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The long term effects of Russian sanctions

September 18th, 2014 - Posted by Claire Barker in Sanctions

US and EU sanctions recently imposed on Russia are poised to bring an abrupt halt to exploration of Russia's huge shale and Arctic oil reserves, while complicating the financing of current Russian projects in Iraq and Ghana.  The renewed intensity, designed to increase pressure over Russia's actions in Ukraine, involves a major broadening of the existing sanctions. 

Dozens of projects will have to be put on hold, as the deduction of US and E.U. technology and resources makes it almost impossible for them to continue.  The companies will have 14 days to wind-down activities, regardless of previous contractual commitments.  Russia is the second largest oil exporter in the world and will be counting on its Arctic and shale oil reserves to sustain production, which currently sits at more than 10.5 million barrels per day.

Long term effects

Before it considers lifting the latest sanctions, the US will require the completion of all 12 points outlined in the Minsk peace plan, including the withdrawal of Russian forces from Ukraine.

Russia will be forced to create a multi-billion dollar anti-crisis fund in 2015, consisting of money destined for pensions and some carried forward from the 2014 budget, to help companies hit by sanctions.  The several waves of sanctions have drastically limited access to foreign capital for Russia’s largest banks and key oil companies.  Former BP chief Tony Hayward has warned that the sanctions, coupled with ongoing political instability in Libya and the advance of ISIS militants in Iraq, could leave the global oil supply exposed and push up oil prices to $150 per barrel.  The former CEO of BP, now chairman of Glencore Xstrata, said the recent boom in US shale production has painted an unrealistic image of the world’s global oil supply, and created a false sense of energy security.

The sanctions will soon hit the heart of Russia’s economy, but will not affect the gas sector so dramatically.  The revamp in restrictions will, however, make it far more difficult for Russia to continue development of its oil industry in the long term.  Combined, the two industries make up more than half of the revenue for Russia.  Russia has an estimated $7.5 trillion in oil and gas resources, but the majority require Western oil technology to extract.  Consequently, the new sanctions will be affecting Western oil companies and their equipment suppliers, but at this early stage, the extent of the effects can only be estimated.

Conclusion

While the new sanctions may have the desired effect of damaging the Russian economy immediately, the future projects and long-term development of the global oil economy are also at risk, with oil prices predicted to hit new highs.  Many of the West’s largest companies are reliant on Russian oil interests, both purely as a resource and due to investment in extraction and production.  With the hard stance the US and the EU have taken so far on Russia’s foreign policy activity, Russia’s economic future, and in many ways the world’s, is in the hands of Russia itself.    


What do you think?