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Harsh sanctions could trigger a crippling response from Moscow

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Harsh sanctions could trigger a crippling response from Moscow

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The United States threatens painful sanctions on Russia if it launches an attack on Ukraine, but Moscow could retaliate to the West by limiting natural gas supplies to Europe or triggering an oil price spike , according to experts and former US officials.

The Biden administration says it is in talks with European gas companies and governments to prepare for possible Russian attempts to disrupt the flow of natural gas to Europe, but it’s unclear whether Washington and its allies will be able to offset a concerted Russian response, the former officials and industry experts said.

A short, limited-scale disruption could be managed, though natural gas prices would rise further and governments would have to help subsidize the effort, industry analysts said. However, a major cut in gas supply over an extended period could have devastating consequences.

“It could be very, very difficult for companies or countries to provide enough supply to fill a very large gap,” said Kevin Book, managing director of ClearView Energy Partners.

“Russia can dig a bigger hole in supply than the West can plug,” Book said. “It’s just a question of molecules and mathematics.”

The potential economic confrontation between Moscow and Washington represents an uncharted situation territory, because Washington has never imposed drastic sanctions on an economy the size and importance of Russia. And if faced with unprecedented sanctions, Russia will likely choose to respond in an unprecedented way that could have ripple effects on the US economy and around the world, experts have said.

“The Kremlin’s ability to retaliate in a meaningful way is significant,” said Adam Smith, who was a senior sanctions official in the Obama administration and is now a partner at law firm Gibson Dunn.

If the United States imposes the sweeping sanctions it has threatened, China will be watching closely. “This Russian affair will really test the ability of Western powers to use sanctions against major powers,” Smith said.

Imposing sanctions on some major Russian commercial banks or restricting Russia’s access to bond markets — measures the administration is considering — could cause collateral damage to Western businesses or investors, and U.S. officials are exploring how to create exceptions to mitigate the adverse effects, former officials said.

In response to US sanctions, Russia could also orchestrate a campaign of hacking and ransomware attacks that could disrupt Western markets and industries, experts say. But the most serious backlash from a set of U.S. sanctions on Russia would almost certainly come in the energy sector, where Russia is a global player with resources that move markets, experts said.

Despite pleas from US and Eastern European governments over the years, Europe remains dependent on Russian gas. Moscow is Europe’s main supplier, supplying around 40% of the continent’s gas. It also supplies more than half of Europe’s coal and is one of the main suppliers of crude oil.

Germany is even more dependent, relying on Russia for more than 50% of its gas, and Russian energy giant Gazprom has many underground storage sites in Germany.

European governments have sought to switch to greener energy sources and their own oil and gas production has declined.

Europe uses around 400 to 500 billion cubic meters of gas per year, and Russia supplies around 130 to 170 billion cubic meters to Europe each year, a third of which passes through pipelines in Ukraine.

If Russia cut gas supplies, European countries could try to make up the difference in liquefied natural gas shipments from the United States and the Middle East.

Experts say that if Russia were to completely cut gas supplies, a drastic and unlikely move, there is not enough liquefied natural gas available on the world market to make up the difference.

If Russia were to cut off the roughly 40 billion cubic meters of gas flowing through Ukraine, it would be difficult to fill the gap with shipments of liquefied natural gas or other energy sources. But making up the shortfall would also have consequences: Gas prices would rise further and governments would have to subsidize the effort, experts said.

About two-thirds of the world’s liquefied natural gas cargo is already under contract, and governments may have to cover the cost of companies breaking contracts to divert it to Europe from other markets, experts have said.

Europe’s ability to receive natural gas shipments is also limited, and it would be difficult to cope with a large increase in deliveries depending on the amount of gas needed to make up for shortages, experts said.

A worker guides drill pipes on a gas rig at the Gazprom PJSC Chayandinskoye oil, gas and condensate field in the Lensk district of Russia’s Sakha Republic on October 13.Andrey Rudakov/Bloomberg via Getty Images File

U.S. officials have been holding talks with Qatar, one of the world’s biggest exporters of liquefied natural gas, to see if Doha could help cushion the blow of the cut in supplies. But Qatar is already producing at full capacity and most of its shipments are already on their way to Asia under long-term contracts, Bloomberg News reported.

