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Russia-Ukraine crisis: Severe sanctions could trigger crippling Moscow response

Russia could use its oil and gas to inflict economic pain on the West, experts say.
Russian President Vladimir Putin in Moscow on Tuesday. Sputnik / Kremlin Pool Photo via AP

The U.S. is threatening painful sanctions against Russia if it launches an attack on Ukraine, but Moscow could hit back at the West by throttling natural gas supplies to Europe or triggering a spike in oil prices, experts and former U.S. officials say.

The Biden administration says it's holding talks with gas companies and European governments to prepare for possible Russian attempts to disrupt the flow of natural gas to Europe, but it’s not clear whether Washington and its allies will be able to offset a concerted retaliation by Russia, former officials and industry experts said. 

A short disruption on a limited scale could be managed, although natural gas prices would rise further and governments would have to help subsidize the effort, industry analysts said. However, a major cut in gas supplies over a sustained period could have devastating consequences.

“It could be very, very difficult for companies or countries to come up with enough supply to close a very big gap,“ said Kevin Book, the managing director at ClearView Energy Partners. 

“Russia can dig a bigger hole in supply than the West can plug,” Book said. “That’s just a matter of molecules and math.”

The potential economic confrontation between Moscow and Washington represents uncharted territory, as Washington has never imposed drastic sanctions on an economy of Russia’s size and importance. And if it is faced with unprecedented sanctions, Russia would be likely to choose to respond in an unprecedented way that could have ripple effects in the U.S. economy and around the world, experts said. 

“The Kremlin’s ability to meaningfully retaliate is significant,” said Adam Smith, who was a senior sanctions official in the Obama administration and is now a partner at the law firm Gibson Dunn. 

If the U.S. imposes the sweeping sanctions it has threatened, China will be watching closely. “This Russia case is really going to test the ability of the Western powers to use sanctions against great powers,” Smith said.

Imposing sanctions on some major Russian commercial banks or restricting Russia’s access to bond markets — measures the administration is considering — could cause some collateral damage to Western companies or investors, and U.S. officials are looking at how to carve out exceptions to soften any harmful effects, former officials said. 

In response to U.S. sanctions, Russia also could orchestrate a campaign of cyber hacking and ransomware attacks that could disrupt Western markets and industries, experts say. But the most serious blowback from a U.S. sanctions package against Russia would almost certainly come in the energy sector, where Russia is a world player with resources that move markets, experts said.

Despite pleas from the U.S. and Eastern European governments over the years, Europe remains dependent on Russian gas. Moscow is Europe’s main supplier, providing about 40 percent of the continent’s gas. It also provides more than half of Europe’s coal, and it is a leading supplier of crude oil.

Germany is even more dependent, relying on Russia for more than 50 percent of its gas, and Russia’s state-owned energy giant Gazprom owns many of Germany’s underground storage sites. 

European governments have sought to shift to greener sources of energy, and their own oil and gas production has declined.

Europe uses about 400 billion to 500 billion cubic meters of gas a year, and Russia provides about 130 billion to 170 billion cubic meters to Europe annually, with a third of that moving through pipelines in Ukraine.

If Russia squeezed gas supplies, European countries could try to make up the difference in shipments of liquefied natural gas from the U.S. and the Middle East.

Experts say that if Russia were to cut off gas supplies entirely, a drastic and unlikely move, there isn’t enough liquefied natural gas available on the world market to make up the difference. 

If Russia were to cut off the approximately 40 billion cubic meters of gas that flows through Ukraine, it would be a challenge to make up the shortfall through liquefied natural gas shipments or other energy sources. But making up the shortfall would also have consequences: gas prices would rise further and governments would have to subsidize the effort, experts said.

About two-thirds of the world’s liquefied natural gas cargo is already under contract, and governments might have to cover the cost of firms’ breaking contracts to divert it to Europe from other markets, experts said.

Europe’s capacity to receive the natural gas shipments is also limited, and it would be a struggle to accommodate a major increase in deliveries depending on how much gas is needed to make up for shortfalls, experts said.

