As Russia’s largest industry, the Russian energy sector has been a major focus of UK, European Union (EU), US and other Western sanctions designed to deter the continuation and escalation of the conflict in Ukraine. With sanctions touching on every aspect of Russia’s energy supply chain, these actions have reportedly begun to successfully dent the sector’s revenue.

The sanctions impact not only trade in Russian oil and gas, but also new equity, debt and investment in energy projects; exports to Russia of equipment and parts used in energy production; as well as designations of specific companies and individuals in the sector. In designing and implementing these sanctions, Western governments have had to carefully thread between restricting the Russian energy sector and ensuring the satisfaction of domestic energy needs. Most recently, the tension between the multilateral goals of prohibiting Russia from profiting from historically high prices of oil and gas and easing the international energy crisis contributed to the implementation of a coordinated price cap on Russian-origin oil and petroleum products traded between third countries. Russia has responded with increasingly complex countermeasures in an attempt to protect its energy sector.

With complex and ever-evolving restrictions spanning the energy market, it is important that individuals and companies remain abreast of developments and their impact on energy-related transactions. Breaking down the path that sanctions have charted over the past year reveals trends, hurdles and a hint at what’s to come.  

In designing and implementing these sanctions, Western governments have had to carefully thread between restricting the Russian energy sector and ensuring the satisfaction of domestic energy needs.

Russian energy import bans 
Soon after the advent of the invasion on 24 February 2022, the UK, EU and US took steps to restrict the import of Russian energy products. However, due to varying Russian energy needs and dependencies among countries, the implementation of the import bans varied. The US was the first to ban the import to the US of Russian crude oil, petroleum, LNG and coal, through the adoption of Executive Order 14066 on 8 March 2022.

The EU followed suit with a ban on the import of Russian coal on 8 April 2022 and Russian crude oil and petroleum products on 3 June 2022. Notably, the EU oil import ban was subject to country-specific derogations for certain EU member states particularly reliant on Russian oil and there was a general exception for most crude oil imports effective until 5 December 2022 and petroleum imports effective until 5 February 2023.

On 21 July 2022, the UK introduced prohibitions on the import of Russian coal and crude oil and petroleum products, which entered into force later in the year (10 August and 5 December 2022 respectively). Furthermore, on 28 October 2022, the UK introduced a ban on the import of LNG, effective from 1 January 2023.

Whilst the import of Russian gas to Europe and the UK has not yet been broadly sanctioned (with the exception of LNG imports in the UK), there have been some steps to limit supply over time. For example, German Chancellor Olaf Scholz revoked the preconditions necessary to certify Nord Stream 2, a pipeline which runs from Russia through Germany, on 22 February 2022. Soon after, the US sanctioned Nord Stream 2 AG, the company which owns the pipeline, effectively halting the project. More recently, the EU introduced a requirement for EU parties to report all transactions for the purchase and import into the EU and third countries of Russian LNG. Based on this information, the European Commission will review potential sanctions measures relating to Russian LNG no later than 18 June 2023.

Price Cap Coalition 
With important export restrictions causing global energy prices to increase materially, in an attempt to limit Russia’s ability to benefit from these extraordinary market conditions and to further reduce Russian energy revenue, the UK, EU and US, alongside Canada, Japan and Australia (collectively known as the ‘Price Cap Coalition’), imposed price caps on Russian-origin oil and petroleum products.

The price caps are implemented as a ban on the transportation of Russian seaborne crude oil and petroleum products to third countries and associated services including brokering, financing and insurance, except where the products are purchased at or below the applicable capped price. On 5 December 2022, the Price Cap Coalition announced a $60/b price cap on services related to maritime transfers of Russian-origin crude oil. On 5 February 2023, the first price cap for petroleum products traded at a discount to crude oil was set at $45/b, while the second price cap for petroleum products traded at a premium to crude, for products such as diesel and jet fuel, was set at $100/b.

The UK, EU and US have issued detailed guidance on the due diligence and record-keeping requirements expected of financial institutions, buyers and sellers, commodities brokers, insurers and other actors involved in energy trading. 

