Russia’s status as an energy superpower is waning
Russia’s energy bridge to Europe survived the Cold War but has now been destroyed. Moscow will try looking east to recoup its losses but has little prospect of doing so.
Maria Shagina
14th June 2022
While Western energy sanctions continue to be applied against Moscow in response to its invasion of Ukraine, their long-term implications are clear: Russia’s status as an energy superpower has been undermined and its traditional energy bridge to Europe, which emerged during the Cold War and survived since then, has been destroyed.
Sanctions have cut off Russia’s key financial institutions such as Sberbank, VEB and Gazprombank from Western capital markets, which will make it difficult for them to make new investments in the country’s energy sector. In the weeks following the invasion, the United States and European Union exploited Russia’s high dependency on foreign technology by introducing a ban on the export of liquefaction technology, key equipment for the refining and petrochemical sectors. Since February 2022, Western energy majors and oilfield service companies have written off their assets, fearing reputational damage. The European Union agreed on 30 May to a phased Russian oil embargo that will further aggravate the industry’s viability. The measure will go into effect at the end of this year and will target seaborne crude oil shipments and petroleum products from Russia, including an insurance ban on maritime shipping. It is expected to apply to 90% of Russian imports, amounting to US$22 billion per year in lost revenue for Russia.
To counter the blow from Western measures, Russia is set to accelerate its pivot to Asia to develop new markets for its commodities. The government has instructed its ministries to devise a plan to reorient infrastructure – energy pipelines, ports and railways – eastwards. Russia may be able to find new buyers, but it will be impossible to compensate for the loss of the entire Western energy markets. The redirection of oil and gas flows to Asia would require substantial investments and time to create new infrastructure that has historically been geared towards the West. On top of infrastructure bottlenecks and logistical challenges, there is an uncertainty around Asia’s demand. India has been purchasing record amounts of discounted Russian crude, but its refineries are already at their capacity. China has been quietly replenishing its strategic reserves, but Beijing would be wary of abandoning its diversification policy and overly relying on Russia. At most, Russia could reroute around one-third of its imports previously destined to the EU to Asia.
Following the invasion of Ukraine, the country’s oil production declined 10% in April compared with March and it is slated to drop even further – by 17% by the end of 2022. Gas production is also expected to fall by 5.6% this year. Falling domestic demand and self-sanctioning from international buyers have been the key drivers behind the decline. Western buyers are seeking alternatives to replace Russian oil and gas, creating demand for crude oil from West Africa and gas from the Middle East and Norway.
As Soviet-era conventional fields are depleting, Russian energy majors will be forced to develop more technically challenging reserves. Losing access to foreign technology and capital will pose a major hindrance for Russia to sustain, let alone ramp up, future oil and gas production volumes. The pullback of the global energy majors will be felt keenly, as they were the key providers of advanced technology and external financing necessary for the development of unconventional fields. Russia’s import substitution efforts, launched in 2014, failed to alleviate this dependency and foreign companies accounted for 50–60% of the Russian market. Novatek, Russia’s second largest producer of natural gas, is already feeling the heat at its Arctic LNG-2 project. The company announced that it will scale down the project’s development to one-third of its original capacity.
In the long term, Russia’s influence as an energy superpower will wane, as Moscow decouples from its traditional markets. The European Commission’s plan, known as ‘REPowerEU’, sets out steps to end the dependency on Russian fossil fuels by 2027 and accelerate the green transition. Energy decoupling will undo the very foundation of EU–Russia relations based on the exchange of Russian hydrocarbons and European technology and capital. Losing Europe as the key export market will mean that the windfall from the export of hydrocarbons will never be the same. This will affect the structure of the state budget, which today is 42% dependent on oil-and-gas sales, and alter the fabric of the Russian economy.
Russia will have little to offer as the EU pursues decarbonisation. Prior to the invasion, Russia was considered a potential supplier of blue hydrogen. Now Russia’s hopes to build a bridge to Europe’s fossil fuel-free future have died. Without access to foreign technology and capital, it will be a tall order for Russia to launch its own green transformation.
That leaves Russia at China’s mercy. Moscow will have difficulty forging significant energy ties with other Asian countries such as Japan and South Korea, given that Tokyo and Seoul have joined Western sanctions. India could serve as a viable but limited hedge against overreliance on China. Thus, it appears that Moscow will become ever-more reliant on Beijing, exacerbating their already strongly asymmetrical relations, and Beijing will capitalise on Moscow’s isolation much as it did in 2014, dictating the conditions on energy deals with Russia, extracting maximum benefits and avoiding its exposure to sanctions risk.
https://www.iiss.org/blogs/analysis/2022/06/russias-status-as-an-energy-superpower-is-waning
Maria Shagina
14th June 2022
While Western energy sanctions continue to be applied against Moscow in response to its invasion of Ukraine, their long-term implications are clear: Russia’s status as an energy superpower has been undermined and its traditional energy bridge to Europe, which emerged during the Cold War and survived since then, has been destroyed.
