Russia’s Energy Crossroads
By the Fletcher Forum of World Affairs featuring Dr. Tatiana Mitrova, Research Fellow at the Center on Global Energy Policy at Columbia University
THE FLETCHER FORUM: We are very interested in knowing about the sanctions that have been placed on Russia’s oil and gas sector. What we notice is that the kind of sanctions placed on the gas sector seem to be different from the sanctions placed on the oil sector. Why is it that the sanctions on Russia’s gas sector have been more effective than the sanctions on the oil sector?
DR. MITROVA: Yes, you are absolutely right. The sanctions on the oil and gas sector are different. And their impact has not been as strong as what many politicians were expecting. The reason behind this is the manner in which the sanctions were crafted. With the oil market, back in 2022, there was a realization that Russia is aggressive. But at the same time, Russia is such an important player in the global oil market that it is not possible to just stop flows of Russian oil because the global oil price will go through the roof and the global economy would collapse. So the idea behind the sanctions, including the G7 price cap, was to keep Russian oil flows going to the market, at the same time reducing its profitability. This is not a simple task. Looking back, I would say that it is more or less working. So in this respect, the sanctions on the oil sector are efficient because Russian oil still keeps going to the global markets—no longer to Europe, but mainly to China and India. But the profitability of these oil exports is decreasing. One reason for this declining profitability is the higher transaction costs, particularly with respect to shipping. Russia had to spend an enormous amount of money and effort to create these shadow fleets, building all these chains of intermediaries and shadow financial transactions. It’s a lot of time and money. So basically right now, Russia is losing somewhere in the magnitude of USD 5 to USD 10 per barrel for these additional transaction costs. So we can call these “sanction costs.” But the volumes of Russian oil that are going overseas during this whole period of time are pretty stable.
With gas, the thinking was different. Immediately after the Russian invasion of Ukraine in March 2022, the United States, the United Kingdom (UK), Australia, and Canada banned Russian liquified natural gas (LNG). But they’ve never really been significant offtakers of Russian LNG. So it was more of a symbolic gesture. There were never any sanctions on Russian pipeline gas nor were there any sanctions from the European Union (the EU) on Russian LNG. We also have to keep this in mind, because Europe felt so dependent on Russian gas supplies, that it was really scared to affect the volumes of Russian gas flowing into the region. What actually happened was that Russia itself cut its gas supplies to Europe in April 2022, and they started to blackmail European customers, demanding that they pay in rubles. Several customers refused, and then supplies to these countries were stopped. But for the whole of summer 2022, Russian gas was still going to European consumers until September 2022, when there were these mysterious explosions in the Nord Stream [pipeline]. So again, it wasn’t sanctions, it was something else. And even up until now, Russian pipeline gas still keeps going to European consumers via Turkey— the TurkStream—and up until the end of 2024, surprisingly, via Ukraine, which is really quite amazing in the hottest stage of the military conflict and with daily bombing. So actually, there was no intention in the Western Bloc to refuse Russian gas or to limit its volumes. Later on, in 2023 and partially at the end of 2024, the U.S. administration started to target the new Russian LNG project—the Arctic LNG 2—specifically hunting each and every tanker that was somehow associated with this project. Around the end of November 2024, there were sanctions against Gazprombank (Russia’s third largest bank by assets), which is the main channel for financial payments for Russian oil and gas. But again, it’s not prohibitive because the other banks like Sber or VTB can also process these transactions, so it’s not a complete disaster. It’s creating some problems for certain buyers like Turkey or Hungary, but it can be solved. It’s not a dead end. So I would say that all in all, the sanctions, despite the magnitude of the discussion, have been quite soft, much softer than, for example, sanctions on Iran.
THE FLETCHER FORUM: You mentioned the Arctic LNG 2 project and mentioned that the United States is sanctioning tankers associated with the projects. We also know that there is a shadow fleet associated with the project, but they are not able to offload their cargo in any port. So, in your opinion, what are the prospects for the Arctic LNG 2 project and how do you perceive the marketability of Russian gas through that project?
