Impotent Western Sanctions Fail To Disrupt Russian Energy Exports

Yves here. This post provides an good look at the sanctions against Russia and who has gained and lost from them. The list of collateral damage is longer than you might expect. There’s one casualty that is arguably missing: the US relationship with Germany. While Merkel has stood solidly with the US against Russia, it’s a not insignificant cost to German businesses. Successor governments may think twice about supporting US priorities so loyally. As Michael Hudson pointed out last year:

What is occurring is a radical shift in U.S.-European diplomacy – in a way that according to textbook theory is inherently unstable and unworkable.

Europe has inverted the major textbook premises of how national diplomacy is conducted. Instead of basing this diplomacy on economic and commercial interests, it is subordinating these interests to U.S. control. And as for Europe’s membership in NATO, instead of viewing military policy as an arm of foreign diplomacy, it is subordinating economic diplomacy, trade patterns, gas and oil supplies, export markets for industry and agriculture all to serve NATO’s military ends.

The objective no longer is military security as originally was the logic for NATO. Europe’s economic realignment against Russia threatens to bring military conflict directly into the continent as a result of the proxy war in Ukraine.

It has been said that nations do not have friends or enemies, only national interests. Most of these are economic. But today in Europe, German Chancellor Merkel seems to be ignoring German and other European economic interests. Still obsessed with her hatred of the East German Communist regime, she sees in Russia only an enemy, not an economic market and supplier of raw materials and customer for German manufactures and technology. Likewise, her political love for the United States deems it Europe’s natural friend, without taking into account how its New Cold War policy toward Europe – “Let’s you and Russia fight” – undercuts European continental interests and exacerbates its austerity.

By Andrew Topf, a business journalist and mining reporter, with expertise in the oilfield services and heavy construction industries. Follow him on Twitter @astopf. Originally published at OilPrice

Energy exports from Russia, in the form of coal, oil, natural gas and uranium, continue to flow unimpeded, despite Western efforts to damage the Russian economy for interfering in Ukraine.

In some ways, the sanctions have had the desired effect. But in others, notably the energy trade, they have failed, and in fact it could be argued they have backfired, by hurting the businesses that do business with Russia. Moreover, the sanctions have further isolated Russia from Europe and drawn it closer to alternative energy partners, namely Turkey and China.

To recap, in March of 2014 the United States and the European Union, along with other countries and international organizations, implemented a series of sanctions against individuals and businesses from Russia and Ukraine, in response to the perceived annexation of Crimea, a peninsula in southern Ukraine. Russia retaliated by imposing sanctions of its own, including a ban on food imports from the EU, US, Norway, Canada and Australia.

As the unrest continued into southern and eastern Ukraine, the sanctions were expanded. The first round targeted Russian and Crimean officials seen to have close ties to Russian President Vladimir Putin, with asset freezes and bans on travel. The second round, so-called sectoral sanctions, focused on major businesses and parts of Russia’s financial, energy and military industries. Targets included Rosneft, Transneft and Gazprom.

In December of 2014, US President Obama signed a bill allowing the White House to levy further sanctions against Russia, although no action has yet been taken to introduce them. The new US sanctions would hit Russia’s state-owned energy and defense industries.

It is important to understand what exactly the sanctions apply to and what they exclude, because even a surface analysis shows that Russian energy exports are continuing apace, and in some areas, even increasing.

The first example is coal. Despite sanctions, Russian coal is moving at higher volumes to the European countries most dependent on the cheap fossil fuel for home heating. German coal imports are the highest since 2006, as importers take advantage of a lower ruble and lower oil prices. According to the news site RT, Germany imported over 12 million tonnes of coal from Russia in 2014, despite the country’s reputation as a leader in renewable energy, symbolized through “energiewende”, the much-lauded plan to switch Germany from nuclear power and fossil fuels to renewables. The dirty truth is that Germany gets about half of its electricity from coal, with the other half coming from natural gas and nuclear. About a third of German coal comes from Russia. In addition, the former World War adversaries also trade a lot of natural gas; 25 billion cubic meters per year imported by Germany, to be exact.

