of sanctions against Russia.
The Russian aggression against Ukraine has global dimensions, one of them being a hybrid attack against European energy security. While the Russian army started bombing peaceful Ukrainian cities on Feb 24, 2022, the Kremlin continued its hybrid warfare against Europe with the aim of undermining EU support for Ukraine and trying to divide the Union.
Gazprom decided to rescind its gas supply contracts to European gas suppliers and hoped that Europe would “freeze” during the winter. The Russian propaganda channel RT even aired a commercial, where an impoverished European family had to cook their hamster to still their hunger.
The Kremlin’s plan did not work out
The abrupt cutting of gas supply clearly aimed at destabilizing the European energy market. Russia hoped that gas prices of European households would skyrocket, and the industry would be forced into rationing. Russia expected that that combined effect would lead to a great uproar among citizens and business in the EU and weather down the willingness to support Ukraine. As we know, that did not work.
Europe proved to be resilient and remained united in the face of Russian aggression. However, now is a good opportunity to evaluate the effectiveness of the EU’s response in the energy sphere and its preparedness for any future Russian actions.
Mutual dependence on energy supply through gas and oil pipelines has long been considered a pillar of EU security in its relations with Russia. Trade was seen as a bridge that would not only stabilize these relations but also lead to the democratization of Russia. A concept known as “Wandel durch Handel”. This concept proved to be wrong, at the latest when Putin decided to break it.
Decline in Russian revenues from energy exports
Russia’s budget income from energy exports in Jan-Feb 2023 decreased by 46%, which is a significant blow to Kremlin’s ability to finance its military spendings. Even decreasing its social expenditures would not be enough to balance the budget without decreasing its military spendings. While Western oil sanctions only became effective in December, they already have a powerful impact. If they would have been agreed and introduced right after Feb. 24, 2022, Russia would be much weaker already and maybe forced to negotiate itself out of the war.
However, European dependence on Russian energy prevented sooner EU sanctions. As a result, in 2022 Russia earned more than $200 billion through energy exports and increased its production by 2%. European consumers paid a significant part of this amount. The Kremlin used this money to finance its war in Ukraine, quell opposition within Russia and spread its propaganda and fake news around the world.
Lower the price cap for Russian oil
The introduction of the price cap on oil and oil products from Russia is an effective measure to decrease Russian profits from the international sale of its fossils, while ensuring that the same amount of Russian oil still reaches international markets. Moving cautiously, Western governments made sure that sanctions would not send shockwaves to the global economy.
Now is the time to decrease the price cap further to ensure Russia does not profit from international sales but rather only covers its production costs. Apparently, average production costs for oil in Russia are about USD40 per Barell. Therefore, with the current price cap Russia can still make profit. Lowering the price cap to USD50 in March 2023 is feasible. This would be a strong signal to Russia’s government that it cannot rely on energy exports to finance its war against Ukraine.
The current sanctions against Russia have no precedence in history in their number and extent. Never has a country with the size of Russia been subjected to sanctions, which aim at excluding it from Western technology, finance markets and international trade.
Russia has successfully circumvented sanctions in the past
What we have learned from the last 9 years (the first sanctions were introduced in 2014 after the annexation of Crimea and attacks on Donbas) is that Russia has become a skillful sanctions evader. Assets are transferred to newly established companies in obscure jurisdictions. Murky deals through third parties ensure supply of necessary tools and spare parts. Russians are ready to double the price for things they need or lower the price of their raw materials to lure customers and contractors into breaching sanctions.
Secondary sanctions are crucial
While not all of Russia’s trade with third countries can be controlled directly, the EU and G‑7 have effective tools to enforce sanction regimes. Be it through regulating financing or insurance services, or through agreements that are beneficial for both the EU and G7 as well as for third countries, they can make sure that no one abuses their position to help Russia evade sanctions.
