A version of this Spotlight from S&P Global Platts Analytics was first published April 16.
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US sanctions on Russia announced on April 15 do not target the Nord Stream 2 pipeline, or Russia's oil sector. However, restrictions on US purchases of ruble-denominated sovereign debt leave open the possibility of stricter penalties to come, which will likely increase Russian focus on supporting short-term oil prices through OPEC+ cohesion.
Risks of military escalation in eastern Ukraine create a potential pathway to tougher measures, in addition to cyber and geopolitical tensions and the jailing of opposition leader, Alexey Navalny. It would likely require a major (and improbable) escalation to trigger Iran-style secondary sanctions on sovereign debt, but additional measures on the financial, or energy sectors, would be unsurprising if tensions worsen. In addition to efforts to delay Nord Stream 2, the US could target financing for oil and gas projects, or build on 2014 sanctions restricting activity in Russian shale, deepwater, and Arctic fields.
Restrictive economic, or energy sector sanctions, would add headwinds to medium-term development, which requires unconventional production and frontier projects to offset brownfield declines. Both are susceptible to sanctions, with shale in particular already delayed by 2014 penalties over Ukraine. Economic setbacks from future sanctions could also jeopardize tax breaks required to stimulate greenfield projects.
S&P Global Platts Analytics estimates Russia requires $64/b Brent to balance its budget in 2021, up from the pre-pandemic average of $51/b in 2018-19. Pressure on social spending will likely rise ahead of September parliamentary elections, increasing the desirability of higher oil prices even without the prospect of tighter economic sanctions in the months ahead.
On April 15, the Biden administration announced sanctions on Russia, the most notable of which prevent US institutions from purchasing primary, ruble-denominated sovereign debt after June 14. The eventual market impact remains unclear, but the measures fall well short of US penalties against countries, including Iran and Venezuela, as they do not affect trading in the secondary market, or target activities by companies in third countries.
On the other hand, the apparent shot across the bow implies that penalties could toughen incrementally if tensions worsen, as occurred in 2014 over Ukraine. Given high inflation and a recent interest rate increase, the Russian government may now sense even greater interest in working constructively with Saudi Arabia to support short-term oil prices and prevent additional currency depreciation.
Tensions with the US come on top of political pressure for greater social spending ahead of September parliamentary elections (see our January 24 Spotlight for more details). Combined with a budget breakeven price above $60/b, these issues should increase Russian support for OPEC+ cohesion.
The longer-term impact on the oil sector from a potential economic setback, due to either sanctions or weaker oil prices, is also a likely consideration for policymakers. As reported by Platts News, Russia's energy ministry warned that in the worst of its four long-term production scenarios, economic stagnation could cause crude output to never again reach peak levels of 2019.
Currently, sanctions are of far less concern than an inefficient, revenue-based tax regime, which is made less transparent by frequent and ad hoc tax breaks. But if biting economic sanctions are implemented down the road, it could exacerbate the biggest headwind to Russian medium-term development: the collision between budget revenues and the need to incentivize new supply. The Vostok Oil Project, for example, targets growth from 280,000 b/d to 600,000 b/d by 2024 (and 1 million b/d by 2027), but likely requires both tax incentives and foreign investment to approach these volumes.
Moreover, greenfield projects themselves could eventually become sanctions targets. In 2018, US Senators proposed banning participation in, or financing any new upstream Russian oil projects, including conventional, but bipartisan support for legislation this restrictive remains unlikely unless relations deteriorate markedly.