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The West closes in on Russia’s last lifeline

<i>Yegor Aleyev/TASS/Getty Images</i><br/>An aerial view of an oil tank battery at the Novokuibyshevsk Refinery
Yegor Aleyev/TASS/Getty Images
An aerial view of an oil tank battery at the Novokuibyshevsk Refinery

By David Goldman, CNN Business

The United States and Europe have pummeled Russia with unprecedented sanctions over the past several weeks as Vladimir Putin’s army bears down on Ukraine. But the West has largely left Russia’s largest export untouched: energy.

Until now.

European Union officials on Tuesday said the bloc would slash imports of Russian natural gas by two thirds this year, and the EU announced a plan to achieve energy independence from Moscow “well before 2030.” That would separate Europe from its single biggest energy supplier.

Separately, President Joe Biden announced Tuesday a ban on Russian oil, natural gas and coal imports to the United States. And the UK government said Tuesday it would phase out Russian oil imports by the end of 2022 and explore ways of ending natural gas imports as well.

America’s ban is largely symbolic. The United States relies very little on Russian energy: The country’s crude represented less than 2% of all US oil imports in December, according to the US Energy Information Administration. Overall, Russian crude and petroleum products made up about 5% of US imports at the end of 2021. Similarly, just 8% of UK demand is supplied by Russian oil, according to UK Business and Energy Secretary Kwasi Kwarteng.

By contrast, the European Union depends foundationally on Russia for its energy. About 40% of Europe’s natural gas and 27% of its oil imports come from Russia. And Russia supplies Europe with 46% of its coal.

That’s why Europe has been so hesitant to take action against Russia’s energy sector. Yet as its war on Ukraine continues to shock the world, western countries are running out of other options to add pressure on Russia for the assault.

Russia’s final lifeline

Existing sanctions have already created a kind of shadow-ban on Russian oil. Traders have grown concerned about access to financing for Russian oil purchases as well as the availability of ports willing to ship it. Urals oil has lately traded at about a $25 discount to Brent crude, the global benchmark. About 70% of Russian seaborne oil was struggling to find buyers, according to JPMorgan.

But gas continues to flow to Europe, and enough Russian crude and gas is finding buyers to make a difference to the Russian economy. Russia has been bringing in between $500 million and $1 billion a day in crude and gas exports during the war, according to Charles Lichfield, deputy director of the GeoEconomics Center for the Atlantic Council, an international think tank.

Restricting energy exports would severely limit Russia’s options to keep its economy afloat. Its central bank has been sanctioned, limiting the government’s access to cash reserves designed to insulate the country from reliance on the West. Businesses are pulling out or suspending operations in the country and shunning Russian exports.

“Energy has been Russia’s final lifeline,” said Lichfield. “Sanctions on oil and gas would put Russia in a much more vulnerable situation.”

The Russian economy isn’t very diverse. It relies heavily on energy exports, and many of its other key industries, including metals and other raw materials, have been sanctioned or shunned.

Despite the sanctions, the Russian central bank has so far been able to meet many of its debt obligations. Reducing the market for oil and gas could force Russia to rein in spending. For example, government wages and pensions may not be paid on time.

“Russia has managed to find quick fixes,” said Lichfield. “Those won’t be available to Russia anymore if its energy is restricted.”

What Russia does next

One reason Europe is working to act quickly on energy independence: It fears Vladimir Putin could turn it into a weapon, cutting off its gas supply before Europe is ready to act.

Russia has already threatened to beat Europe to the punch: Russian Deputy Prime Minister Alexander Novak said in a statement on state television Tuesday that Russia could retaliate against Europe’s sanctions by turning off Germany’s access to Nord Stream 1, the gas pipeline that supplies the country with Russian natural gas.

Novak said Russia would be entirely within its rights to retaliate against the European Union after Germany last month froze the certification of the Nord Stream 2 gas pipeline.

“If you want to reject energy supplies from Russia, go ahead. We are ready for it,” Novak said. “We know where we could redirect the volumes to.”

— CNN’s Chris Liakos and Reuters contributed to this report

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