Sanctions have cut off Russia’s key financial institutions such as Sberbank, VEB and Gazprombank from Western capital markets, which will make it difficult for them to make new investments in the country’s energy sector. In the weeks following the invasion, the United States and European Union exploited Russia’s high dependency on foreign technology by introducing a ban on the export of liquefaction technology, key equipment for the refining and petrochemical sectors. Since February 2022, Western energy majors and oilfield service companies have written off their assets, fearing reputational damage. The European Union agreed on 30 May to a phased Russian oil embargo that will further aggravate the industry’s viability. The measure will go into effect at the end of this year and will target seaborne crude oil shipments and petroleum products from Russia, including an insurance ban on maritime shipping. It is expected to apply to 90% of Russian imports, amounting to US$22 billion per year in lost revenue for Russia.
To counter the blow from Western measures, Russia is set to accelerate its pivot to Asia to develop new markets for its commodities. The government has instructed its ministries to devise a plan to reorient infrastructure – energy pipelines, ports and railways – eastwards. Russia may be able to find new buyers, but it will be impossible to compensate for the loss of the entire Western energy markets. The redirection of oil and gas flows to Asia would require substantial investments and time to create new infrastructure that has historically been geared towards the West. On top of infrastructure bottlenecks and logistical challenges, there is an uncertainty around Asia’s demand. India has been purchasing record amounts of discounted Russian crude, but its refineries are already at their capacity. China has been quietly replenishing its strategic reserves, but Beijing would be wary of abandoning its diversification policy and overly relying on Russia. At most, Russia could reroute around one-third of its imports previously destined to the EU to Asia.
Following the invasion of Ukraine, the country’s oil production declined 10% in April compared with March and it is slated to drop even further – by 17% by the end of 2022. Gas production is also expected to fall by 5.6% this year. Falling domestic demand and self-sanctioning from international buyers have been the key drivers behind the decline. Western buyers are seeking alternatives to replace Russian oil and gas, creating demand for crude oil from West Africa and gas from the Middle East and Norway.
As Soviet-era conventional fields are depleting, Russian energy majors will be forced to develop more technically challenging reserves. Losing access to foreign technology and capital will pose a major hindrance for Russia to sustain, let alone ramp up, future oil and gas production volumes. The pullback of the global energy majors will be felt keenly, as they were the key providers of advanced technology and external financing necessary for the development of unconventional fields. Russia’s import substitution efforts, launched in 2014, failed to alleviate this dependency and foreign companies accounted for 50–60% of the Russian market. Novatek, Russia’s second largest producer of natural gas, is already feeling the heat at its Arctic LNG-2 project. The company announced that it will scale down the project’s development to one-third of its original capacity.
In the long term, Russia’s influence as an energy superpower will wane, as Moscow decouples from its traditional markets. The European Commission’s plan, known as ‘REPowerEU’, sets out steps to end the dependency on Russian fossil fuels by 2027 and accelerate the green transition. Energy decoupling will undo the very foundation of EU–Russia relations based on the exchange of Russian hydrocarbons and European technology and capital. Losing Europe as the key export market will mean that the windfall from the export of hydrocarbons will never be the same. This will affect the structure of the state budget, which today is 42% dependent on oil-and-gas sales, and alter the fabric of the Russian economy.
Russia will have little to offer as the EU pursues decarbonisation. Prior to the invasion, Russia was considered a potential supplier of blue hydrogen. Now Russia’s hopes to build a bridge to Europe’s fossil fuel-free future have died. Without access to foreign technology and capital, it will be a tall order for Russia to launch its own green transformation.
That leaves Russia at China’s mercy. Moscow will have difficulty forging significant energy ties with other Asian countries such as Japan and South Korea, given that Tokyo and Seoul have joined Western sanctions. India could serve as a viable but limited hedge against overreliance on China. Thus, it appears that Moscow will become ever-more reliant on Beijing, exacerbating their already strongly asymmetrical relations, and Beijing will capitalise on Moscow’s isolation much as it did in 2014, dictating the conditions on energy deals with Russia, extracting maximum benefits and avoiding its exposure to sanctions risk.
https://www.iiss.org/blogs/analysis/2022/06/russias-status-as-an-energy-superpower-is-waning
