While the Russian energy sector has felt the impact of Western sanctions, the risk of major restrictions being placed directly on the sector remains relatively low.
The Ukrainian crisis has tested whether the EU and US are willing to use energy markets as a political tool in pressuring Russia.
While both have been extremely hesitant to do so, the limited manner in which they have done so to date has had a clear impact.
The measures imposed thus far have focused on sowing uncertainty among investors in the Russian energy industry while avoiding a spike in energy prices.
Furthermore, should the crisis de-escalate and investor confidence return, it will be relatively straightforward to return to business as usual.
However, engaging Russia in brinksmanship over energy markets is a tactic neither side can afford and the sanctions are therefore unlikely to result in a major change in Russia’s actions in Ukraine.
It is clear that even the gravest of escalations in Ukraine would not result in blanket Western embargoes on the Russian energy market.
Europe remains heavily reliant on Russian oil and gas supplies, while the US economy remains highly sensitive to shifts in global oil prices.
Although Washington included Rosneft on its sanctions list on July 16, these measures have not stopped ExxonMobil or Statoil from pursuing exploration projects with the firm.
Measures to limit drilling technology exports have also been easily overcome via Norway, Switzerland and South Korea.
Nonetheless, examining Rosneft makes it clear the sanctions still have had an effect.
Although Rosneft’s CEO, Igor Sechin, boasted that the measures would have no discernible impact when the firm was added to the US sanctions list on July 16, he requested a £25billion loan from Russia, to be paid using funds from the national wealth fund on August 14.
The change in Rosneft’s fortunes between July 16 and August 14 came in part from a result of additional measures limiting loans to Russian banks, but was primarily driven by the market’s reaction.
Cancellations and delays in oil-for-loan agreements preceded the July 31 sanctions that bar EU and US businesses from dealing in Russian state-owned banks’ bonds, equity or other financial instruments with a maturity over 90 days.
Major commodity trading houses, financial institutions and institutional investors had already pulled back from their dealings with Russian state-owned banks and firms and escalated efforts to do so following the July 31 measures, although they did not target the energy industry directly.
The disruptions that the Russian market experienced demonstrated the limited extent to which the market can be used as a tool of political pressure without a spike in energy prices.
As the sanctions’ effectiveness has been driven primarily by uncertainty, their effects would quickly dissipate in the event of de-escalation.
The intended message to Russia is that any escalation will incur significant costs, whereas a draw-down would quickly see it welcomed back to the fold.
However, the US and EU’s options for further escalation remain extremely limited. As a result, measures targeting the energy industry have not served as a credible deterrent.
While expanded measures would shake the foundations of the resource-dependant Russian economy, there is little chance the US or EU would accept the costs of such a pyrrhic victory. As a result, while there remains a high risk the crisis will escalate and Russia will face further sanctions, the risk that they will involve major restrictions on Russian energy markets remains low.
Max Hess is the Russia and FSU Analyst at security specialist AKE
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