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By Jason Bordoff and Elizabeth Rosenberg
NEW YORK/WASHINGTON, May 2 (Reuters) - The newest round of sanctions on Russia sets the right tone for potential escalation of pressure if the political crisis in Ukraine deteriorates further. Hit President Vladimir Putin’s inner circle of cronies and companies, but leave the energy taps on. Turning them off is impossible and unnecessary. There is a long path of painful sanctions short of direct bans on Russian energy supplies that could cripple the Russian energy sector and make its economy bleed.
The latest round of Russia sanctions, announced April 28, show that the Obama administration is willing to target the energy sector as a key point of leverage against Moscow. That Russia is the eighth-largest economy, and No. 3 in oil production and No. 2 in gas production globally, is apparently not a roadblock for energy sanctions. Energy and economic concerns — for example about the potential effects of sanctions on global energy prices and Europe’s heavy reliance on Russian natural gas and oil — have yielded to diplomatic and security imperatives.
Some believe that the energy sanctions are symbolic. Oil prices and shares of oil companies operating in Russia did not move dramatically after the announcement of the new restrictions. But such a reading misunderstands this opening foray and underestimates the opportunities available to calibrate sanctions.
Potential future energy sanctions can and should strike at Russian energy companies and executives without forcing any actual supply disruption. As we learned from our work on Iran sanctions, gradually escalating such sanctions will disrupt the normal flow of business and investment by making it progressively more difficult for energy companies to operate. By precipitating massive asset flight from Russia, freezing new business and siphoning energy revenue, sanctions can impose economic pain on Russia. Significantly, this strategy will limit the pain for consumer countries, including European countries and the United States. It will also limit energy price increases that would bolster Russia’s revenue from its existing energy sales.
The creep of sanctions targeting leading energy companies and executives raises strategic uncertainty about exactly where the legal limits may lie in doing business with sanctioned Russian energy firms. For now, Russian energy titan Rosneft , whose Chief Executive Officer Igor Sechin was sanctioned Monday, is not off limits. Foreign partners merely have to carve Sechin out of their business interactions. However, concerns over the potential expansion of energy sector sanctions will make foreign companies dealing with Rosneft more cautious about engaging in transactions, imposing economic hardship on the firm.
Severely limiting the foreign financing, technology and services available to Russia’s major energy firms can broadly deter investment and raise the cost for Russia’s energy business. For example, the United States could sanction the sale of certain energy extraction and production technologies to Russian firms and provision of engineering or field services. It could impose export controls on goods and specialized equipment necessary for complex oil and gas projects, akin to military technology export controls announced with the latest sanctions.
Even more severe, direct sanctions on Russian energy companies would paralyze the joint ventures they have with foreign firms. Only smaller, non-U.S. firms unexposed to the U.S. financial system would continue to supply sanctioned Russian energy companies with goods and services. But these companies would not offer the leading-edge technology, experience and deep pockets necessary to develop some of Russia’s most promising oil and gas megaprojects, such as LNG terminals or drilling and production in deepwater offshore or Arctic areas. Recent experience in Cuban offshore drilling, for example, demonstrates how challenging it can be to find an offshore rig that has no or de minimus U.S. content.
Without U.S. and European partners such as ExxonMobil , BP, Total and Shell in Russia’s vast new LNG and Arctic energy projects, Moscow would have to significantly delay some of its biggest plans to supply the burgeoning Asia-Pacific market with energy. It would have to turn to Asian partners for project development assistance. This would mean less energy technology know-how, and more limited future revenue streams and competitiveness in developing Asia, where energy demand is expected to rise by almost 80 percent over the next two decades.
The road to stronger sanctions against Moscow will no doubt be paved with difficult negotiations with key European allies. Their strong dependence on Russian oil and gas makes them understandably uncomfortable handicapping Russia’s ability to produce. Contending with Russian retaliation for sanctions is a real possibility. There are significant U.S. and European energy assets parked in Russia or tied to Russian firms through joint ventures, all of which are vulnerable if Russia seeks retribution.
But while sanctions on the Russian energy sector are uncharted territory, the plays and consequences are clear. Cutting off energy supplies, with all the pain it would impose on all other countries, is not necessary to cause massive Russian energy sector pain. This is the march of sanctions we should pursue if the going gets tougher with President Putin.
Jason Bordoff, a former energy advisor to President Barack Obama, is a professor and Founding Director of the Center on Global Energy Policy at Columbia University. Elizabeth Rosenberg is the Director of the Center for A New American Security's Energy Program and a former senior sanctions advisor at the U.S. Department of the Treasury. The views expressed are their own. Editing by David Gregorio