DR. MITROVA: The project has a very interesting fate because the construction of the first train was finished by the end of 2023. It started to operate but as you said, now the problem is with the logistics and with the buyers, who are really scared because of this intense pressure from the U.S. authorities. Nobody is ready to take the risk of potential secondary sanctions, which could be imposed. It must be noted that these are only potential secondary sanctions and that it isn’t something that has been announced clearly. The second and the third train are also under construction. So we are talking about quite substantial volumes of LNG once the whole project is built. The project is really very important for Novatek (a Russian natural gas producing firm) itself but equally important for the Russian government. Because in addition to the potential gas export leverage and the ability to reach different destinations all over the world, the Arctic LNG 2 project is also very important as part of the development of the Northern Sea Route and the Arctic program. So there are many dimensions. It’s not just a project, it’s much more than that. A year ago, the feeling was that the sanctions would not target this project as much. Because right now, if you look at the European TTF Futures, the price of gas is rather high.
So it doesn’t look like a good moment to withdraw several million tons of LNG from the market while the prices are so high. Nevertheless, this is a decision of the U.S. administration. There is speculation that the Arctic LNG 2 project is competing with U.S. LNG and that’s why the U.S. administration doesn’t want to let it get to the market. Anyway, the fact is that the project is under severe, real-time pressure. I would say that the team of Novatek is known for being very creative and adaptable. They always find a solution. They are very flexible in their decision making. But right now, what is happening is that they are under daily monitoring, and the U.S. authorities are implementing sanctions with respect to every step that Novatek is taking. So, if this hunt continues, I don’t think that the project has good prospects. What we see currently is that they keep the produced LNG in tankers, and basically announced that they have stopped operations and that they cannot produce more because there isn’t any offtake for this additional LNG. So the project is on hold. But if this daily pressure is not removed, but is at least eased a bit, I’m sure that Novatek can find a solution. This depends on what the new U.S. administration will do. Will they still wish to put pressure on the project? The sanctions come with a cost—you need many people to really monitor and implement these sanctions. So I would say that the future of the project depends on the strictness of implementation of the U.S. sanctions and on the willingness of the new U.S. administration to kill this project. They have shown that they can really at least freeze the project, so we’ll see what comes next.
THE FLETCHER FORUM: With the Trump administration, in your opinion, how are the sanctions on Russian oil and gas likely to change or will they remain intact? Especially given that President Trump has called for a ceasefire in Ukraine, would the removal of sanctions against Russia be a way of bringing Russia to the negotiating table?
DR. MITROVA: Well, first of all, I have to make a disclaimer. My answer will be very speculative because the only thing we can be certain about Trump is that he’s unpredictable. Obviously, the most important questions with respect to ceasefire talks will be about territories, security guarantees, and guarantees that Ukraine will not join NATO. This will be the most important request from the Russian side. Other considerations would include post-war financial support to Ukraine and sanctions. So I would say this is something they cannot avoid discussing if any negotiations are to begin. With respect to the sanctions, oil is much, much more important for the Russian state compared to gas. Oil revenues amount to 20–25 percent of the budget revenues while gas is responsible for less than 5 percent. So oil is about money and this money is currently starting to shrink. Right now, after nearly three years under sanctions, we can see some signs of the Russian economy getting weaker—very high interest rates, growing inflation, and labor shortage. So there are several macroeconomic fundamentals [that] are already indicating that it’s not as good as the Russian government pretends. So they need the money badly. And this money is coming from oil. So I assume that sanctions on oil will be the most important part of the discussion of this negotiation process.
At the same time, what can Trump do with the oil sanctions? Well, he can keep them as they are and then most likely Putin will not agree to anything. He can lift the sanctions completely. And then I assume that U.S. oil producers wouldn’t be completely happy. And Trump can keep the oil sanctions as they are but ease their implementation. So everything is actually about enforcement mechanisms, monitoring, and the response to the violation of the sanctions. If this pressure is stopped it would be tantamount to the sanctions not being there. So, one possibility is that the enforcement of the sanctions is eased. But if Russia, for example, violates the ceasefire agreement, the sanctions can be reinforced very easily without Congress, without any external approval. It is just an internal order— “Guys, please take a closer look at what’s happening there.” So I think that would give much more flexibility, although it’s not providing guarantees, which Putin would obviously ask for.
