Prolonged Sanctions Rip Into Russia, Causing Angst For Putin

One Novatek project, the massive $27 billion Yamal LNG project to be built in the Russian Arctic, has suffered considerable setbacks. Prohibited from securing financing in U.S. dollars, it scrambled for at least a year in search of funds and finally turned to Chinese banks, which are more expensive and less flexible than Western funding.

Moreover, when Russia’s oil production starts to decline, new oil discoveries will be needed while lack of access to Western technology for offshore drilling will have repercussions for Russia’s oil industry for years to come. Unable to replace declining production, Moscow’s’ state coffers will also decline. As much as half of the offshore and fracking technology used by Russia comes from the West.

Low oil prices also take a bite

Oil prices, which have tumbled from $107 per barrel in July 2014 to the mid to high $40s level now, have also caused considerably angst in Russia. Around half of Moscow’s state revenue is derived from oil and natural gas exports, though Moscow claims a much lower figure.

Budget problems from low oil prices have also caused Moscow to try selling large stakes in its state-controlled energy companies. In late June, Russian media reported that the Russian government was considering selling 19.5 % of its shares ($10 billion) in oil major Rosneft to China and India. Last week, however, Russia was forced to delay its privatization of Rosneft as it waits for oil prices to improve.

Russia’s oil exports have been helped to some degree by the massive devaluation of the Russia ruble, whose 20% loss against the dollar last year was added to a nosedive of 44% the previous year. Though a weak currency hurts Moscow, it makes Russian oil exports cheaper.

In late June, Russian President Vladimir Putin tried to persuade the EU to not renew sanctions, but to no avail. A week later, the EU extended sanctions in connection with the ongoing conflict in eastern Ukraine. They are in effect until January 31, 2017, then will be reviewed again.

Now the question is: just how long will sanctions remain in place? That depends on who you ask and on Russia’s future geopolitical developments and finally, how the West continues to respond.

On Tuesday, Chris Weafer, a senior partner at economic and political analysis firm Macro-Advisory, told CNBC that Crimea-related sanctions will stay indefinitely because clearly Crimea is not going to go back (to Ukraine) as far as the Russians are concerned.