Image: Gas Drilling & Wells at Gazprom PJSC's Chayandinskoye Field
A worker guides drilling pipes at a gas rig on the Gazprom PJSC Chayandinskoye oil, gas and condensate field in the Lensk district of the Sakha Republic of Russia on Oct. 13.Andrey Rudakov / Bloomberg via Getty Images file

U.S. officials have held talks with Qatar, one of the world’s biggest exporters of liquefied natural gas, to see whether Doha could help cushion the blow of reduced supplies. But Qatar is already producing at full capacity, and most of its shipments are already en route to Asia under long-term contracts, Bloomberg News reported. 

Russia has cut off gas supplies before, but only briefly during disputes with Ukraine. In 2009, gas supplies were shut down for nearly two weeks in wintertime, forcing Slovakia and some Balkan countries to ration gas and cut power supplies.

If Russia carried out a major cutback on gas deliveries, European countries would have to consider rationing and governments would have to decide how much they were willing to share gas and energy resources with their neighbors. 

After Russia invaded Ukraine in 2014 and seized the Crimean peninsula, the Obama administration chose to avoid large-scale sanctions against Moscow, partly because of fears that Russia could wage economic warfare of its own by exploiting vast oil and gas reserves, according to former officials.

But Biden administration officials say they are confident that natural gas producers will be able to ramp up production to help offset any Russian attempt to squeeze supply.

“To ensure Europe is able to make it through the winter and spring, we expect to be prepared to ensure alternative supplies covering a significant majority of the potential shortfall,” a senior administration official told reporters Tuesday. 

The official noted that Russia has already cut by half the customary level of gas supplies flowing to Europe through Ukraine. 

The official’s comments are “a way of sending a message to Putin: We know what you might do, and we’re prepared for that,” said Dan Fried, a former career diplomat who crafted sanctions policy and now works at the Atlantic Council think tank.

The U.S. has had to accept the harsh reality that introducing hard-hitting financial sanctions on Russia carries risks, but sacrifices are necessary to deter Moscow, Fried said. “Your risk tolerance has to go up when you’re talking about a land war in Europe,” he said. 

As one of the world’s largest oil producers, Russia could also slow down oil production and cause a spike in oil prices, a step that could aggravate inflation in the global economy and jack up gasoline prices for Americans. Oil is Russia’s most lucrative export, and Moscow would have to weigh the consequences of any cut in production.

U.S. officials argue that even though Europe depends heavily on Russian gas, Moscow also needs the revenue from the gas sales, and that cutting off gas shipments would hurt its own financial position.

The senior administration official said that “if Russia decides to weaponize its supply of natural gas or crude oil, it wouldn’t be without consequences to the Russian economy.” 

“Remember, this is a one-dimensional economy, and that means it needs oil and gas revenues at least as much as Europe needs its energy supply,” the official said.

In the last several months, Europe already has experienced shortfalls in Russian gas supplies. 

Although Russia has fulfilled long-term contracts and delivered enough gas to keep homes heated and factories operating, the overall flow of gas has declined, storage supplies have dwindled, and prices have hit record levels.

Western officials and industry analysts say Russia is clearly flexing its muscle to signal its leverage over energy. Fatih Birol, the executive director of the International Energy Agency, blamed Russia this month for record-high energy prices in Europe, saying Russia’s state-owned gas company Gazprom had sent 25 percent less gas than usual to Europe.

But Moscow denies there has been any deliberate bid to scale back shipments.

With Russia facing potentially harsh financial sanctions and restrictions on U.S.-made technology if it attacks Ukraine, and with the West facing a possible energy crisis in the middle of winter, the question is who would blink first.

Compared to 2014, the last time Russia launched an invasion into Ukraine, Moscow’s economy is in a stronger position thanks to high oil prices and a record level of foreign currency reserves, including gold, totaling $620 billion. 

“The reality is that today you have a situation in which Russia is much more prepared to weather significant sanctions than they were in 2014,“ Smith said.

Drawing on its reserves, Russia would be able to sustain a certain degree of financial damage from U.S. sanctions. But for how long? 

Prolonged spikes in energy prices and gas shortages could make it difficult for leaders in Western democracies to maintain sanctions on Russia, as voters might demand a change in course to ease the pressure on their costs of living.

But Russian President Vladimir Putin, who presides over an autocratic system with no genuine political opposition, doesn’t have to answer to popular pressure. Russia might be able to tolerate a protracted economic downturn longer than adversaries in the West, some experts said.

“Russia has a reasonable expectation that consumer democracies very well might find that their pain point comes sooner, because of their political systems and their reliance on energy,” Book said.