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Russian Sanctions Affect Energy Market

Sanctions – Weapons of Mass Disruption

For the energy markets

As the US hits Russia with sanctions, former sanction laden Iran rides to the rescue of European energy supplies.

A curious situation but nevertheless one that shows the truly globalised and connected nature of the energy markets and the absolute reliance nations have on one another to ‘keep the lights on’ and ‘their economies working’.

The US Treasury have targeted sanctions upon the Chairman of Rosneft, Igor Sechin.

In common with many politicians and business leaders in Russia, including Putin and Medvedev, Sechin is a former member of the KGB. He also happens to be the boss of Russia’s biggest oil producer. In this role, he is suspected of being far more than a company man, indeed he is seen by the US as the lynchpin behind the energy strategy that is so crucial to Russia’s economy. Indeed such is the sphere of influence of Sechin that he is labelled as Russia’s second most powerful man.

Rosneft itself has a very murky past, put simply it is the company that controls the assets that were seized from Yukos, the oil business controlled by Mikhail Khodorkovsky before he broke an agreement to not enter politics, leading Putin to not only to implement sanctions by seizing Yukos’s assets but also placing Khodorkovsky in a Siberian prison.

The US in turn is threatening sanctions against Russia if the Ukraine situation escalates; their targets are non-military ones with the aim of causing major disruption to the Russian economy.

Other potential targets of the sanction strategy include the Russian banking, gas, and mining industries. However oil has been selected as the first target as it is a lower risk strategy with regards alternate sources and it has a ‘bigger bang for your buck’ in that oil generates the vast majority of the Russian budget paying $75bn a year in taxes to the Russian state.

Further stealth sanctions are in the pipeline with the tentacles of international finance enabling the US to place significant pressure on to Rosneft’s lenders potentially forcing them to scale back their investment, expansion and exploitation plans.

In addition the various ‘joint ventures’ involving the likes of Norway’s Statoil and BP are in serious doubt as the changing political and commercial backdrop to such deals creates additional risk which will need to be considered in boardrooms around the globe. No wonder sanctions are seen as the key to fomenting change, after all, as we all know, money talks.

Whilst, for now, the Russian gas industry isn’t the focus of sanctions, the very real threat of disruption to European energy supply remains on the agenda, and indeed has been threatened as an inevitable consequence by Putin himself.

An unlikely saviour has therefore emerged with Tehran offering to supply Iranian natural gas to Europe to cope with any Russian moves to curtail supplies.

The irony is that although Iran has the second biggest reserves of natural gas in the world, they have been prevented from exploiting them to their full potential by US sanctions aimed at limiting iran’s nuclear programme!

However with sanctions having been lifted, Iran needs to restart its fields and exploit its reserves, to do this it needs investment and palatable risk, hence the olive branch to the major market sitting on its doorstep and one that is soon potentially in need of an alternative source of gas.

Bijan Namdar Zanganeh, Iran’s Oil minister said:

“As a country capable of supplying gas in very big volumes, Iran is always willing to be present in Europe’s market, either through pipeline or in LNG form.”

A ‘win win’ for all concerned? If trading one dependency on an unstable regime for another is a ‘win win’ then yes.

If however this further exemplifies how fraught, interdependent and downright fragile energy security is then no.

A potential solution then, but not a sustainable, long term one by any stretch of the imagination.

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