Since February 2022, the world has witnessed Russia’s aggressive actions in Ukraine. While geopolitical factors and military maneuvers dominate headlines, there’s another dimension to this conflict that often goes unnoticed but is equally crucial: the role of the oil and gas industry in funding and fueling Putin’s war of aggression.
In the past 600 days, Russia has amassed a staggering 440 billion US dollars in revenue from fossil-fuel exports. This colossal flow of money has made it possible for Russia to put its economy on a war footing and increase the production of weapons, while also incentivising further expansion of fossil fuel infrastructure in Russia.
Why this matters
Funding war crimes: The revenues generated by the oil and gas industry provide a financial lifeline to the Russian government. These funds have been diverted to support military actions in Ukraine and maintain an aggressive posture on the international stage. This not only exacerbates the conflict but also endangers the lives of innocent civilians.
Economic Leverage: By controlling energy resources, Russia can exert immense economic influence over its neighbors, trading partners, and much of the global economy. This gives Moscow the power to manipulate energy prices and cut off supplies, which can have devastating consequences for countries dependent on Russian energy.
Environmental Impact: The extraction and export of fossil fuels have significant environmental consequences, contributing to climate change and ecological damage. Russian fossil fuels are immensely damaging because of massive methane emissions from gas fields, pipelines and coal mining operations. In particular, Russia’s oil and gas infrastructure sprawl in the Arctic poses a global climate threat as it could ignite the fuse to massive carbon bombs, unlocking extraction in new Russian oil and gas fields and enabling further exploration in the world’s most climate-sensitive region.
Key Issues & Solutions
Addressing the issue of the oil and gas industry’s role in fueling Putin’s war requires a multi-pronged approach that has been called for by several of the B4Ukraine’s Coalition members such as Ukraine-based Razom We Stand, CREA, Data Desk, Dixi Group, Global Witness, Kyiv School of Economics, and Urgewald.
To shut down Russia’s energy cash cow, policy makers must:
1. Prevent the expansion of Russian Liquified Natural Gas exports
In 2022, Ukraine’s allies imposed sweeping sanctions to limit the flow of the Kremlin’s revenue from fossil fuels. Specifically, the European Union and the United Kingdom banned imports of Russian crude oil by sea in December 2022 with a subsequent ban on imports of petroleum products two months later.
Additionally and importantly, the EU’s imports of Russian natural gas have shrunk since last year after Russia decided to cut the flows in response to western sanctions and the explosion at the Nord Stream pipeline.
The drop in pipeline sales to the EU in 2022 had a significant impact on Russia’s gas sector, reducing tax revenue and capacity to finance the ongoing invasion of Ukraine. However, Russian exports of Liquified Natural Gas (LNG) to the EU have increased by 26% since the full-scale invasion of Ukraine. In November 2022 Russia increased the tax rate on LNG exports from 20% to 34%. These trends partially reverse the previous decline in Russian pipeline gas exports and provide a growing revenue stream to the aggressor country.
The development of new LNG terminal Arctic LNG 2 — a massive gas project on the Gydan Peninsula with a capacity to produce 19 million tonnes of LNG per year — also underpins these plans for LNG expansion. Novatek, Russia’s largest private natural gas producer, aims to launch the first phase of the Arctic LNG 2 terminal by the end of this year and reach full capacity of 19 million tons of LNG per year by 2026. Much like the Nord Stream 2, the Arctic LNG 2 project is a dire threat to the EU’s energy security and climate policies.
The EU countries must unequivocally ban the transfer of Russian LNG in their ports and immediately cease providing any services to Russian companies linked to LNG expansion. The EU should take a cue from the US and impose sanctions on companies linked to Russia’s LNG export plans, including the development of the Arctic LNG-2. Additionally, EU companies should cease supplying equipment for Russian oil and gas projects, including the LNG tankers.
2. Enforce & Revise the Price Cap Policy
The price cap on Russian crude was introduced to stabilize oil markets and keep Russian oil flowing, while limiting oil revenues and thus curbing the Kremlin’s ability to continue waging war. The cap itself was set at $60 per barrel on its introduction and this cap has not yet been formally revised, despite commitments from the price cap coalition to do so.
Widespread violations of the price cap were quickly documented. The risk of price cap evasion was publicly recognized by the US Office of Foreign Asset Control in April, but this recognition has not been accompanied by proactive enforcement of the cap.
By late September 2023, rising oil prices had sent the price of Russia’s flagship crude grade Urals near $100 per barrel. US Treasury Secretary Janet Yellen has for the first time now acknowledged that this indicates the price cap is not working as hoped. At the same time, recent analysis indicates that Russia is circumventing the cap by moving the majority of its crude exports using a “shadow fleet” of ships, generally not carrying insurance from G7/EU providers – a tool formerly understood to be critical to the cap’s function. Seaborne Russian oil export volumes, meanwhile, are at their lowest levels since September 2022. This is precisely the opposite of the cap’s goals of maintaining flows while cutting revenues to the Kremlin.
The oil price cap should be strengthened by making penalties for sanction violations significantly stricter, lowering the price cap level to USD 30 per barrel and greater monitoring such as requiring enhanced protection and indemnity insurance (P&I) disclosure. Further measures should be adopted to prevent growth of the ‘shadow tanker’ fleet.
3. Impose a full ban on Russia fossil fuels to the EU
Although the EU has significantly reduced its imports of Russian fossil fuels since pre-war levels, much more must be done to wean itself off fuels that fund Putin’s war against Ukraine.
LNG was the largest fossil fuel type that the EU purchased from Russia between January to August 2023, valued at EUR 5.8 billion. Belgium was the biggest importer of Russian LNG, buying EUR 2 billion, followed by Spain, (EUR 1.9 billion), France (EUR 1.2 billion), and the Netherlands (EUR 0.3 billion) in 2023.
Despite Russia’s energy blackmail in 2022, Russian gas continues to reach EU countries through two primary conduits: firstly, via Ukraine to Central and Eastern Europe, and secondly, via TurkStream to South European countries. Notably, the EU remains the principal purchaser of Russian pipeline gas, surpassing Turkey, while China also plays a crucial role as a significant buyer within Russia’s gas export framework.
The EU bought EUR 4.9 billion of pipeline gas from Russia from January to August 2023, a huge source of revenue for the Kremlin used to fund the war against Russia.
It is time to put a full ban on all of Russia’s fossil fuels coming into the EU, including pipeline oil and gas as well as LNG and LPG. Also, Russia relies heavily on the sophisticated equipment provided by companies in the EU and the USA for its oil and gas operations. The EU and USA should firmly reject the export of vital technology and equipment for Russian projects. Governments must ban the supply of equipment to Russian companies or their intermediaries.