Other countries have jumped on the Russian coal train. Poland is the second-biggest consumer of Russian coal behind Germany. Ukraine – whose territory Russian natural gas must cross in order to reach its destination in Europe– has quietly been buying Russian coal, fueled no doubt from constant threats by natgas provider Gazprom to shut off the taps. The latest threat came on Feb. 25. According to RT, Ukraine bought 50,000 tons of Russian coal in December.

Then there’s the United States. As President Obama and Secretary of State John Kerry last year lambasted Russia for supporting pro-separatist rebels in Crimea and eastern Ukraine, and accused the Kremlin of involvement in the shooting down of a Malaysian airliner, a huge coal carrier was crossing the ocean to deliver 40,000 tons of thermal coal to the Schiller Station coal-fired power plant in New Hampshire. Forbes broke down the reasons for the apparent contradiction nicely, stating that for the East Coast, Russian coal is “easy to get and cheaper to ship.” An added advantage: coal from Russia emits less sulfur than US coal, making it easier to comply with environmental regulations.

Many US citizens would also be horrified to learn that a considerable amount of nuclear power produced in the United States comes from Russian uranium, none of which is yet subject to Western sanctions. According to the US government’s National Nuclear Security Administration, about half of the fuel used in American nuclear reactors comes from dismantled Soviet warheads, purchased under the $12-billion “Megatons to Megawatts” program. While that program expired in 2013, Russia continues to work with the United States in supplying enrichment facilities to enrich uranium for use in nuclear power plants as Russia is the world leader in supplying enriched uranium. In 2012 the two countries reached six-year deals to supply over $1 billion worth of reactor fuel to four American utilities, and to provide enrichment services for the US Enrichment Corporation (USEC) for nine years. According to a report by The Jamestown Foundation, “[if] US sanctions extend to include the Russian nuclear industry, one of the biggest losers could well be the US nuclear industry itself.”

Marin Katusa, chief energy investment strategist for Casey Research, agrees that sanctions will have a negative effect on the American economy. Katusa, whose recent book “The Colder War” outlines Vladimir Putin’s strategy for worldwide energy domination, quotes former Texas congressman Ron Paul as saying that “The US government’s decision to apply more sanctions on Russia is a grave mistake and will only escalate an already tense situation, ultimately harming the US itself. While the effect of sanctions on the dollar may not be appreciated in the short term, in the long run these sanctions are just another step toward the dollar’s eventual demise as the world’s reserve currency.”

If there is one area in the energy sphere where sanctions have had an appreciable effect, it’s oil and gas exploration. While current supplies to the West remain unaffected, the sanctions target Russia’s long-term oil and gas operations and future projects. This includes construction of future pipelines, technology used in offshore drilling, and equipment for LNG plants.

Probably the biggest loser so far has been ExxonMobil, which over the past two years has been collaborating with Russia’s largest oil company, Rosneft, to conduct exploration and research in the Black Sea and Arctic Ocean, as well as onshore in western Siberia.

In December, as a result of Western sanctions, the two companies terminated contracts for five service vessels that were to begin operating in the Kara Sea, after ExxonMobil made a billion-barrel discovery last September. In January, ExxonMobil said in its annual report that anti-Russian sanctions have cost the company $1 billion:

“In compliance with the sanctions and all general and specific licenses, prohibited activities involving offshore Russia in the Black Sea, Arctic regions, and onshore western Siberia have been wound down,” the report states.

Geopolitically, sanctions have accelerated Russia’s shift of focus from Europe, its traditional market for oil and gas, to China and Turkey – with the latter being an important conduit for getting gas to Europe while avoiding the Ukraine quagmire, and the former as an important buyer of Russian gas that has blithely ignored Western sanctions.

As proof, consider that last October, Russia and China signed 38 energy, trade and finance agreements, along with a currency swap worth 150 billion Chinese yuan ($25 billion) that assiduously avoids using the US dollar. The agreements ¬- which include a deepening of cooperation between Rosneft and the Chinese National Petroleum Company in building LNG projects – followed a colossal $400-billion deal between the two nations to supply China with Russian gas for the next 30 years.

