Thursday’s Number Is 14: On the EU’s ‘New’ Russia Sanctions

Is the 14^th time the charm? EU member-state ambassadors hashed out their 14^th package of sanctions against Russia Thursday, continuing their effort to defund Vladimir Putin’s Ukraine war machine. This batch targeted, for the first time: Russian liquefied natural gas (LNG). And in a refreshing twist, we aren’t seeing related concerns about global or EU energy supply. Seems right to us—past sanctions haven’t kept Russian fossil fuels off the market, and these probably won’t, either. Markets have rightly moved on.

Maybe you are thinking, but wait, didn’t the EU already ditch Russian gas? Look, we get it. There have been many twists and turns since the war began in early 2022. Before then, the EU got a bunch of its energy from Russian natural gas delivered via pipeline. EU leaders discussed ending their Russian gas reliance and eventually announced plans for a ban in 2027 (which wouldn’t cancel extant long-term contracts, so it is a slow roll). In the meantime, as the West dialed up sanctions, Putin halted pipeline gas flows into Europe as retaliation. This accelerated most EU nations’ energy supplier switch plans, and it reorganized global energy markets in a hurry as prices spiked, then settled back down as supply increased and new supplier relationships formed.

Anyway, that was all related to Russian pipeline delivered gas. One way EU countries diversified from Russian pipelines: Russian LNG. That is, natural gas chilled into liquid form, loaded onto a tanker and shipped by sea. The EU imported a fair amount of it. Some got re-exported, mostly to China, India and Turkey.^[i] But most of it stayed, powering Hungary, Germany and Italy in particular. Leaders saw it as a necessary evil to keep the lights on while they pressed on toward their longer-term divorce.

Thursday’s sanctions aren’t a huge change. They don’t ban EU nations from buying and consuming Russian LNG. Instead, they bar Russian tankers from using EU ports as waystations for their shipments elsewhere.

Essentially, EU leaders are trying to take advantage of geography. One of Russia’s main LNG export terminals is on its Arctic coast. From there, icebreakers haul the gas through icy seas to European warm water ports, where they transfer the LNG to smaller ships to distribute worldwide. Somewhat ironically, the EU has the ideally placed infrastructure for this in large part because of all the floating regasification and storage units (FRSUs) they adopted to replace Russian gas with supply from the US and elsewhere.

We doubt these measures will put much of a proverbial cork in the bottle. Russia may have put a lot of its LNG export infrastructure on the Arctic coast, but westbound icebreakers aren’t its sole mode of LNG transit. It also has the Sahkalin export terminal, located off its east coast, which serves Asia. This facility will come under US and UK sanctions next week, but they echo the oil tanker sanctions that have long proved rather feckless. There are also alternatives to Europe’s FRSUs, and late last year an Indian company even completed the world’s first ship-to-ship LNG transfer.^[ii] Billed as a way of cutting costs, shipping times and emissions, it could also put Russia’s infamous shadow fleet of tankers in the game.

Yes, with some gumption and elbow grease, Russia can probably use the same tools it has deployed to evade all the sanctions on its oil exports. Despite the West’s repeated efforts, Russian crude still enjoys a big market globally. Exports are firm, and OPEC is even started to get peeved that Russia is exceeding production targets.^[iii] The new sanctions claim to crack down on this, but the devil will be in the details, which won’t be available until the full rules are published in the EU’s Official Journal. However, the US and UK have detailed their new sanctions that target the shadow fleet, and they amount to blackballing a few individual ships they identified.

From a sociological and human standpoint, this probably frustrates many—it means Russia continues accessing hard currency to fund its war effort. However, markets are more cold-hearted. They care simply about whether energy supply will face greater-than-expected disruptions, stoking shortages and spiking inflation anew. And we have seen, over and over again, sanctions don’t work well enough to do this. The US, UK and EU can tighten the shackles all they want, but as long wide areas of the world aren’t participating, Russian energy will always find a way to market. The incentives for all involved are simply too powerful.

Which means energy shortages aren’t likely. Oil and gas will still get where it needs to go, just with perhaps a more complicated route. Markets are already showing this, with oil and natural gas prices still well below 2022’s highs. This fear has lost its bite, showing how much sentiment has improved.