Economic Sanctions Against Russia: Short and Medium Term Consequences for the Oil and Gas Industry

Abstract

The growth in production and exports of oil and gas from the United States and other OECD countries led to pressure on energy prices, and posed the problem of redistribution of the structure of oil and gas market shares. The aggravation of competition contributed to the selection of measures to modernize the industry in Russia as the main measures of economic sanctions, as well as restrictions on the supply of Russian oil and gas to Europe, which jeopardized the implementation of the South Stream and North Stream-2 projects. The oil and gas industry continues to play a significant role in the formation of the revenue base of the federal budget of the Russian Federation. As a result of the imposition of sanctions, the export of Western equipment to Russia was banned, it could be a serious blow to the industry, which potential could be fully realized in the next 3-5 years. Oil and gas companies are most dependent on the pumping equipment (import share is 50%), catalysts (80% share of imports), applied software (the share of imports is more than 80%). Currently, Russian companies purchase equipment in China and South Korea, but the quality is much lower than the US, and the equipment often fails, so it is associated with the high costs of repairs. The import substitution should revive the domestic production of oil and gas equipment, but how this policy is implemented is difficult to predict, as enterprises have to overcome a significant technological gap and lag behind foreign developments. Russia managed to survive the short-term period of economic sanctions with significant, but not extremely large losses. Much more acute consequences can affect in the medium term, unless vigorous steps are taken to import substitution and modernization of oil and gas production and processing.

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“…The problem of Russia's energy export policy effectiveness is also exacerbated by the sanctions imposed against it (Sidorova, 2016;Nureev andBusygin, 2017, Russian Council on Foreign Affairs, 2018) to limit the supply of Western technologies and equipment for exploration and development of new gas and oil fields in Russia, a rise in the cost of supplies of equipment and components for regasification and further use of natural gas. The change in the economic and political course of countries with large reserves of natural gas and other hydrocarbons and their entering into contracts with Western companies who possess efficient technologies could contribute to the rapid growth in the gas and oil exports on better terms than with Russia.…”