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Reflections of the Russia-Ukraine War on the Energy Sector - Yaren Öztürk


From the beginning of the Ukrainian invasion on February 24 to today, which Russia called a "special military operation," with 5581 sanctions in effect, Russia became the country with the most sanctions in the world. Two days before the invasion, Russia had a total of 2754 sanctions. After recognizing the Donetsk and Luhansk regions as independent states, countries imposed 2827 sanctions on Russia until March 8. Countries such as the USA, Switzerland, Japan, the United Kingdom, and France did not hesitate to double the number of sanctions imposed on Russia compared to previous periods. As a result, sanctions against Russia surpassed the imposed sanctions on Iran, Syria, and North Korea. Besides that, companies operating in various fields such as Apple, Adidas, Google, Disney, Exxon, and Volkswagen announced that they were withdrawn from Russia in these conditions.


Russia is the producer of 12 percent of the world's needed oil and 17 percent of needed natural gas. Now, it is dragging the energy markets into a deep crisis with its occupation of Ukraine. While it is a controversial issue for countries to impose sanctions on Russia in the field of energy, US President Biden recently banned the import of oil, coal, and natural gas from Russia. By contrast with the European countries, the USA is less dependent on Russia. It only gets 8 percent of the daily oil, which means about 700,000 barrels of oil from Russia. Since Russia invaded Ukraine, the price of crude oil has risen nearly 30 percent, which corresponds to an 18 percent increase in gas prices for Americans. In his statement, Biden emphasized that defending freedom can be expensive. After that, the question of which resources would be filled in the oil vacuum created due to the bans in the country came to the fore. Although some people consider this crisis as a plus for accelerating the transition to clean energy, the installation and distribution of renewable energy sources require a certain process, so it can not be a solution in the short term. On the other hand, the Biden administration is for increasing the oil supply, setting talks with countries such as Venezuela and Iran, which have been subjected to various sanctions. However, it does not seem possible for Venezuela to open the oil valve suddenly after years of unsuccessful administrations, unsuccessful policies, insufficient investments, and sanctions imposed by the USA. To return oil production to its former high levels in Venezuela, there is approximately a requirement of $250 billion in investment. Even if Venezuela reaches that amount of investment, seven or eight years have to pass to return to its former level. While Venezuela's national oil and gas company PDVSA exported around 3 million barrels a day twenty-five years ago, the country's oil production has dropped to just 668,000 barrels a day at the present.


After a short period of Biden's statement, the European Union announced its plan to reduce dependency on Russia, Europe's largest supplier. The plan contains reducing the oil imported from Russia by two-thirds to 2022 and reducing the dependence on Russian gas as far as possible by accelerating the installation and distribution processes of renewable energy sources. Increasing LNG imports to reduce dependency exists among the options for the European Union. Europe imports about 40 percent of the natural gas; it imports about 35 percent of its crude oil and more than 40 percent of its coal from Russia. As long as Russia's occupation of Ukraine continues, uncertainties regarding imports are increasing day by day. The vast majority of European countries are highly dependent on Russian oil. This dependency is the main reason European countries have not yet imposed any sanctions on Russia regarding the energy sector. Governments are aware that Russia's sanctions will have more costly effects on the European Union. On the other side, the United Kingdom announced its decision to phase out oil and natural gas imported from Russia. Johnson emphasized that every country has distinctive levels of dependency. Poland, which supplies 55 percent of its natural gas imports from Russia, and Slovakia, which supplies 87 percent of its natural gas imports from Russia, are supporters of the imposition of sanctions on Russia, taking into account the possibility of damaging their economies. France, which imports 17 percent of its natural gas imports, 7 percent of oil, and 30.2 percent of coal from Russia, expressed that the impact of a possible sanction on European Union countries should be taken into account. At the same time, France also underlines that they can take additional decisions if necessary. On the other hand, Germany, one of the European Union's most dependent countries on Russian natural gas, stands against any sanctions to Russia in the energy sector for now. Vice-Chancellor Habeck warned that if sanctions are imposed, the peaceful atmosphere in the country may deteriorate, and certain sectors can find themselves in danger of serious energy shortages. In Finland, where two-thirds of the country's oil and gas is imported from Russia, the government does not favor any sanctions that could hazard the country's energy supply security and stand with Germany's same line. Despite the government's attitude, big Finnish brands such as Nokia, Wärtsilä, Fazer, and StoraEnso have decided to leave Russia. Helen, one of the largest Finnish energy companies within the municipality of Helsinki, also announced that it would no longer use Russian coal.


While Europe continues these discussions, companies are in the dilemma of the reputational risk and financial benefits of being in Russia. Results show that the reputational risk outweighs than economic benefits. Well-established companies containing BP, Shell, Exxon, Equinor prefer to protect their reputation and avoid probable legal problems. Even though the sanctions imposed on Russia do not target energy supply in the first place, the data shows that Russian oil in the market has decreased compared to the past days. Russia, in turn, threatens to cut off gas flow to Europe and argues that oil prices could rise to $300 per barrel. Last week, Russia declared that they added Biden and a dozen senior US officials to the sanctions list due to their opposition to Russia, signaling that it could expand further. In conclusion, albeit it is uncertain what will occur in the coming days, the experiences indicate that the reflection of the tension between Russia and the West on the energy sector may increase to higher levels and cause more detriment.