The economy of the Russian Federation has proven to be surprisingly resistant to the onslaught of Western sanctions. Two years after the invasion of Ukraine, the aggressor's economy continues to finance an expensive war and support Russian dictator Vladimir Putin. However, despite this, the Russian economy has an area where a real problem has already formed.
Painful sanctions
The Arctic LNG-2 project (LNG - liquefied natural gas - ed.), which is being conducted by Novatek PJSC in the Kara Sea, is a key part of Moscow's plans to increase fuel exports and replenish the state budget.
The company has been ready for several months to supply liquefied natural gas to new markets, which is an alternative to the once profitable trade between the Russian Federation and Europe through pipeline exports. However, a new large-scale operation worth $25 billion is essentially idle due to US sanctions. This is the first case of American restrictions effectively working against the Russian energy complex.
Russia has long sought to increase its share of the global LNG market, but the war and subsequent sharp decline in overland exports to Europe have increased the importance of these ambitions - Moscow wants to triple LNG production by 2030, adding at least $35 billion in annual revenue.
Thanks to legacy operations, Russia is now the world's fourth-largest exporter of liquefied natural gas, but restrictions on its flagship Arctic LNG 2 project are limiting its ambition to move forward.
Moscow is even more concerned that the sanctions have set the stage for any future Western efforts to limit the Kremlin's gas revenues by targeting projects such as Yamal or Sakhalin 2 in the Far East that still supply gas to customers in Europe. and Asia.
Arctic supplies of Russian LNG to the Arctic
Moscow's plans to send LNG to Asia via the Eastern Sea Route have been disrupted by a shortage of icebreakers and sanctions
The founder of the Arctic Institute, Malte Humpert, noted that US sanctions “work surprisingly well” and blocked Arctic LNG 2 even before it began producing gas and delivering it by tanker.
The Joe Biden administration has imposed sanctions on the Arctic LNG 2 project in 2023. Buyers in China and India - countries that bought and traded Russian oil in circumvention of existing restrictions - refused to buy LNG even at a discount. And lawyers in Singapore and London refused to participate in the project.
In addition, Russian LNG ships worth hundreds of millions of dollars are stuck in dry docks in South Korea - because of sanctions, no one can buy or lease them.
Unlike Russia's oil exports, despite price caps and other restrictions, liquefied gas is more difficult to transport using its vast "shadow fleet", largely due to the more complex technology required to load and transport the supercooled fuel.
Bloomberg notes that the European Union still relies on Russian LNG and is reluctant to limit its imports, but is already planning to introduce some of its own sanctions. Europe does not directly ban the export of Russian fuel, but there is a debate in the EU discussing a ban on the use of EU ports for re-exporting Russian LNG supplies to third countries.
Russian liquefied natural gas plants in the Arctic region are very remote, so the fuel is usually first shipped to Belgium or France for re-export to Asia or another European port. Limiting this practice will lead to the fact that the Russian shipping fleet will be stretched to the limit.
Russia was the 4th largest LNG exporter in the world in 2023
The US has not imposed sanctions against existing Russian LNG export facilities
"Dead in the Water" LNG
The White House National Security Council began taking notice of the disruption to Russian plans to expand LNG production in 2023, about a year after the war began. A group of officials, along with the US State Department and the US Department of Defense, selected Arctic LNG 2 as a target, and then transferred the package of sanctions to the Treasury Department.
Today, as part of a broader plan to block Russia from developing any new energy projects that could generate significant revenue, the United States wants to ensure that the Arctic enterprise is "dead in the water."
White House officials have good reason to target the facility, which is co-owned by the Japanese government, Chinese state oil companies and France's TotalEnergies. While it irritates important allies, the Arctic LNG 2 freeze hurts Moscow while causing only limited unrest in global natural gas markets. Equally important to the Biden administration as the election approaches is containing the impact on American consumers.
Washington has other advantages in this project. LNG trading requires expensive, specialized vessels that can be tracked using satellite data, making it almost impossible the creation of an alternative fleet is possible. Although there are approximately 7,500 oil tankers of varying sizes in the world today, the entire LNG industry consists of approximately 700 vessels.
In addition, Arctic LNG 2 requires a unique type of vessel that can glide through thick ice. 21 ice-class tankers were ordered for the operation, including vessels owned by South Korean companies Hanwha Ocean Co. and Mitsui OSK. Now the companies are trying to find new owners. It is obvious that Russia can attract its own capacity, and ships for transporting LNG are being built at the Zvezda shipyard, but even their construction is delayed due to US sanctions.
“The biggest single limiting factor to the development of the Arctic LNG 2 project is the availability of tankers. This is a weak point in the Russian overall strategy. Long-term prospects are clouded by the fact that the main mission, which was to develop LNG for East Asia through the Northern Sea Route "is not a possibility at this point," said Tan Gustafson, a Georgetown University professor who has been following Russia's fossil fuel expansion for decades.
Russia holds the world's largest share of natural gas, with about 20% of proven reserves, but it still needs to turn it into profit. New gas pipelines are not being built quickly enough to redirect sales, leaving only liquefied natural gas, which dictator Putin himself has identified as the fuel of the future.
The Kremlin expects to export more than 100 million tons of LNG per year by 2030, with or without sanctions, up from about 31 million in 2023.
Arctic LNG 2 is not the first project to be subject to restrictions, and restrictions on the transfer of technology and equipment for hydrocarbon exploration introduced in 2014 have stimulated the emergence of some local alternative projects.
However, even the Russian government is beginning to recognize the scale of the problem as sanctions accumulate and technologies are slowly reproduced. Data in an Economy Ministry document published earlier this year, seen by Bloomberg, suggests that production could effectively stagnate by 2027 under a conservative scenario. This means that Arctic LNG-2 will not be able to quickly increase production volumes.
The plant started working
At the same time, none of the traders and analysts surveyed by Bloomberg expected the plant, which has completed construction (and launched only one of three production lines), to reach full capacity while sanctions remain in force.
The Novatek company, which is behind all this, insists on its own. The founder of the enterprise, Leonid Mikhelson, the fourth richest man in Russia and a close ally of Putin, managed to complete construction of the first stage of the Arctic LNG-2 project in 2023. This came in defiance of industry expectations that a lack of technology would hold back its implementation. Following the withdrawal of companies such as France's Technip Energies, new supply chains were created, with parts and equipment imported from engineering factories in China.
“The fact that we became the target of sanctions is a signal of how they assess our competencies,” Mikhelson said at the XVI Verona Eurasian Economic Forum in November, shortly after the project came under sanctions.
At the same time, Novatek's founder now needs to contend with the potential departure of more foreign partners due to increased restrictions, as well as look for clients.
Novatek hired staff in China to try to revive the business and sent officials to India in February, according to people familiar with the matter. However, no concrete deals have been concluded yet.
The next test will take place in the summer, when Novatek plans to send its first cargo of liquefied natural gas from Arctic LNG 2, using ice thin enough for a regular ship to use.
“There will be special flights, but they are very limited. Where will Russia go next?” asked Gumpert of the Arctic Institute.
Sanctions against Russian liquefied gas
The European Union is already developing a 14th package of sanctions against Russia for its full-scale invasion of Ukraine. The new package will contain restrictions on those individuals and legal entities that help circumvent existing sanctions.
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