What might happen to the Russian energy market if sanctions were lifted?

One of the topics on the agenda is a possible relief in the sanctions against Russia, which includes its vast energy sector.

The oil and gas sector is a major source of revenue for Moscow. It has been under Western sanctions since 2014 when Russia annexed Crimea from Ukraine. These sanctions were tightened considerably after Russia invaded Ukraine 2022. Washington announced its most severe round of sanctions in January 2010.

Here are some implications of a possible reversal.

RUSSIA TRADE with US and EU

Before the war, Russia was the biggest supplier of fuel oil in the United States. It exported up to one million metric tonnes (240,000 barrels of fuel per day) per month.

The United States imported crude oil, mainly from Russia's Far East. If sanctions are lifted, these flows could resume.

Before the war, Europe was the largest buyer of Russian gas and oil. The European Union has imposed several rounds of sanctions, the most recent package being extended until September. This and efforts to reduce the bloc's dependence on Moscow have dramatically reduced these figures.

Eurostat reports that the volume of "petroleum" oil imported from Russia during the fourth quarter of 2024 is 10% less than it was in the first three months of 2021.

The EU is not expected to change its imports of Russian gas and oil until it reviews the current sanctions.

Even if sanctions were lifted, a return to the energy supply of pre-war is unlikely. Damage to infrastructure such as the Nord Stream pipelines connecting Russia and Germany, of which three were blown up by 2022, will also limit future flow.

PAYMENTS

The impact of the easing financial sanctions by the United States on Russian energy revenues and exports would be greater.

The U.S. sanctions and EU sanctions have forced Russian exporters to switch to alternative payment methods and increased fees. The easing of U.S. sanction could allow Russian companies to conduct transactions in dollars.

Russian and Chinese banks have found a way to shorten the payment period, but problems persist.

The cost of payments in currencies other that the U.S. Dollar is high, as Russian oil suppliers have to convert their currency several times.

The U.S. imposed sanctions on January 10, which included Gazprom Neft, and Surgutneftegaz. These two companies, the third- and fourth-largest Russian oil producers by production, had to depend more on intermediaries.

In November, United States also imposed sanction on Russia's Gazprombank which was used to pay Gazprom's European gas customers.

Washington has issued temporary waivers for Hungary, Slovakia, and Turkey to facilitate payment through the bank.

Prices are listed below.

The U.S. and its allies, including the EU, capped Russian oil prices at $60 per barrel. Western shippers and insurers are prohibited from facilitating any trade above this level due to sanctions. Russian exporters could find that more maritime service providers are willing to work with Russian exporters if the U.S. ceases to enforce the cap.

The price of Russia's Urals crude, its flagship, collapsed early in 2022 after European refiners, which were the main buyers, stopped importing.

Urals is now valued at around $10 a barrel less than the Brent crude benchmark, compared to pre-war levels that were around $1 to $2 per barrel.

Urals may increase if U.S. Sanctions are eased, but they are unlikely to return back to their historical levels until European sanctions are lifted.

Russia will continue selling most of its crude oil to India and China until then. These countries became the largest buyers when European refiners stopped purchasing.

Shipping

Since 2022, the U.S. Treasury Department has imposed sanctions against hundreds of vessels that are involved in Russian oil and gas shipments. It also imposed sanctions upon dozens of shipping companies and several Russian insurance firms.

Many vessels suspended operations due to the sanctions. Some traders have called the docking of sanctioned ships off Russian ports "tanker graveyards".

Should such sanctions be lifted, Moscow will pay less to ship its crude oil and thus increase its revenue from crude sales.

No sanctions are in place on the import of Russian pipeline natural gas. However, most countries have stopped buying it since Russia invaded Ukraine. This makes Gazprom, the Russian gas export monopoly, the biggest corporate victim of the conflict.

U.S. sanctions included companies that supported the Arctic LNG 2 project in Russia. The development of Russian LNG plant could be accelerated if the sanctions are lifted. Nina Chestney and Simon Webb edited the report.

(source: Reuters)