Why it’s so hard to sanction Russia’s global energy trade – Grid News

ADVERTISEMENT

Why it’s so hard to sanction Russia’s global energy trade

Behind the massive sanctions imposed by European nations and the United States on Russia following its invasion of Ukraine lies a very thorny question: What to do about Russia’s massive energy industry?

Russian gas exports supply about a third of Europe’s natural gas for electricity, cooking and heating — and getting around them is a tricky geopolitical problem. The United States keeps getting rebuffed in its efforts to get countries with which it has a long-standing military relationship to increase oil production and thereby stabilize global gas and oil prices and consider tougher sanctions on Russia.


Hear more from Matthew Zeitlin about this story:


Grid spoke with Helen Thompson, a professor of politics at Cambridge University whose new book “Disorder” looks at, among other things, the deep history of U.S., European and Russian energy policy, which has brought the three powers together and driven them apart.

This interview has been edited for length and clarity.

ADVERTISEMENT

Grid: The European-Russian energy relationship predates the post-Soviet period. Could you talk about what happened after the Suez Crisis in 1956 — when France, Israel and Britain attacked Egypt following the nationalization of the Suez Canal only for the United States to impose a ceasefire and pressure the three states to withdraw — that brought Western Europe and what was then the Soviet Union together on energy?

Helen Thompson: The Suez Crisis is a big juncture. What had happened was that President [Dwight] Eisenhower had stopped the West European powers defending their immediate oil interests in the Middle East. And not only had he done that, he had also done that in ways that makes it quite difficult, particularly for Britain, to import any emergency oil from the United States.

This for them is a massive wake-up call that if [Western European countries] were dependent upon Middle Eastern oil, and that if American power can be used to circumscribe how they protect those energy interests in the Middle East, they needed some alternatives.

Ultimately, the most successful alternative that emerges out of this is to start importing oil from the Soviet Union again.

G: Your book argues that the United States’ own energy self-sufficiency does not buy it the kind of geopolitical weight that you might think.

ADVERTISEMENT

HT: The American shale oil and gas boom is a much-underestimated factor in a lot of what’s happened in geopolitics in the last 10 years.

There is this paradox at the center of that, because on the one hand, as you said, the United States now has more energy power than it has had at any time since 1970.

So on the one hand, that has allowed the United States an autonomy about energy, including some capacity for detaching in the Middle East, that wasn’t there during the ’90s and the 2000s. But this new American energy power has been very, very disruptive to geopolitics.

It’s been disruptive on the oil side, in the first instance, where Saudi Arabia was concerned because it made the United States and Saudi Arabia oil rivals and ended up incentivizing Saudi Arabia to pursue an oil relationship, oil alliance effectively, with Russia — the creation of OPEC Plus.

And it was extremely disruptive on the gas side because it basically turned the United States and Russia into commercial competitors, first in Europe and now increasingly in Asia as well.

And that really sort of got tied up with the Nord Stream issue because the Germans said, “Oh, well, you don’t really care about the geopolitics of this, you just want to be able to sell shale gas to us, the sanctions against Nord Stream are not driven by concern about what Russia is up to, it is driven by the commercial interest of American shale gas producers.” It became quite difficult to disentangle what was what.

G: Could you maybe talk a little bit about how OPEC Plus, the current members of the Organization of Petroleum Exporting Countries like Saudi Arabia and the United Arab Emirates with the addition of Russia, is becoming this rival to the United States?

HT: The origins of OPEC Plus really lie in an attempt by Saudi Arabia to do two things at the same time: hurt the United States, and to hurt Russia.

They wanted to bankrupt shale oil producers by forcing the price very low in 2015.

And the Saudi hope appears to be, given the amount of debt that shale oil producers had, that they would not be able to live with prices so low. And indeed, there was a string of bankruptcies of shale oil companies in late 2015, 2016. But it didn’t go anywhere near to taking the shale oil boom out.


ADVERTISEMENT

The second hope was that with very low oil prices, that Russia would get hit as the Soviet Union got hit by very low oil prices in the middle of the 1980s, and it might change the calculations that Russia made in Syria. At that point, Russia hadn’t made its military intervention into Syria. But it didn’t work. It didn’t change things significantly for the American shale oil producers. And it didn’t change anything that Russia did. Indeed, Russia intervened in Syria after this was taking place.

The Saudis then moved to reach an accommodation with Russia in the autumn of 2016 in order to push the prices back up, because by this point, Saudi Arabia was hurting itself with lower oil prices.

And you can see that, once you’re living in a world of three big oil producers, that this was going to cause some geopolitical turbulence. The perverse logic, though, was always there in OPEC Plus, which made it vulnerable to how Putin reacted to what was [happening] on the gas side of things in Europe in particular. Once OPEC Plus was pushing prices back up again, that obviously helped American shale oil producers too.