Indeed the shift from west to east is already occurring. Russian energy data released last fall showed crude supplies to China from January to September rose by almost 45 percent, while shipments to Europe via the Black Sea port of Primorsk fell almost 20 percent, according to Reuters. In a further undermining of Russian sanctions, Chinese credit rating agency Dagong Global in February gave Gazprom its highest AAA rating, allowing the company to place its shares in Hong Kong and expand its investor base in the Asia Pacific region. Western ratings agencies like Moody’s, S&P and Fitch have all downgraded Russia’s sovereign rating to junk or near-junk levels, said IBT Times.

The sanctions have also pushed Russia away from European trade partners and into the arms of Turkey, the largest consumer of Russian gas behind Germany. The long-envisioned South Stream pipeline that would have carried Europe-bound Russian gas underneath the Black Sea through Bulgaria, was abruptly cancelled in December. Instead, the Kremlin announced that a new pipeline, known as Turkish (or Turk) Stream, would run from Russia under the Black Sea to the Turkish town of Kiyikoy, before continuing overland to the Greek border.

The same month, Russian President Putin praised Turkey for refusing to join Western sanctions against Russia over Ukraine, while also announcing a near tripling of trade between the two countries from $32.7 billion to $100 billion. Turkey is able to avoid Western sanctions because it is an EU accession member, not a full member, pointed out. The relationship building came despite Russia’s differences with Turkey over Syria, with Russia supporting Syrian President Bashar al-Assad and Turkey pushing for regime change.

Russian aggression in Ukraine certainly put its Western trading partners in a quagmire. While the stick of sanctions, exacerbated by plunging oil prices, has paid off from a Western point of view in terms of halving the value of the ruble, spiking inflation and causing Russia’s first contraction of GDP in five years, they have also had a boomerang effect. Victims of sanctions and countersanctions include American poultry businesses, which export around $300 million a year worth of chicken to Russia; European businesses that export to Russia; and big oil companies like BP and ExxonMobil that have had their exploration activities curtailed.

An editorial in the Japan Times quotes the chairman of the Association of European Businesses in Russia, as saying that sanctions against Russia could cause 300,000 layoffs in Germany and 100,000 in France. The last word goes to Hungarian Prime Minister Victor Orban, who in the same editorial, states “the sanctions policy pursued by the West causes more harm to us than to Russia. In politics, this is called shooting oneself in the foot.”

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    1. Jack

      5% from solar, and it’s very intermittent. On cloudy days they have to ramp up the natural gas plants to make up for the shortfall. The reality is that fossil fuels aren’t going anywhere anytime soon. Not if we want to maintain our modern industrial civilization. Which we won’t be able to anyway, of course, but that isn’t a doomsday scenario TPTB want to even consider.

      Especially if we rule out nuclear power, which at this point I say we should. It’s too damn dangerous, particularly if all the rumors and claims I hear about the corruption of the regulators and the degree of decades spanning coverups about just how often (and how badly) plants have gone, well, ‘wrong’, are true.

      It’s becoming increasingly clear just how screwed we already are, much less how much more in the hole we get with every passing day.

  1. European Observer

    WHAT Russian aggression in Ukraine? That whole fiasco was initiated and master-minded by the US, remember Nuland’s “F.. the EU”? Russia merely reacted, with remarkably cool restraint. Crocodile tears about the fate of the Crimea are just propaganda – the Crimeans are very lucky that they escaped the ongoing ruin of Ukraine.

  2. vlade

    sanctions aren’t explicitly targeting energy exports. they do target energy sector technolog, equipment and services, but not the product itself.

    china doesn’t have the expertise or technology to do say artic development. and letting chinese develop say siberian stuff would be pretty stupid, given how much china would like to do crimea on parts of siberia.

    sanctions always have economiceffect on both sides, the question is who is hurt more, and it’s russia right now. second question is who is willing to take the pain for longer, and that could well be russia as well, so in long term it well could be that sanctions will turn out to be inefficient.

    so i’m not really sure what is really new or interesting here. the only bit i can see is closer turkey-russia relationship, which is strategically more significant than ukraine (althought less from historical-pride perspective, so could still end up in tears), but that deserves a full article of its own, with sanctions as just one of the drivers.

