US-EU sanctions: Why they target Russian energy of tomorrow, not today

New US and EU sanctions on Russia over Ukraine target some of the country’s most important sectors, including energy. But instead of cutting off Russia’s current oil and gas output, the new sanctions target energy technology critical to its future.

Alexei Nikolsky/Presidential Press Service/RIA Novosti/AP
Russian President Vladimir Putin heads the Cabinet meeting in the Novo-Ogaryovo residence, outside Moscow, Russia, Wednesday. The United States and the European Union on Tuesday announced a raft of new sanctions against Russian companies and banks over Moscow’s support for separatists in Ukraine.

New American and European sanctions may not sting Russia as much as some would like – at least not yet.

The US and EU imposed Tuesday an additional round of coordinated limits on trade with Russian financial, arms, and energy sectors. Officials say the so-called “Level 3” sanctions are in response to Russia inability to de-escalate violence in Ukraine. Moscow continues to support pro-Russian separatists, according to European and US officials, arming them with the kind of heavy weaponry used to down Malaysia Airlines Flight 17.

The new sanctions are the broadest yet, targeting companies and sectors vital to the Russian economy. But officials walked a fine line in aiming to crimp Moscow, without the economic impact boomeranging back to hit Brussels, Berlin, London, and beyond.

Russia, after all, produces about 30 percent of the natural gas Europe burns to run its power plants and heat its homes. The country’s state-run oil company, Rosneft, accounts for more than 4 percent of the world’s oil, at a time when violence in Iraq, Libya, and elsewhere threaten global supply.

It’s why this week’s energy sanctions largely sidestep Russia’s current oil and gas output, opting instead to limit energy technology critical to its future.  

“The intention of the oil technology licensing restrictions is not to affect current oil production or Russian sales right now, but it does have and will have a cumulative impact on development of future fields, particularly the exotic fields -- Arctic, deep sea, and shale,” A senior administration official said in a White House background briefing Tuesday. “And the impact of these restrictions will grow over time.”  

Advanced extraction techniques like hydraulic fracturing, horizontal drilling, and ultra-deepwater exploration have unlocked new sources of oil and gas in the US. Russia has made progress on doing the same in Siberia and the Arctic, but it relies on Western firms like BP and ExxonMobil for technology and expertise. This week’s sanctions aim to cut off that transfer of knowledge.  

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That strategy has worked in the past, according to Ruslan Stefanov, director of the economic program at the Center for the Study of Democracy, a public policy institute based in Sofia, Bulgaria. But the impact of technology sanctions is slow, Mr. Stefanov adds, and it could take a decade to feel the full effect.

“In a way its impact depends on Russia's perception as to what the negative consequences will be. And it seems they do not deem it important for the time being,” Stefanov writes via e-mail. “Russia is more resilient, and it has withstood in the past such cut offs, but, nevertheless, the end result is not good for the country and its economic development.”

That doesn’t go far enough for some. The slow drip of European and American sanctions have yet to significantly change the course of a crisis in Ukraine that shows little sign of easing. Many Russian experts seem undeterred by this week’s escalation, as the Monitor's Fred Weir reports from Moscow. Russia’s Foreign Ministry has weighed in, warning Europe that new sanctions will hurt Europeans more than they hurt Russians. BP warned its investors this week that Russian sanctions “could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation.”

If the sanctions really do unnerve Western investors more than they do the Russian elite, some wonder if it’s a strategy worth pursuing at all.

“We have to continue to ask what purpose these sanctions really serve,”  Tim Boersma, an energy-security fellow at the Brookings Institution, a Washington-based think tank, writes via e-mail. “I am still under the impression that we are doing this because 'we have to do something'. To date there is no sign that the Russian calculus has changed one bit because of the sanctions." 

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