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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