Putin's Achilles' Heel: Tighter Energy Sector Sanctions

The European Union, in coordination with the United States, finally decided to impose serious sanctions on Russia. In addition to measures against the financial sector, they include energy sector sanctions that bar export of highly sophisticated technologies needed in deep-sea drilling, Arctic exploration, and shale oil projects. These sanctions have the potential to seriously undermine Putin's regime in the medium-term, but must be further tightened to close loopholes and cover previously contracted arrangements to effectively weaken Putin.

Russia is still among the world's largest producers of both oil and natural gas. But as conventional reserves decline and production gets more expensive, Russia badly needs Western technology to maintain oil production and control costs by using modern drilling techniques and tapping into its unconventional and offshore resources. Though Moscow rallies against hydraulic fracturing in Europe, Russia already is the second-largest market outside North America for fracking (China is first).

This is where sanctions come into play. By hindering technology transfer and inhibiting cooperation, the West can hurt Putin by putting in jeopardy medium-term oil and gas production so critical in upholding his political system. Hydrocarbons still account for more than two thirds of Russia's exports and around half of its budget revenues. Putin needs high oil prices and sustained production to balance the budget and keep social discontent at bay by doling out money.

Sectoral sanctions are a welcome realization in the West that business as usual is unsustainable and Russia's complete ignorance of international norms cannot go unpunished. Targeting energy technology transfer is the right approach, in principle. But expecting to place Russia under an Iran-style oil embargo has been unrealistic. While Iran's much smaller export was mostly replaced by other producers, including the United States, the 7 million barrels of daily Russian export is irreplaceable. Given the volatility on international oil markets in the wake of the crises in Libya, Iraq, and Nigeria, and the fragility of economic recovery, the United States and Europe could ill-afford skyrocketing oil prices.

Imposing a ban on gas imports to Europe is equally impractical. Despite the EU's renewed zeal to address its dangerous dependency on imported gas from Russia, especially in the continent's East, Europe cannot completely replace Russian gas in the coming years. Yet Russia's ability to apply political and commercial pressure is already diminishing. Gazprom has to compete with other suppliers on an increasingly liquid and integrated European gas market. The ongoing anti-monopoly case against Gazprom should deliver another major blow to the company's positions throughout Europe. Despite all the posturing, Moscow's increasing focus on Asia is unlikely to become a primary concern for European gas-supply security for the foreseeable future.

Yet, in their current form, energy sector sanctions are weak. They are limited in both time and scope. They only prohibit new agreements and fail to cover such major deals as Rosneft's and Exxon's joint venture at the Kara Sea inaugurated just last week. The unwillingness to extend the sanctions to the gas sector will mean technology transfer and investment will not be seriously hindered in Russian shale and offshore plays, due to the dual use of most technologies in both oil and gas extraction.

The EU and the United States need to adopt extended, better defined, and more comprehensive energy technology sanctions with urgency, especially if Putin decides to invade Eastern Ukraine under the pretext of humanitarian assistance. Even ramped up energy sector sanctions may not deter and force him to deescalate in Ukraine. But over time, they have the potential to seriously undermine Putin's power base. The West must show its resolve to play the long game.