Sanctions Impact on Russia – Step by Step?

By Chris Weafer, March 12, 2014

effort towards business reforms in order to counterbalance the negative legacy from the politics
    •    More focus on import substitution so as to reduce vulnerability to European imports.
    •    Greater diversification of both import sources and export routes for energy. A greater focus on Asia.

What sanction would be inconvenient?
    •    Travel restrictions against named individuals
    •    Asset freeze against named individuals
    •    Travel visa bans or restrictions against Russian population
    •    Exclusion from G8
    •    Suspension of trade talks
    •    Suspension of OECD membership entry talks

What sanctions would be economically disruptive?
    •    Capital flows ban
    •    Exclusion or restricted access to international financial markets
    •    Targeted trade restrictions

What would be catastrophic?
    •    Restriction or ban on gas exports
    •    Restriction or ban on oil exports
    •    General export restrictions
    •    General trade disruption
    •    Exclusion from WTO
    •    Withdrawal of the FIFA 2018 World Cup

Can US Energy damage prices?

There have been several articles recently suggesting an alternative energy strategy to export bans, i.e. basically that the US should use its considerable shale gas resources and/or growing oil output to increase exports and depress the price of gas and/or oil.

In reality all of that is irrelevant. The US does not have the physical infrastructure to boost gas exports and is many years away from having loading terminals and LNG tankers. Russian LNG tanker orders currently dominate the order books for LNG tankers in Asian shipyards.

The US has certainly seen a surge in oil production in recent years. From an average daily production of 7.8 million barrels in 2010 to an average of 10.3 million last year and an expected average of 11.4 million this year (IEA data). But, the US still burns close to 20 million barrels per day and, therefore, imported almost 10 million barrels in 2013 and will need almost 9 million of imports in 2014. If it exports some of its own production then it will have to compensate with extra imports, thus negating the export impact. Doesn’t make any sense.

We issued a note on the possible impact on the Russian economy in February as part of our In Context series “Lower oil will not destabilize Russia”.  The conclusions include a) the weaker ruble would partly compensate for the lower price and so, even at $80 p/bbl average, the budget would run an affordable deficit of only 3-4% even without spending cuts B) Saudi Arabia’s budget would be under more strain at that price and lead to an increase in Mid East supply risk, C) there are emerging big question marks over the economics of US shale production and the notion of cheap energy is fast being discredited.