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By Jason Bordoff and Elizabeth Rosenberg
NEW YORK/WASHINGTON, May 2 (Reuters) - The newest round ofsanctions on Russia sets the right tone for potential escalationof pressure if the political crisis in Ukraine deterioratesfurther. Hit President Vladimir Putin's inner circle of croniesand companies, but leave the energy taps on. Turning them off isimpossible and unnecessary. There is a long path of painfulsanctions short of direct bans on Russian energy supplies thatcould cripple the Russian energy sector and make its economybleed.
The latest round of Russia sanctions, announced April 28,show that the Obama administration is willing to target theenergy sector as a key point of leverage against Moscow. ThatRussia is the eighth-largest economy, and No. 3 in oilproduction and No. 2 in gas production globally, is apparentlynot a roadblock for energy sanctions. Energy and economicconcerns -- for example about the potential effects of sanctionson global energy prices and Europe's heavy reliance on Russiannatural gas and oil -- have yielded to diplomatic and securityimperatives.
Some believe that the energy sanctions are symbolic. Oilprices and shares of oil companies operating in Russia did notmove dramatically after the announcement of the newrestrictions. But such a reading misunderstands this openingforay and underestimates the opportunities available tocalibrate sanctions.
Potential future energy sanctions can and should strike atRussian energy companies and executives without forcing anyactual supply disruption. As we learned from our work on Iransanctions, gradually escalating such sanctions will disrupt thenormal flow of business and investment by making itprogressively more difficult for energy companies to operate. Byprecipitating massive asset flight from Russia, freezing newbusiness and siphoning energy revenue, sanctions can imposeeconomic pain on Russia. Significantly, this strategy will limitthe pain for consumer countries, including European countriesand the United States. It will also limit energy price increasesthat would bolster Russia's revenue from its existing energysales.
The creep of sanctions targeting leading energy companiesand executives raises strategic uncertainty about exactly wherethe legal limits may lie in doing business with sanctionedRussian energy firms. For now, Russian energy titan Rosneft, whose Chief Executive Officer Igor Sechin wassanctioned Monday, is not off limits. Foreign partners merelyhave to carve Sechin out of their business interactions.However, concerns over the potential expansion of energy sectorsanctions will make foreign companies dealing with Rosneft morecautious about engaging in transactions, imposing economichardship on the firm.
Severely limiting the foreign financing, technology andservices available to Russia's major energy firms can broadlydeter investment and raise the cost for Russia's energybusiness. For example, the United States could sanction the saleof certain energy extraction and production technologies toRussian firms and provision of engineering or field services. Itcould impose export controls on goods and specialized equipmentnecessary for complex oil and gas projects, akin to militarytechnology export controls announced with the latest sanctions.
Even more severe, direct sanctions on Russian energycompanies would paralyze the joint ventures they have withforeign firms. Only smaller, non-U.S. firms unexposed to theU.S. financial system would continue to supply sanctionedRussian energy companies with goods and services. But thesecompanies would not offer the leading-edge technology,experience and deep pockets necessary to develop some ofRussia's most promising oil and gas megaprojects, such as LNGterminals or drilling and production in deepwater offshore orArctic areas. Recent experience in Cuban offshore drilling, forexample, demonstrates how challenging it can be to find anoffshore rig that has no or de minimus U.S. content.
Without U.S. and European partners such as ExxonMobil , BP, Total and Shell inRussia's vast new LNG and Arctic energy projects, Moscow wouldhave to significantly delay some of its biggest plans to supplythe burgeoning Asia-Pacific market with energy. It would have toturn to Asian partners for project development assistance. Thiswould mean less energy technology know-how, and more limitedfuture revenue streams and competitiveness in developing Asia,where energy demand is expected to rise by almost 80 percentover the next two decades.
The road to stronger sanctions against Moscow will no doubtbe paved with difficult negotiations with key European allies.Their strong dependence on Russian oil and gas makes themunderstandably uncomfortable handicapping Russia's ability toproduce. Contending with Russian retaliation for sanctions is areal possibility. There are significant U.S. and European energyassets parked in Russia or tied to Russian firms through jointventures, all of which are vulnerable if Russia seeksretribution.
But while sanctions on the Russian energy sector areuncharted territory, the plays and consequences are clear.Cutting off energy supplies, with all the pain it would imposeon all other countries, is not necessary to cause massiveRussian energy sector pain. This is the march of sanctions weshould pursue if the going gets tougher with President Putin.
(Jason Bordoff, a former energy advisor to President BarackObama, is a professor and Founding Director of the Center onGlobal Energy Policy at Columbia University. Elizabeth Rosenbergis the Director of the Center for A New American Security'sEnergy Program and a former senior sanctions advisor at the U.S.Department of the Treasury. The views expressed are their own.) (Editing by David Gregorio)