The negotiation process will start with both sides asking for as much as they can—removal of all sanctions, return of all territories, etc. But then they will probably find some common ground. So with oil therefore, my impression is, and it’s just an educated guess, that the status quo will more or less be preserved, with slightly less strict enforcement from the United States so that Russia may still be able to sell approximately the same volumes of oil to the global market. One additional consideration is that Russia is part of the OPEC+ coalition. So they cannot increase their oil output that easily because they will lose their friends in the Gulf. So it’s a tricky balance to keep. Therefore, the status quo seems to be more or less acceptable to everybody, especially given that the global economy is still quite weak and global oil demand isn’t recovering as many people were hoping. With gas, the question of LNG is more difficult because Trump and Putin have completely opposite views. Trump wants more U.S. LNG and Putin wants more Russian LNG, and they are competing directly around the world. So here, finding a compromise might be difficult. Therefore, I’m a bit skeptical. I would think that they will probably postpone it for the next stage of negotiations.
The Ukrainian transit is basically the only other significant question on the agenda because Russian gas is flowing through Turkey anyway, and this is not something that the United States can stop. Even with Gazprombank sanctions, they will find another way to pay for it. But I assume that the Ukrainian transit will be part of the negotiations. And here again, if Trump would allow more pipeline gas from Russia to flow into Europe as a part of a compensation to Russia for let’s say, giving up some regions, it will start to compete directly with U.S. LNG in Europe. So it may not really be desirable for Trump, especially if we keep in mind that Trump has repeated several times that it was foolish for the Europeans to have been dependent on Russian gas to such a great extent. So I think that he will not contradict himself that much. At the same time, if the Ukrainian transit stops completely on January 1, 2025, which is the most likely scenario at the moment, that would mean that Ukraine, first of all, will need some support from Europe.i This is because they will be left without gas and it will be really difficult to find sources of additional flows to Ukraine. Several European countries—for instance, Slovakia—will feel extremely uncomfortable. Additionally, Transnistria, which is a part of Moldova and is very important for Russia, will also be left without gas and without electricity as well. But as a part of negotiations, some of these transit volumes could come back. Looking at these different interests, I think there can be a mutually acceptable agreement to maintain approximately the same volumes of Ukrainian transit as of today, which would be about 10–15 billion cubic meters. I would expect that maybe at the end of January, or in February, European gas companies that are willing to buy Russian gas, will find some way to organize these minor spot volumes, which are not basically changing the big gas map, but would go to Europe, to keep everybody calm. That is my guess and we’ll have to see how it works out.
THE FLETCHER FORUM: What do you think will be the impact of the cessation of the Ukrainian transit on January 1, 2025, on countries like Slovakia, Hungary, and Austria, who more than others, depend on the Ukrainian transit? What would be the impact on the demand for gas in Europe? And do you think that European countries can make up for the loss of gas through the Ukrainian transit by replacing it with Azerbaijani gas?
DR. MITROVA: Well, first of all, Hungary is receiving gas via the TurkStream. So for them, it doesn’t matter. They are now preoccupied with Gazprombank sanctions and are trying to find a solution to process their payments. With respect to the Ukrainian transit, Slovakia is focused on achieving some sort of deal. With Austria, it was really something quite strange because in the end of November 2024, Austrian OMV (an integrated oil, gas, and petrochemical company) and Gazprom (a Russian state-owned firm supplying gas to European countries) had a clash and Gazprom stopped supplies unilaterally, saying that Austria refused to pay as per an arbitration case earlier and that Gazprom doesn’t want to supply gas for free. So the flow to Austria is officially terminated. I think both Austria and Slovakia are facing problems. They have gas storage facilities and they have other routes to bring gas into their countries. So it’s not a complete collapse. Instead, it is a question of prices—how high the prices will go in these regions. But, they have had three years to prepare for this termination. So I assume that they have some plan B. Of course, they would prefer to have cheaper Russian gas still flowing in. But I’m pretty sure that it will not end up in people freezing in their homes or something dramatic.
