Sadly, no. Despite its enormous cost, Russia can finance its horrific invasion of Ukraine for months into the future. Russia is more likely to run out of equipment, materials and perhaps men than money.
Most countries are encountering significant difficulties trying to reduce their dependence on Russian energy. In all cases, transitioning away from Russian energy will increase energy costs further when consumers are already upset about high energy costs.
The sanctions against purchasing Russian crude oil are not working because:
- Not enough countries are participating in the sanctions.
- Some countries are reaping a financial benefit from purchasing Russian crude oil.
- Alternative producers don’t have enough capacity to replace the significant world market share satisfied by Russian crude oil volumes.
- A few countries depend on Russian pipelines for crude oil. Alternative pipelines or ports will take years and a significant investment to build.
The sanctions against purchasing Russian natural gas are not working because:
- Alternative producers don’t have enough capacity to replace the significant Russian natural gas volumes.
- Building new LNG import terminals in consuming countries will take years and a sizable investment.
- Replacing Russian natural gas with renewable energy will take years and an enormous investment.
Why has Russian energy income increased?
The increases in the world price of fossil fuels have overshadowed the decrease in demand for Russian energy caused by the sanctions that various countries have implemented. Russia has gained roughly $200+ million in the last year.
The world price of fossil fuels has increased because:
- Worldwide demand has increased as the economies of most countries have rebounded after the COVID-19 pandemic.
- Oil & natural gas producers have underinvested in new developments for several years. The reasons include market uncertainty, reduced demand caused by the pandemic and vilification by activists and various governments.
- Major producers don’t have enough idle capacity to meet growing demand.
- Most OPEC+ members are happy to keep the world price at high levels.
Russia will continue to receive significant energy income even under the most optimistic scenario in which those countries that can reduce or eliminate Russian energy from their energy mix actually do so.
Which countries are buying Russian energy?
During the first 100 days of the war in Ukraine, from February 24 to June 3, the largest energy importers from Russia were China (EUR12.6bln), Germany (EUR12.1bln), Italy (EUR7.8bln), Netherlands (EUR7.8bln), Turkey (EUR6.7bln), Poland (EUR4.4bln), France (EUR4.3bln) and India (EUR3.4bln).
Given these large energy purchases, it will be difficult for these countries to change suppliers. Expect that the European countries of Germany, Italy, Netherlands, Poland, and France will reduce Russian energy purchases as quickly as possible. Significant reductions will occur in 2023 and continue for at least five years.
Turkey will likely continue its purchases as it is trying to maintain good relations with Russia while not increasing the annoyance of its NATO partner countries further. China and India have already increased their Russian energy purchases and are likely to continue.
How quickly did countries respond to Russian energy sanctions?
Countries vary widely in terms of:
- How much Russian energy they consume as a percentage of their total energy consumption.
- Their political ambition to respond to Russian energy sanctions.
- Their ability to implement Russian energy sanctions without causing economic collapse.
- The speed of their decision-making culture.
Here’s a summary of the initial reduction results.
We can expect more easterly European countries that feel threatened by Russia to take heroic actions to keep decreasing their reliance on Russian energy. The USA quickly achieved a 100% reduction because the volume was small and alternative domestic supplies existed.
Why haven’t sanctions affected Russian sales?
Russia has offset decreases in crude oil sales to countries committed to sanctions by increasing sales to countries that don’t care about sanctions and like discounted Russian crude oil when offered to them.
This chart illustrates how difficult it is to enforce sanctions against Russia and other countries determined to evade the sanctions.
As European crude oil sales have decreased, Russian sales to Asia, principally China and India, have increased sharply. The community of crude oil logistics experts has responded quickly to minimize the impact of sanctions on global energy security.
Rapidly changing the destinations of Russian seaborne cargos of crude oil is tricky due to:
- Contractual commitments.
- The need to match crude oil characteristics to refinery capability.
- Sanctions making settlement more complicated.
- Ship size and other limitations of receiving terminals.
Also, notice the emergence of shipments to unknown destinations. One of several actions cause this category:
- Ships turn off their transponders to hide their destination.
- Ship-to-ship oil transfers to mask the origin of crude oil.
In all cases, these actions are motivated by countries wanting to give the impression of some level of compliance with sanctions but wanting to benefit financially from discounted Russian crude oil.
Which European countries can shift from Russian natural gas?
The difficulty of weaning off Russian natural gas varies widely across European countries based on how actively they have pursued the energy transition to renewable energy sources.
The chart compares how dependent each country is on Russian natural gas compared to their plans for adding renewable generation capacity. That transition will reduce their need to purchase Russian natural gas.
Over the next five years, Germany, Netherlands, France and Poland can wean off Russian natural gas. Based on current plans, Italy, Finland, Austria, Greece, and Hungary will experience great difficulty.
This chart also shows that the remaining countries’ plans far exceed their needs. That situation creates an opportunity to improve electricity resilience by sharing through new transmission lines.
Yogi Schulz is an information technology consultant who works extensively in the petroleum industry to select and implement administrative, operations, and geotechnical systems. He writes regular articles about developments in the energy industry and technology.
You can contact Yogi Schulz through his LinkedIn profile at this link.