    1. vlade

      oh, and on the uranium stuff, that’s just a joke, right? us imports about 20% of its urNium from russia, the number was steadily declining (as percentage of imports), uranium is a commodity and russia is far behind australia and canada as the major uranium exporter… so claiming that us nuclear industry heavily depends on russian uranium is, well, bollocks

      1. EmilianoZ

        The author is talking about “enriched uranium” not “uranium”. Russkis do the processing, thereby getting the added value.

        1. vlade

          About slightly less than 40% of enriched U ineeded by us is imported. russia is responsible for about 7% of the total, about the same as uk. after fukushima, the cost of enriched u plummetted, since it’s expensive o stop and restart the centrifuges, so i’m sure there wold be capacity to replace russians.

          my back-of-envelope calcs tell me that impact of russia being out of the u market would be likely swamped by us electricity market volatility. cost of fuel in nuclear plant is about 5% of the cost of output electricity, which is far less than the ralised vol.

      2. guest

        The interesting question is whether Canada, Australia, Niger, etc would be able to compensate right away (with some allowances for probable stocks) the sudden loss of those 20% U coming from Russia?

        1. vlade

          russia mines about 1/5th of aus+can U output. it mines about 1/10th of U mined by kazakhstan. even ukraine mines about 1/4 of russian U output. iirc U is on historically low prices right now, so replacing lost Russian output should be easy (low prices in commodities tend to mean spare capacity). Now, if russia really wanted to hurt nuclear industry, they could stop U leaving Kazakhstan, as Russian landroute is about the only feasible export route for any significnat amounts (although China could in theory develop one, but it would take time), unless you want to export U via Iran and Afghanistan….

  3. Jim McKay

    Interesting article. The world has changed dramatically in last several decades. US (and others’) notions of sanctions’ effectiveness just don’t work: too many “emerged” nations providing outlets sanctions can’t prevent. US efforts as described are, AFAIC… just a colossal waste of time.

    One quibble (not the point of article, but…):

    The dirty truth is that Germany gets about half of its electricity from coal, with the other half coming from natural gas and nuclear.

    That totals 100%. There is no question Germany has dramatically increased energy production from renewables. Whatever the % of their total (articles here on NC in recent months discussing this) renewable production, this (quoted) statement says implicitly it’s -0-.

    Something’s wrong with those numbers (eg. 100% from coal/NG/nuke).

    1. OpenThePodBayDoorsHAL

      I haven’t heard any discussion about the sanctions on Cuba. They succeeded in keeping that nation in poverty, that’s for sure. But they’re still Communist, and like China and Vietnam now they will just be trading partners like everybody else that happen to be Communist. So what exactly did the sanctions accomplish again?

      1. susan the other

        The Cold War gave the US (us) time to begin to understand reality. But for embarrassment, we would not still be broadcasting nonsense. Truth bottom line: The entire world (perhaps with the sole exception of some US citizens who are stupefied) understands global overpopulation and global warming; The World understands ecological devastation; it understands massive extinctions and the implications for us “humans”; and it understands the trade-off: oil/groaf v. settle down, go slow for the next century. Become one with nature.

      2. Praedor

        They served a purely domestic political purpose: the sanctions allowed politicians to display their anti-communist bonafides as if that even matters anymore. They also allowed the impotent few who are still smarting of the gall of the peasants of Cuba rising up to claim their country for themselves rather than the 1% of the US to feel like they were doing something. Same applies in slightly altered form to Iranian sanctions. Allows a few impotents to feel like they are doing something to get back at those damn Iranian little people who had to gall to kick out OUR dictator and claim their resources for themselves. Who do they think they are?

