EU officials huddled Friday, Sept. 5, in Brussels to finalize the fourth round of sanctions on key Russian economic sectors, including finance, energy, and defense, while U.S. President Barack Obama said that the United States is working to “deepen and broaden” existing sanctions meant to ratchet up financial pressure on Russia.
The EU was poised to expand its earlier sanctions that banned major Russian banks and energy firms from global capital markets. The latest sanctions, for example, would target Rosneft, Russia’s big oil company. Europe would also aim at the export of sensitive technologies, such as those used for oil exploration offshore and in the Arctic, two priority areas for a Russian state anxious to boost its oil and gas production to compensate for declining output at aging fields.
A last-minute cease-fire agreement may have forestalled Europe’s latest steps to bring pressure to bear on Russia, which it says is responsible for the armed violence in eastern Ukraine. Many observers view the cease-fire skeptically because it does not address the underlying drivers of the conflict between Kiev and Moscow. But European officials said they are willing to give the plan, drafted by Russian President Vladimir Putin, a chance to end five months of sporadic fighting.
More broadly, will Western sanctions, which threaten to choke off much-needed financing for big Russian banks and energy companies, trigger tough reprisals from Putin?
Putin has long threatened to wield the energy weapon to cow European countries, which are heavily reliant on imports of Russian oil and natural gas, and he threatened to shut off gas exports to Ukraine in May. The energy weapon will become more powerful for Russia as temperatures drop. Russia’s dominant role in a handful of other key sectors, such as critical metals, could also give it leverage to inflict targeted pain on major U.S. and European manufacturers.
Russian metal exports are a particular vulnerability. Russia is the biggest global supplier of key titanium components used by aircraft manufacturers such as Boeing and Airbus, for example. Reprisals from Moscow could complicate production of a major and lucrative Western exports.
Boeing has been stockpiling Russian titanium parts since March out of concern that the Ukraine crisis might disrupt supplies, the Wall Street Journal reported Aug 7.
The Federal Reserve said airplane-makers in the Pacific Northwest were concerned about metal supplies, in its survey of local economic conditions published eight times a year. Although titanium is perhaps the most vulnerable supply, nickel and palladium could also be targeted. Because supply chains often weave through several different companies from raw material to component part to finished product, there may be unrealized dependencies that aren’t revealed until the supply is halted.
Europe’s deepest fear, and Putin’s ultimate ace in the hole, would be to run a reliable play and halt natural gas exports to Europe, as it did in the winters of 2006 and 2009. Europe gets about 40 percent of its gas supplies from Russia.
Cutting off energy flows is a double-edged sword. About half of Russia’s revenues come from energy exports, and Europe is gas giant Gazprom’s biggest export destination. What’s more, Europe has braced itself for the worst.
“Europe could probably sit out a supply disruption for about two months, but then countries like Romania, Bulgaria, Hungary, and Greece would be in trouble again,” said Tim Boersma, a European-gas expert at the Brookings Institution.
Throughout the Ukrainian crisis, Russian officials have promised to keep energy exports flowing to Europe: They want to ensure the $100 million a day in revenue and maintain Russia’s reputation as a dependable energy supplier. But Europe could suffer even if Gazprom and Putin play ball. That’s because Ukraine is in the middle.
About half of Europe-bound Russian gas passes through the country; Russia shut off gas exports to Kiev this spring. As colder temperatures arrive, Ukrainian officials may have no choice but to tap into gas supplies meant for other European countries downstream in order to keep their citizens from freezing, as appears to have happened in 2006 and 2009.