And now what we’ve seen before the present crisis was the Biden administration getting very edgy every time oil prices were going over about $75 a barrel. And they are a lot higher now. But that would involve [President Joe] Biden making appeals to OPEC Plus, but OPEC Plus is just a name that covers the fact it’s essentially a Saudi-Russia axis and that Biden was having to ask Putin for help on oil prices.

G: A big theme of your book is how the American military and energy involvement in the Middle East does not always have straightforward results; the relationship is not always as simple as it seems. I think a lot of people are wondering why both the United Arab Emirates and Saudi Arabia are kind of playing both sides against the middle here in this crisis and are not fully on the U.S.’s side.

ADVERTISEMENT

What is the United States’ involvement militarily in the Middle East getting, if not geopolitical or political alliances from these large oil producers?

HT: The fact the United States is now a rival for market share obviously makes things much, much more complicated than they were when the United States still had a significant oil import dependency from these countries.

Saudi Arabia and Russia and the United States are competing selling oil to China, which obviously has now become the world’s single biggest importer of oil.

If you look at what is the core purpose now of American military power in the Middle East, it’s essentially policing the Persian Gulf and keeping the Persian Gulf open.

And the problem in domestic political terms, and I think that [Donald] Trump in his sort of usual kind of fashion blurted this out quite a few times, is that given that significantly more oil is now coming out of the Persian Gulf to go to China and Japan than is going to European countries and certainly to the United States, it looks like the United States is providing naval energy security for China. I don’t think that’s the easiest sell in domestic politics as to what American military power is being used for in the Middle East.

ADVERTISEMENT

The problem is, though, if you’re sitting in Washington, do you really want China to take responsibility for naval energy security in the Middle East? That China would be the naval power that’s policing the Persian Gulf? That would be quite a significant geopolitical shift with complicated, at the very least, consequences.

G: I was wondering if you could talk about, from the historical perspective, how countries like Russia or China, or even in Europe, have been worried about the ability to leverage the U.S. dollar to geopolitical ends.

HT: You can see this very much particularly over the last decade and in the aftermath of the 2007-2008 crash in the way in which it turned the Federal Reserve into an international lender of last resort for dollars.

You can see a clear attempt, albeit pursued in different ways, in Moscow and in Beijing, to try to decouple from the dollar where possible. In China’s case, there was some emphasis, at least early on, on trying to find ways in which [Chinese President Xi Jinping] could pay for oil and gas imports in his own currency and not pay for them in dollars.

And obviously in the Russian case, there was more of an emphasis on trying to make sure that Russian companies and Russian banks will not be sanctionable in the kinds of ways in which we’ve seen that they are.

ADVERTISEMENT

[Russian President Vladimir] Putin went quite some way to try to reduce Russia’s dollar debt, built up a lot of gold reserves, rather than holding dollar reserves, which had been more the strategy in the 2000s.

The Russians and the Chinese are very aware of the power that the dollar gives the United States and the fact that the dollar is the currency of international banking. But the ability completely to detach? It’s not there. I think in some sense, Russia went further than China did. But we’ve seen that the actions that have been taken over the last few days are going to hurt Russia.

American financial power is not only acute, but it’s grown considerably over the last 10 years. And it really gets in the way of any idea that is sometimes articulated, particularly in Europe, that there’s some kind of inevitable decline of American power going on.

Because you can’t just say, because America has got military problems in the Middle East, that means that all American power is waning. American financial power is ascendant; it’s not waning.

G: I think many people in the United States would not see the last 20 years as a time of increasing American power on any scale. So what is it about the dollar system where America’s financial power and then the geopolitical power attached to that has increased?

ADVERTISEMENT

HT: You can think about this in two different ways. I think the first of them is the ways in which it has been shown that sanctions can be designed in ways that provide very quick incentives for foreign companies to comply, because they get shut out of the American banking system [otherwise].

And I think it’s hard to imagine, for instance, the sanctions against Iran that the Obama administration pursued to bring Iran to the negotiating table about the nuclear deal working in the way in which they did without that extraterritorial element that could be directed against European and Chinese companies who didn’t want to comply.

The second thing that’s true is that in the post-2008 world, in which the Federal Reserve had become an international lender of last resort, and in which the Federal Reserve’s monetary decisions had huge consequences for the financial position of a number of countries, everybody else in the world economy is constrained by what the Federal Reserve decides monetarily. And I think it’s pretty clear that the extent to which the Federal Reserve decision-making constrains everybody else is a probably an order of magnitude higher than it was in the pre-2008 world.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.