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Russian announcement of Donbas military operation raises risks for energy markets


Operation raises risks of harsher sanctions on energy sector

Financial sanctions could include ban on access to SWIFT, US dollar

Dutch TTF assessed at Eur 88.85/Mwh on Feb 23, up 24% from Feb 21

  • Author
  • Rosemary Griffin
  • Editor
  • Agamoni Ghosh
  • Commodity
  • Natural Gas Oil
  • Tags
  • United States
  • Topic
  • War in Ukraine

Russian President Vladimir Putin said Feb. 24 in a televised address that a special military operation in the Donbas region has begun, raising the risk that a conflict may disrupt energy supplies to Europe and spur new sanctions against Russian energy companies.

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Russia's move comes after certification of the Nord Stream 2 gas pipeline was suspended and sanctions were introduced against individuals, following Putin recognizing the independence of the Luhansk and Donetsk regions, on Feb. 21.

"Rapidly escalating military tensions create a high probability of near-term clashes for control of regions in Ukraine's Donbas and potentially beyond," S&P Global Platts Analytics said in a spotlight Feb. 23.

"Oil markets are understandably on edge due to Russia's outsized market position and 2.7 million b/d of crude exports to Europe, but Platts Analytics still does not anticipate a notable supply curtailment from Western sanctions or Russia holding back large volumes," Platts Analytics said.

Since October 2021 when reports about an increased Russian troop build-up at the Ukrainian border emerged, prices for Russia's key crude grade Urals have increased significantly. S&P Global Platts assessed Urals at $90.72/b on Feb. 23, up 19% from $75.99/b on Oct. 1, 2021.

Urals, a medium sour crude, staple for refiners in Northwest Europe and the Mediterranean is exported via the Druzhba pipeline, a branch of which runs through Ukraine, as well as via seaports Primorsk and Ust Luga on the Baltic Sea, and Novorossiisk on the Black Sea. Around 1 million b/d flows through the Druzhba pipeline system from Russia to Europe.

The incursion also comes at a time of significant price volatility in European gas markets, which have seen record high prices in recent months. Prices hit a record high of Eur182.775/MWh on Dec. 21, 2021.

S&P Global Platts assessed Dutch TTF at Eur 88.85/Mwh on Feb. 23, a jump of 24% from Feb. 21.

Financial sanctions

For months US, UK and EU officials have indicated that military operations in Ukraine would trigger harsh sanctions.

Fresh financial sanctions against Russian exporters could be implemented, including a ban on using the SWIFT system and accessing the US dollar. Two-thirds of Russia's export contracts for hydrocarbons are in dollars, according to the Central Bank.

Both measures were first mooted when original sanctions were introduced against Russia in 2014 over its role in the conflict in Ukraine. Russian exporters may be able to trade in alternative currencies or using alternative networks to SWIFT.