Secondary sanctions – sanctioning those who help circumventing primary sanctions – is a powerful tool that has not been properly used yet. For example, Russian oil and oil products can be mixed with products from other countries and then sold in the EU market under a new disguised origin. A real danger of losing a lucrative EU market due to secondary sanctions will discourage businesses from these practices.
The EU must consistently punish a violation of sanctions
Most importantly, violations of sanctions are a crime. Hence, violators must be prosecuted, be it European companies or individuals or third countries. Enforcement has long been a weak part of EU sanctions, mostly due to the complexity of investigation and the unwillingness of European countries to prosecute their own companies and citizens. That control of implementation lays with the Member States and not the EU, additionally hinders enforcement. This should be changed. Best practice examples of sanction enforcement should be analyzed and applied by all EU countries.
Sanctions against the Russian nuclear industry
Russia has seized control over Ukraine’s nuclear stations Chernobyl and Zaporizhzhia, the latter being the biggest operating station of its kind in Europe. In direct violation of the international humanitarian law, which mandates that armed activities should not be pursued in or around nuclear stations, Russia made them a cornerstone of its occupation plan for Ukraine. Not only were they taken under control, but heavy weapons were stationed there, and Ukrainian personnel were subjected to threats and inhuman treatment.
Rosatom, a Russian state-owned monopolist in nuclear energy production and building of nuclear plants, played an integral role in this. Its personnel were shipped to Ukraine to replace local staff which refused to obey to Russian orders.
The dependence on Rosatom
Rosatom has been active around the world and within the EU. It possesses an exclusive technology which the EU dependents on. It is only a question of time until the Kremlin will use it against Western countries. Russia has 8% of the world’s uranium resources, and even more crucial, the world relies on Russian uranium enrichment. In 2021, Rosatom’s subsidiaries provided 31% of nuclear fuel enrichment services to EU’s nuclear companies and 28% to the United States.
EU sanctions on Russian nuclear industry were blocked recently by those member states who have strategic cooperations with Rosatom. The sanctions are mainly opposed by Hungary, as it is not only heavily dependent on energy supply from Rosatom’s nuclear plants but also issued Rosatom a construction permit for two new power units in Hungary. Consequently, the EU needs to rethink its nuclear strategy and ensure that it is in line with the current security threats from Russia.
The first steps could entail individual sanctions against key Rosatom officials and employees who have interfered at Ukrainian NPP’s and taken actions endangering nuclear safety, followed by a supply ban on raw uranium from Russia.
Europe has freed itself from dependence on Russian energy imports
The Russian hybrid energy war against Europe shows how dependent the EU was on Russian oil and gas supply. Contrary to its own policy of diversification, some EU countries became critically dependent on Russian supplies. Last winter became a turning point where the EU managed to overcome its great dependency, though at great costs.
Energy transition in Europe and knowledge transfer to the global South
Now Europe must accelerate its transition to a green economy. That would make the EU less reliable on Russian energy and will ensure that the exclusion of Russian oil and gas from the global market will not lead to skyrocketing prices, which would harm developing countries, who still rely on oil imports. Sharing green technologies with developing countries will make these countries more resilient and sustainable and would de-couple their foreign policy from authoritarian oil-exporting regimes.
Overall, the green transition will not only help tackle global climate change but will make the world safer and more just by decreasing economic power of oil rich regimes.
Security guarantees for Ukraine
In the mid-term, future Russian gas and oil supply should come exclusively through Ukraine, including the EU negotiating a purchase at the Russian-Ukrainian border and making use of the Ukrainian underground storage capacity. This would be an important security guarantee to Ukraine against any future Russian attacks.
A combination of the diversification of EU imports of energy, the price-cap on Russian oil and gas exports and maintaining strong sanctions, should force Russia to stop manipulating markets for its political goals.
Even if the sanctions alone cannot make Russia withdraw its troops from Ukraine, they can seriously undermine its capacity to finance the war and help Ukraine win it.
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