      3. peter de haan

        Exactly that… That it remained poor (and preferentially destroyed.. Haiti-like, but that never quite happened). The US don’t want nations in their backyard to set a ‘bad’ example. Heaven forbid that a socialist economy actually bears fruit. Make sure other nations don’t get the wrong idea! It’s tough enough to swallow the fact that there is very good health care and education in Cuba. That surely is reason enough to punish the country with sanctions (and other covert operations)? Cuba’s survival has been very frustrating to the US. The formal arguments behind these sanctions are of course BS and irrelevant.

  4. knowbuddhau

    Topf calls that a “recap?” How ’bout we start with US funding of straight up Nazis to force the overthrow of a democratically-elected government? Harold Pinter’s 2005 points still apply:

    Hundreds of thousands of deaths took place throughout these countries. Did they take place? And are they in all cases attributable to US foreign policy? The answer is yes they did take place and they are attributable to American foreign policy. But you wouldn’t know it.

    It never happened. Nothing ever happened. Even while it was happening it wasn’t happening. It didn’t matter. It was of no interest. The crimes of the United States have been systematic, constant, vicious, remorseless, but very few people have actually talked about them. You have to hand it to America. It has exercised a quite clinical manipulation of power worldwide while masquerading as a force for universal good. It’s a brilliant, even witty, highly successful act of hypnosis.

    I put to you that the United States is without doubt the greatest show on the road. Brutal, indifferent, scornful and ruthless it may be but it is also very clever. As a salesman it is out on its own and its most saleable commodity is self love. It’s a winner. Listen to all American presidents on television say the words, ‘the American people’, as in the sentence, ‘I say to the American people it is time to pray and to defend the rights of the American people and I ask the American people to trust their president in the action he is about to take on behalf of the American people.’

    It’s a scintillating stratagem. Language is actually employed to keep thought at bay. The words ‘the American people’ provide a truly voluptuous cushion of reassurance. You don’t need to think. Just lie back on the cushion. The cushion may be suffocating your intelligence and your critical faculties but it’s very comfortable. This does not apply of course to the 40 million people living below the poverty line and the 2 million men and women imprisoned in the vast gulag of prisons, which extends across the US.

    The United States no longer bothers about low intensity conflict. It no longer sees any point in being reticent or even devious. It puts its cards on the table without fear or favour. It quite simply doesn’t give a damn about the United Nations, international law or critical dissent, which it regards as impotent and irrelevant. It also has its own bleating little lamb tagging behind it on a lead, the pathetic and supine Great Britain. (

    1. Praedor

      I’m glad you hit on that point as I was feeling an urge to. Russian aggression in Ukraine? Really? RUSSIAN? The actions of Russia in Ukraine are IDENTICAL to those of the US if Russia were to foment a coup in Mexico and install a government of its choosing there…followed by military basing agreements. Think the US would just sit back and allow it?

      Shouldn’t go screwing around in other people’s territories if you can’t handle the obvious results. The US has a LONG history of overthrowing democratically elected governments when those governments don’t stay on script aftwards and refuse to privatize everything, outsource everything, sell everything on the open market. Gods forfend if that new democratic government wants to reclaim its own natural resources from foreign control and benefit from the development and sale of same themselves. THAT is the fastest way to see a coup or invasion by the West.

    2. Yves Smith Post author

      The lack of any sense of proportion your comment is pretty distressing. If you reject all articles that take the party line about “Russian aggression,” you might as well put your head in a bag. This article has important information on how the US sanctions against Russia are failing. But you seem to prefer to throw the baby out with the bathwater.

  5. RBHoughton

    My hobby is history and I have to say, concerning sanctions, that they have never worked as intended. All they do is put up prices in the sanctioned country as suppliers add the value of their support to the usual price of the product.

    It has been well said that trade always finds a way and I believe that is one of the main reasons why governments have largely given-up trying to regulate merchants.

  6. William Crain

    … so many erudite comments ! i had no idea the US imported Coal and enhanced nukuler fuels ~ Good for Russia… doesn’t sound like sanctioning Russian nuke fuel to the US would have much fallout.
    The world would be a better place if the US State Dept was vaporized.

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