Sanctions on export of energy equipment and parts  
In addition to restricting the demand for Russian energy imports, the UK, EU and US each imposed additional export restrictions on equipment and parts used in energy production, with the aim of curbing Russia’s long-term ability to pursue oil and gas exploration and other energy projects. These followed measures originally introduced in 2014, following Russia’s annexation of Crimea.

In 2022 the US Department of Commerce implemented export controls on additional items related to deepwater oil and gas exploration, extraction and oil refining, while the UK and EU imposed increasingly broad restrictions on various products related to the oil industry. For example, the UK banned energy-related services (including drilling and well testing) for oil and gas production and exploration projects in Russia.

Russia’s January 2023 monthly budget revenues from oil and gas reportedly fell to their lowest level since August 2020.

Photo: Pillsbury

Energy investment and financing sanctions  
As well as limiting the trade of Russian energy, the UK, EU and the US have also each adopted measures targeted earlier in the business process – aiming to thwart foreign investment and access to finance for Russian energy projects.

The US and EU imposed specific prohibitions on investments by their citizens in the Russian energy sector. In the US, these measures were effective from 8 March 2022 and also prohibit US persons from approving, financing, facilitating or guaranteeing investments by non-US persons in Russia’s energy sector. The US later expanded its policy, as of 6 April 2022, to prohibit all new investments in Russia.

The EU adopted similar restrictions on acquiring or extending ownership in Russian or third-country entities operating in the Russian energy sector, and granting new loans to, or creating any new joint ventures with, such an entity. The UK did not impose an energy-specific investment ban, but rather imposed an outright prohibition on investments in Russian companies and land on 19 July 2022, as well as broad restrictions on new loans and credit to Russian companies.

Russia’s reply 
In view of the importance of oil and gas revenue to the Russian economy, Russia has adopted various countermeasures to mitigate the impact of Western energy-related sanctions.

The Russian government has adopted measures to slow the divestment in Russian energy companies and projects by Western companies. Such divestments are subject to special approval from the Russian President Vladimir Putin. In practice, only a handful of such approvals have been granted in the last six months. This measure complicates the exit of many companies, who have been forced to hold their Russian operations for the time being.

When countermeasures have targeted investments from ‘unfriendly countries’ (ie, countries that have introduced sanctions on Russia and Russian persons), the Russian government generally has done so without definitively expropriating their assets. One example of a project-targeted measure was the quasi-nationalisation of Sakhalin-1 and Sakhalin-2, which are major LNG and hydrocarbon projects. The Russian government pointed to a potential environmental disaster among the grounds for the moves.

In addition, in response to the price caps imposed by the Price Cap Coalition, Russia prohibited the export of raw oil and raw oil products under contracts with price cap compliance provisions. This rule does not restrict sales to any particular country, as long as there is no reference to a price cap mechanism, even if the price itself may be within the price cap.

An effective strategy? 
As time progresses, further sanctions targeting the Russian energy sector are likely. There is potential to apply sanctions pressure on trade in Russian-origin gas as well as Russia’s civil nuclear sector. In addition, enforcement of the existing regimes is a priority for 2023, with agencies like the US Department of Justice focused on prosecuting sanctions evaders and the UK’s Office of Financial Sanctions Implementation looking to use new powers to issue monetary penalties for sanctions violations on a strict liability basis, to enforce Russian sanctions robustly. In parallel, the Russian government and Russian actors are likely to continue to search for ways to mitigate Western sanctions in this ongoing, very high stakes tug of war.

In terms of impact, evidence suggests that Western sanctions have begun to have some impact on Russia’s energy revenue. Russia’s January 2023 monthly budget revenues from oil and gas reportedly fell to their lowest level since August 2020. Looking ahead, their long-term impact will likely depend on the market appetite of non-aligned jurisdictions, such as China and India, to engage in trade with Russia as buyers of energy commodities and as alternative suppliers of energy-related development, refining and transport technologies.