Impact of Sanctions on Europe and the U.S.

President Biden has been promising to "help" Europe with its energy needs, given its reliance on Russia for oil and gas. In 2021 the EU imported about 132.4 billion cubic meters of natural gas. Biden has promised 15 billion cubic meters, which amounts to a drop in the bucket and far from what is immediately needed for industrial production, home heating and more. COVID has already contributed to disruptions and U.S. sanctions have only made things worse. Russia has countered U.S. sanctions by demanding that gas and oil be purchased in rubles.

In his Warsaw speech Biden claimed, "As a result of these unprecedented sanctions, the ruble almost is immediately reduced to rubble." He said it takes 200 rubles to equal one dollar to prove that the Russian economy is "on track to be cut in half in the coming years." In fact, the ruble has been rebounding since March 22, now less than 85 to the dollar and dropping -- in part because of Russia's demand for oil and gas to be bought in rubles, something Europe cannot prevent.

Russian Federation Council Speaker Valentina Matviyenko said April 1 that Russia would be exposed to groundless risks if it continued to sell gas to unfriendly countries for dollars and euros. Both currencies have lost credibility, she said at a meeting devoted to the development of Russia's regional retail gas distribution networks. Deputy Prime Minister Alexander Novak also attended.

"Amid the strongest pressures and illegitimate sanctions we still prefer to act as a responsible member of the international economic community. We have been doing nothing that might worsen conditions for our partners who are the recipients of our hydrocarbons. All contracts for them remain in force: the supply dates, the amounts and the prices set in the euros and dollars. The sole difference is the actual settlements will be performed in rubles," Matviyenko said

"Nobody should over-dramatize or politicize this. It is our sovereign right and our sovereign decision. In the past, we were paid for gas in dollars and euros, and part of the payments went into our gold and foreign exchange reserves. We have been stripped of an opportunity to use these. In fact, this is a gross violation of international law and of the rules of international trade. We will no longer accept payments in currencies that have lost credibility. Selling hydrocarbons without being paid on time would be tantamount to charity," she added.

The new procedure of payment for Russian pipeline gas in rubles by buyers from what Russia calls unfriendly countries came into force on April 1. A statement issued by Gazprom said such buyers are required to open special ruble and foreign currency accounts with Gazprombank to pay for gas supplies. Currency conversion will be carried out on Russian exchanges. In case of incomplete payment, the Russian customs are authorized to ban deliveries. The government commission for the control of foreign investment in Russia has the right to issue exceptions to these rules for individual buyers, Gazprom said.

The list of unfriendly countries includes the United States, Canada, European Union countries, Britain (including Jersey, Anguilla, the British Virgin Islands and Gibraltar), Ukraine, Montenegro, Switzerland, Albania, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, North Macedonia, as well as Japan, south Korea, Australia, Micronesia, New Zealand, Singapore and Taiwan (considered as the territory of China, but since 1949 governed by its own administration).

Meanwhile, because of price gouging and speculation, oil prices continue to float above $100 a barrel. The United States announced a "historic release" of one million barrels a day of oil from the country's emergency stockpile on March 31, one day before European countries would have to start paying for Russian oil and gas in rubles and hours after the OPEC +, OPEC and non-OPEC Ministerial Meeting, agreed on another modest increase in output. Even the Saudi energy minister, who the U.S. relies on to defend its interests, said OPEC+ will leave politics out of output decisions.

The U.S. administration said in a statement that the release would last for six months, amounting to about 180 million barrels in total, draining almost a third of the U.S.'s Strategic Petroleum Reserve (SPR).

"The scale of this release is unprecedented: the world has never had a release of oil reserves at this 1 million per day rate for this length of time," the White House said. "This record release will provide a historic amount of supply to serve as a bridge until the end of the year when domestic production ramps up." Part of the aim is to lessen the broad anger with skyrocketing gas prices while also providing a guarantee for oil supplies for the military, the largest single consumer of oil.

What it also shows is that the U.S. has in various ways shot itself in the foot with its sanctions against the importation of Russian oil, gas and coal. On March 8 the White House announced:

"Today, President Biden will sign an Executive Order (E.O.) to ban the import of Russian oil, liquefied natural gas, and coal to the United States -- a significant action with widespread bipartisan support that will further deprive President Putin of the economic resources he uses to continue his needless war of choice."

The Executive Order bans the importation into the United States of Russian crude oil and certain petroleum products, liquefied natural gas and coal. Last year, the U.S. imported nearly 700,000 barrels per day of crude oil and refined petroleum products from Russia and this step is meant to deprive Russia of billions of dollars in revenues from the U.S. However, the U.S. Energy Information Administration informed that in the week ending March 26 the U.S. still imported 100,000 barrels per day of Russian crude oil and oil oligopolies like Haliburton and Koch remain active in Russia.

Since 2019 the U.S. has blockaded heavy oil imports from Venezuela and replaced them with imports of heavy Ural variants from Russia. It sent two officials to Caracas on March 5 allegedly to negotiate getting Venezuela's oil flowing again, but there is no word of any agreement being reached or in the works. A lack of willingness by the U.S. to agree to Venezuela’s conditions that it lift all its sanctions and return all of the country’s illegally seized assets likely contributed to that.

Diesel and heating oil consist of long hydrocarbon chains. Lighter types of crude oil lack these. There are ways to create longer hydrocarbon chains from shorter ones but those processes are expensive. It is much easier to start off with heavy crude oil and to break it down as needed. Certain interests in Canada who serve the oil and gas industry are using the occasion to lobby for more pipelines to be approved to deliver heavy oil to the refineries on the Gulf Coast.

Diesel was in short supply even before the sanctions began. Diesel is used by the military. It is used for freight transport to deliver goods to consumers. About 90 per cent of fresh food deliveries in the U.S. are done by trucks requiring diesel, for example. Diesel is also what industrial transport uses for fuel. With Russian refiners cutting their processing rates in the wake of several waves of Western sanctions, the already tight diesel supply is going to get a lot tighter and prices higher, which will increase dissatisfaction and resistance among truck drivers and others, as well as major private interests requiring diesel.

"Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel," the director general of Fuels Europe, part of the European Petroleum Refiners Association, told Reuters on April 1. "Europe imports about half of its diesel from Russia and about half of its diesel from the Middle East. That systemic shortfall of diesel is there," Vitol's Russell Hardy noted earlier in the week. Vitol is a major energy and commodities trader.

Writing for Reuters, John Kemp said Europe is not the only one feeling the diesel pinch as related stocks are on a decline in the United States as well.

As with Biden's other attempts to use sanctions to unite Europe behind U.S. dictate while acting to crush Russia, sanctions concerning oil and gas are doing the opposite.

This article was published in
Volume 52 Number 4 - April 3, 2022

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