Now, regarding your question on Azerbaijani gas transit, I’ve written a piece on this together with my colleague Anne-Sophie Corbeau, looking at the different routes and assessing Azerbaijani gas balance. Well, the funny thing is first, Azerbaijan doesn’t have any excess gas. Everything is going through the Southern Gas Corridor to Europe and they simply do not have anything on top of that which is available. The second problem is that even if they would have found some physical gas, it would have to flow through Russian territory, through Sudzha, which is in the Kursk region. Currently, the Kursk region is controlled by Ukrainian military forces. There may not be many insurance companies or banks that would allow such a transaction. So it looks pretty risky. And most likely, the whole discussion would be about a virtual swap, which is not actually about physically moving Azerbaijani gas, but rather renaming Russian gas as Azerbaijani gas. So if this scheme works out, it will be Russian molecules renamed as Azerbaijani gas. And in return, Russia would most likely provide some other services to Azerbaijan. So it may likely be really difficult both for Azerbaijan and for Russia to sell this story to European consumers. They’ve tried it and it was a good attempt, but I think that people who can calculate and look at the real numbers would realize that it doesn’t work and that it’s probably too risky.
There is another opportunity that we didn’t mention, but which could also work, which is selling Russian gas on the Ukrainian border, so that European companies, or let’s say non-Ukrainian companies, can buy this gas on the border with Russia and then transit it, making a transit deal with Ukraine. It could be Swiss traders for example, who are ready to take this risk because the military actions still persist and the infrastructure can be affected. They can lose everything so they will, I assume, put some additional risk premium for their services. But they can bring this gas for their European customers through Ukraine. I don’t think that any of them would have such a high-risk tolerance to make a multi-year transit agreement. Therefore, these are more likely to be month-ahead deals and there will be plenty of these traders distributing those risks. But it is also quite a realistic opportunity to keep some volumes, so maybe it could be 4–6 billion cubic meters, which isn’t much but is sufficient to solve the headache of Slovakia and Austria.
THE FLETCHER FORUM: Given the difficulties that Russia is facing with getting its oil and gas out into world markets and profiting from it, one possible solution for increasing the margins would be to nationalize energy companies. Do you believe that some kind of expropriation or nationalization of Russian energy companies is being considered by the Kremlin? And, if nationalization of some of these large, basically quasi-state entities, does happen, how will that change things? How would Europe, and the rest of the world, look at Russia’s oil and gas exports, or do you think there won’t be much difference at all?
DR. MITROVA: The Russian government has already nationalized many assets. To begin with, many of the assets that were left behind by Western companies when they were exiting Russia were transferred to private or semi-private companies inside Russia. There was indeed a very interesting letter written to Putin by the newly-appointed energy minister Sergey Tsivilyov, who proposed to nationalize the oil and gas industry and to unify it into one entity. Obviously, if this materializes, he will be in the control of this entity. So, as a professional bureaucrat, his rationale behind such a proposal is quite clear as it would be a better idea for him to manage one organization as opposed to convincing dozens of firms that are competing with each other. However, there was no clear reaction from the Kremlin. They didn’t outrightly negate such an idea, which means that it is something that they are considering. So, yes, they are considering it, but it doesn’t seem to be their preferred choice. I don’t see any signs of that happening anytime soon, not in the short term.
At the same time, I would say that there is this logic of a militarized economy. Russia generally has always been quite a centralized country, but during the war this idea of massive mobilization of the economy gained currency. The idea that for victory, we have to optimize on a large scale, that we have to plan for everything, and that all the assets and new construction have to be approved and coordinated, this desire is becoming stronger. So it could be that in the longer term, perhaps by 2030. It will depend on many factors such as who will be managing Russia by that time. We cannot say for sure if the country will still be as aggressive or militarized by then, but they could potentially end up creating these large oil and gas ministries. Frankly, I don’t think that it will result in better cost control or better efficiency. For example, Rosneft (Russia’s state oil firm) is already quite a big monster and is definitely not the most efficient company in Russia. So in my opinion, it would be a mistake to nationalize the energy companies. So far they are avoiding this mistake, but at a certain point once again this logic of centralization might just force them to do it.
THE FLETCHER FORUM: Coming back to the point of the Arctic LNG 2 project, given the possibility of secondary sanctions, countries like China and India might be reluctant to buy Russian gas. In that case, who are the other potential buyers that Russia might be looking at?
