Brexit could lead to divergence between EU, UK sanctions against Russia

In the event of Brexit there could be long-term consequences for UK-Russia energy links, if the UK’s policy on sanctions against Russia changes to reflect its vocal opposition to the current Russian government, and close relationship with the US.

“There is a good chance the UK would eventually toughen sanctions against Russia, if and when a deal to leave the EU is finalized,” Paul Sheldon at Platts Analytics said. Currently the UK is a participant in EU sanctions against Russia introduced gradually since 2014 in response to Russia’s role in the conflict in Ukraine. These include restrictions on Russian oil and gas companies’ access to long-term financing and technology used in offshore Arctic, shale and deep-water oil production.

UK officials have indicated they will carry over all EU sanctions and can do so via the Sanctions and Anti-Money Laundering Act passed last year.

If Brexit goes ahead there may be a greater chance of the EU and UK pursuing different sanctions policies in the longer term, however. The UK has long been one of the most vocal critics of the Russian government within the EU. Last year it pushed for harsher sanctions in the wake of suspected Russian involvement in the poisoning of former intelligence officer Sergei Skripal in the UK. While other EU countries offered support by expelling some Russian diplomats, they were reluctant to introduce broader measures. Further risks lie in ongoing investigations into alleged Russian interference in the Brexit referendum, which could spark fresh calls for new sanctions.

Go deeper: S&P Global Ratings' Alexandra Dimitrijevic discusses risks of disorderly Brexit on CNN:

The UK’s close relationship with the US could also fuel calls for harsher measures. “Several uncertainties persist, led by the fate of Brexit itself and the potential for tighter U.S sanctions on Russian oil at the conclusion of ongoing investigations. In the event of the latter, Brexit would make it easier for the UK to act in solidarity with the U.S.,” Sheldon said.

US lawmakers have pushed for harsher sanctions against Russia in response to allegations of Russian interference in the 2016 presidential election, and it is likely that some of these proposals will come into force. This may include restrictions on the energy sector, including development of the Nord Stream 2 gas pipeline.

This has led to a divergence in approach between the EU and the US. While they remain aligned in opposition to Russian interference in Ukraine, there is no consensus in Europe on introducing fresh sanctions on major energy projects including Nord Stream 2. TheEU is looking to apply stronger regulations to Nord Stream 2, but it stands to lose out if the project is delayed or blocked, as it involves investment from several European companies and would increase gas supply capacity to Europe.

UK energy assets in Russia

Sanctions aside, analysts do not expect Brexit, if it goes ahead, to have any immediate impact on the UK’s energy interests in Russia. UK companies have continued to develop their operations in Russia in recent years, despite living with sanctions and the significant deterioration in the two countries’ political relationship.

Any changes to UK sanctions policy are unlikely to put those projects at risk, Platts Analytics believes. “We do not currently anticipate new sanctions on BP cooperation with Rosneft in conventional oil fields, or other penalties outside of the already-restricted upstream sectors of shale, Arctic, and deepwater,” Sheldon said.

The cornerstone of UK-Russian energy links is BP’s cooperation with Russia’s largest oil producer Rosneft. BP owns a 19.75% stake in the company itself, as well as stakes in joint ventures. A company spokesman said that BP’s share of output in Russia averaged around 1.1 million barrels of oil equivalent per day in 2018, around a third of the company’s overall output. This is likely to grow in future if plans to increase output from the Taas-Yuryakh and Kharampur projects go ahead.

BP closed deals to join these two projects since sanctions were introduced. It has also expanded cooperation with Rosneft outside of Russia, with Rosneft taking a 30% stake in the Zohr gas fieldin Egypt in 2017. In recent years BP officials have indicated that they want to continue to develop operations in Russia and with Rosneft, but will adhere strictly to sanctions.

British-Dutch company Shell also continues to operate in Russia, through its joint projects with Gazprom. It holds a 27.5% stake in the Sakalin 2 oil, gas and LNG project, and a 50% stake in Salym Petroleum, which produces around 120,000 b/d of oil. Shell is also one of the investors in the Nord Stream 2 pipeline project.

Go Deeper: S&P Global Ratings' Alexandra Dimitrijevic discusses risks of disorderly Brexit on CNN: