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The Washington Post: Russian Energy Sector Comes to Standstill Following US and EU Sanctions Tightening

The Washington Post: Russian Energy Sector Comes to Standstill Following US and EU Sanctions Tightening

The sanctions have coincided with a plunge in oil and gas prices that have hurt the Russian economy.

The major Russian projects that were to deliver oil and natural gas to customers in China, Turkey and Germany have stalled a year and a half after the United States and its European allies imposed economic sanctions on Russia’s energy sector.

Censor.NET reports citing Steven Mufson's article in The Washington Post.

And even though the Obama administration is seeking Russia's cooperation in Syria, there is no sign that it is planning to let up on sanctions that were designed to get Moscow to withdraw from its occupation of Crimea and eastern provinces of Ukraine.

On Tuesday, the Treasury barred business dealings with dozens of individuals and companies in Russia who were allegedly trying to circumvent the earlier economic restrictions. The announcement comes one day after the European Union extended sanctions against Russia for another six months.

The Treasury also imposed sanctions on six individuals in the self-proclaimed peoples' republics of Donetsk and Luhansk in eastern Ukraine, two former officials in the government of ousted Ukrainian President Viktor Yanukovich and a dozen firms operating in Crimea.

"Today's steps support the U.S. commitment to seek a diplomatic resolution to the crisis in Ukraine by maintaining our sanctions on Russia," the Treasury said in a statement. "Those sanctions will not begin to be rolled back until Russia fully implements its commitments under the Minsk Agreements, including the return to Ukraine of control of its side of the international border with Russia."

The sanctions have coincided with a plunge in oil and gas prices that have hurt the Russian economy. A World Bank update this month said that Russia's inflation rate is running around 16 percent, meaning that after adjusting for inflation, pensions contracted 4 percent in the past year. Overall, the economy is shrinking with manufacturing off 5.9 percent, retail services down 11.7 percent and fixed capital investment down 5.2 percent, the World Bank said.

In order to cover its budget, Russia's federal government has been forced to dip into its Reserve Fund, built up when oil prices were high.

The biggest victim of the energy sector sanctions so far has been a plan for three natural gas pipelines to China. The Russian pivot to China was supposed to open up a major new market for Russia, which currently relies heavily on exports to Europe. Although the deals haven't been scuttled, they have been postponed, perhaps for years. An increase in worldwide natural gas supplies and liquefied natural gas facilities has cut the global price of natural gas in half during the past year, undermining the rationale for the pipeline.

Moreover, big Chinese commercial banks that were supposed to provide $25 billion in financing for the project - some in the form of advance payments for the gas - have balked. Many of the Russian companies that were to build large portions of the pipeline are on the U.S. sanctions list, including firms controlled by Gennady Timchenko and the Rotenberg brothers. Any Chinese bank doing business abroad could be harshly punished for dealing with those firms.

Another casualty for Russia's energy sector has been Moscow's proposed natural gas pipeline to Turkey, announced by Russian President Putin in December 2014. Like the Chinese pipeline, the Turkstream pipeline had a strategic rationale: It would give Russia a way to cut off gas supplies to Ukraine without cutting supplies to the rest of Europe. Currently the pipelines through Ukraine are major routes for Russian gas sales to central Europe.

Edward C. Chow, an international energy expert at the Center for Strategic and International Studies said that "the Turkish project always seemed like improvising by Putin to begin with" after the collapse of another pipeline called South Stream. When he announced the Turkish project, "the project had no name, no route, and no price agreed to by the Turks."

Now the pipeline plans have been killed after Turkey shot down a Russian fighter jet that Ankara alleged was flying over Turkish territory. Russia has responded with sanctions on Turkey, a major trading partner.

Russia's plans for building a pipeline to Germany, called Nord S tream 2, have also been facing opposition. Nord Stream 2 would be built with international partners, including BASF, E.ON, ENGIE, OMV, and Royal Dutch Shell. The pipeline would run from Russia to Germany through the Baltic Sea.

But Anders Aslund, an economist and senior fellow at the Atlantic Council, said that only half of the capacity of Nord Stream 1 is being used, and that if anything, Europe should be diversifying its sources of gas so that it is less dependent upon Russia. The State Department has sent an envoy to urge European countries to reject the plan. "This project makes no sense and should be stopped," Aslund said. The dim export prospects for Gazprom, the main Russian natural gas company, along with low gas prices has knocked the market capitalization of the firm down from $369 billion in May 2008 to $43 billion today. Over the past year alone, the stock price has tumbled 25 percent.

At the end of the Soviet era, Gazprom sold about 130 billion cubic meters of gas to Ukraine, then one of the least energy efficient countries in the world. This year, after slashing the size of energy subsidies, Ukraine will use about 35 billion cubic meters and produce 20 billion of that itself, Aslund estimates. Ukraine can buy two-thirds of its import needs from Europe, leaving it much less vulnerable to political pressure from Moscow.

Gazprom faces legal problems too. In April, after four years of investigation, the European Commission officially advised Gazprom that its practices violate E.U. antitrust laws. On Tuesday, Gazprom was given a chance to respond to allegations that it had engaged in monopolistic practices by threatening the supply of gas to Poland and seven other E.U. states.

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