DR. MITROVA: It was a very difficult period for the Russian gas industry back in 2022 when they realized that the European market was basically lost. They realized that China isn’t that keen to go for the Power of Siberia 2 pipeline. LNG looked like a pretty good idea until these precise sanctions started. So what are the other options left? Just a few of them, and they are not very attractive options. The first option is domestic gasification. That’s socially very well supported. Everybody wants to have cheaper and convenient gas instead of coal or wood. But this option is very expensive and absolutely unprofitable. So for the gas industry, it’s not a good idea. Then the idea was to go for gas chemistry. This would involve exporting not pipeline gas or LNG, but ammonia and methanol—the fertilizers produced out of gas. They do not require freezing temperatures like LNG and they do not require high technologies to be produced. It’s not that difficult to transport them. So it could also solve the problem of sanctions on logistics. And they are also related to the food issue, which is so sensitive for developing countries. So that could work. So far, Russia doesn’t have much experience in this and doesn’t have the big capacitors required for this. So there are no technologies and these would have to be imported from somewhere and these plants would have to be built. This equipment is not under sanctions yet, but it can get there. So, I’m not sure how exactly it will work out. They haven’t started anything yet, they haven’t had any investments yet, and there has been no final investment decision (FID), but it is something that they are definitely thinking about.
Another option would be to export the gas to Russia’s closest neighbors, such as in Central Asia. There was this deal made in October 2023 with Uzbekistan. Then in 2024, Kazakhstan said that it will also probably join. Now they are negotiating bigger volumes. It’s still not clear what part of these volumes will go to Kazakhstan’s domestic market and which part might be transited to China. But it looks like they were giving this impression that potentially it could be an alternative to Power of Siberia 2. If China doesn’t want these big additional pipelines, maybe it will be more curious to have 20 billion cubic meters of additional gas going from Russia through Uzbekistan and Kazakhstan. China has never commented on that, so we don’t know what their attitude is. But at least Uzbekistan and Kazakhstan seem to be quite interested for a very simple reason. They are really running short of gas. Although both countries are gas producers, they have severe seasonal gas deficits that are resulting in winter blackouts. So it’s a big social problem. It’s a big challenge for their economies and therefore, Russian gas seems to be a blessing. They really want and need Russian gas. But the volumes would maybe be a maximum of 20, maybe 25 billion cubic meters compared to the 140 billion cubic meters that Russia lost in Europe, with much lower sales prices. It’s not a good replacement.
There were also some speculations about building this gas pipeline north to south, like a vertical pipeline from Russia to Iran, so that Iran could liquefy its gas in the Gulf. They started construction of these liquefaction plants ages ago. It’s not finished, but potentially Russia could help with some equipment because in terms of liquefaction, Novatek managed to develop domestic technology. The issue is now with the LNG tankers, not with liquefaction itself. So if Russia and Iran together liquefy this gas in the Gulf and send it, let’s say to India, Africa, Southeast Asia, that could be another opportunity. Russia signed several memorandums of intention with Iran, but it never moved forward. I’m really very skeptical whether they can find the money and offtake guarantees. So for me, it’s more like political messaging than a realistic project.
Most of the hopes, I would say, were with the development of massive LNG production units in Yamal, in the Baltics. And there was this potential in the Murmansk region, Novatek was also thinking about diverting flows that were feeding Nord Stream and building the confection plant for all this gas in the Murmansk region and then sending it as LNG around the world. But now, after this very severe pressure, Novatek has announced that they put on hold all the new LNG projects. For now, it’s not relevant.
THE FLETCHER FORUM: Going back to what you mentioned about the possibility of nationalizing Russian energy companies, you said that it’s something that they may consider, but have currently kept it on hold. So would it be right to say that maybe they’re waiting to see how the negotiations will play out and what will come out of it, to then ultimately make a call on whether energy companies in Russia should be nationalized or not?
DR. MITROVA: Of course. There are advantages that Russia could get out of the negotiations. Trump’s victory was received as a sign of hope, that the war will end soon, that there will be some sort of settlement with Ukraine. And then, it was felt that the situation would be different. Moreover, oil companies are not very happy with this idea of nationalization. And they will all oppose it. As you can imagine, these are very influential players inside Russia. It could take several years for this idea to become reality. It could take several years of very tough, if not bloody, power fighting among Russian elites because whoever controls the oil sector controls the financial flows into the country. So it will be very difficult to make such a decision overnight. And basically there is this feeling that now that Trump has come to power, there are different rules, now Russia can probably negotiate for something else. The idea is to try out the negotiations and see how it materializes. Nobody knows how the negotiations will fare, but there is the idea to at least give it a try.
(This post is republished from the Fletcher Forum of World Affairs.)