Russia has cut gas supplies before, but only briefly during disputes with Ukraine. In 2009, the gas supply was interrupted for almost two weeks in winter, forcing Slovakia and some Balkan countries to ration gas and cut electricity.

If Russia were to make a major cut in gas supplies, European countries would have to consider rationing and governments would have to decide to what extent they were willing to share gas and energy resources with their neighbors.

After Russia invaded Ukraine in 2014 and seized the Crimean peninsula, the Obama administration chose to avoid large-scale sanctions against Moscow, partly out of fear that Russia would carry out its own economic war by exploiting vast reserves of oil and gas, according to former officials. .

But Biden administration officials say they are confident natural gas producers will be able to ramp up production to help offset any Russian attempts to squeeze supply.

“To ensure Europe is able to weather the winter and spring, we expect to be ready to secure alternative supplies covering a large majority of the potential shortfall,” a senior EU official told reporters on Tuesday. ‘administration.

The official noted that Russia had already halved the usual level of gas supplies to Europe via Ukraine.

The official’s comments are “a way of sending a message to Putin that we know what you might do, and we’re prepared for it,” said Dan Fried, a former career diplomat who crafted a sanctions policy and works now at the Atlantic Council. Tank.

The United States had to come to terms with the harsh reality that introducing tough financial sanctions against Russia carries risks, but sacrifices are needed to deter Moscow, Fried said. “Your risk tolerance has to increase when you’re talking about a ground war in Europe,” he said.

As one of the world’s largest oil producers, Russia could also slow oil production and cause oil prices to spike, a step that could aggravate inflation in the global economy and drive up oil prices. gas prices for Americans. Oil is Russia’s most lucrative export, and Moscow is expected to weigh the consequences of any production cuts.

US officials say that while Europe is heavily dependent on Russian gas, Moscow also needs the revenue from gas sales, and stopping gas shipments would hurt its own financial situation.

The senior administration official said that “if Russia decides to militarize its supply of natural gas or crude oil, it will not be without consequences for the Russian economy”.

“Remember this is a one-dimensional economy, which means it needs oil and gas revenues at least as much as Europe needs its energy supply,” the official said.

In recent months, Europe has already experienced Russian gas supply shortages.

Although Russia has fulfilled long-term contracts and delivered enough gas to heat homes and run factories, overall gas flow has shrunk, storage inventories have shrunk and prices have reached record highs.

Western officials and industry analysts say Russia is clearly flexing its muscles to signal its influence on energy. Fatih Birol, executive director of the International Energy Agency, blamed Russia this month for record energy prices in Europe, saying Russian gas company Gazprom sent 25% less gas than usual in Europe.

But Moscow denies there was a deliberate attempt to cut shipments.

As Russia faces potentially severe financial sanctions and restrictions on US-made technology if it attacks Ukraine, and the West faces a potential mid-winter energy crisis, the question is who would blink first.

Compared to 2014, the last time Russia launched an invasion of Ukraine, Moscow’s economy is in a stronger position thanks to high oil prices and a record level of foreign currency reserves, including gold, totaling $620 billion.

“The reality is that today you have a situation where Russia is much more prepared to deal with significant sanctions than it was in 2014,” Smith said.

Drawing on its reserves, Russia would be able to suffer some financial harm from US sanctions. But for how long ?

Prolonged energy price spikes and gas shortages could make it difficult for leaders in Western democracies to maintain sanctions on Russia as voters may demand a change of course to ease pressure on their cost of living .

But Russian President Vladimir Putin, who presides over an autocratic system with no real political opposition, does not have to respond to popular pressure. Russia may be able to tolerate a prolonged economic downturn longer than its Western adversaries, some experts have said.

“Russia reasonably expects consumer democracies to find their problem coming sooner, because of their political systems and their reliance on energy,” Book said.

Harsh sanctions could trigger a crippling response from Moscow

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