After months of fighting, it looks like Ukraine is going to hit Russia where it’ll hurt the most.
Tomorrow, Ukrainian legislators will vote on a bill that could significantly affect Russia’s energy sector.
And although Russia already cut off gas supplies to Ukraine, they still ship natural gas and oil through Ukraine to other nations in Europe such as Germany, the U.K., and Italy.
But strategists in Kiev are considering a bill that would ban the shipment of all Russian resources through Ukraine. Add to that restrictions in defense industry cooperation and a ban on Russian travel in Ukraine’s airspace, and the bill presents significant problems for Russia.
Even though Vladimir Putin denies any Russian involvement in the Civil War in Donetsk and Luhansk, it has become quite clear that the Russian separatists have been covertly acquiring Russian weapons and intelligence.
The only response to the threatened sanctions was a statement by a Putin spokesman: “We’ll retaliate.”
It’s no secret as to why…
As you can see, Russia depends on Europe for more than half of their gas exports. About 86 billion cubic meters of Russia’s gas was exported through pipelines in Ukraine to Europe last year, while another 7% of their oil exports are also shipped through the battle-stricken nation.
And even though Russia just signed a $400 billion dollar gas deal with China, the infrastructure necessary to see that revenue has not yet materialized, and won’t for some time.
So if Ukraine does decide to cut off all or some of Russia’s exports to Western Europe there could be drastic ramifications for Russian revenue, EU gas prices, and perhaps even some military intervention by Russia.
These additional sanctions would add to Russia’s financial anxiety as U.S. and European sanctions take a slow but steady toll on influential sectors of Russia’s economy.
For example, Morgan Stanley had projected that Russia would add an extra 250,000 barrels of crude oil to their daily production by 2018 because of shale resources. But with the U.S. sanctions on oil field technologies, Russia won’t be able to obtain the proper equipment to exploit their tight oil and gas resources.
And if the sanctions last much longer, their production targets will be in serious jeopardy.
At the same time Barclay’s has said they expect Russian oil and gas production to falter in 2015 if sanctions continue, which it looks as though they will. And that was before Ukraine threatened to cut off shipments to Europe.
Of course if Ukraine does cut off gas, it would cause pain for more than just Russia. If you take another look at the chart above you’ll see that Germany and other EU nations – where gas is already above $10 per BTU – receive significant amounts of natural gas from Russia, a lot of it via the Ukraine.
So you could expect resistance form those countries who would ultimately pay more for energy as winter rolls around. And since they have already loaned $18 billion to the Ukraine through the IMF, there would likely be strict penalties if Western Europe loses its primary energy resource.
And if Russia does threaten military retaliation, Ukraine could exacerbate the war in their own country even though they are edging closer to victory. Most of the separatists have been pushed back into Donetsk and Luhansk and are surrounded by Ukrainian troops.
Of course, even if the new government wins the battle against separatists, they are still no closer to recapturing Crimea, which is now under complete Russian control.
In any event, the ban of Russian gas shipments could be a deathblow to Putin’s incursion in Ukraine, so keep watch for news tomorrow on the vote.
