And yet the Western decision-makers are extremely unhappy about the price windfall working in Russia’s favour as they do not want to give the Kremlin the means to finance its military program and diversification efforts away from Europe via ‘Pivoting East’. So, they weaponize energy, introducing plans of energy sanctions, trade embargos, and asset freezes.
Additionally, as the monetary estimates of the damages incurred by Ukraine as a result of the
military conflict grow, so do the concerns by the West about the future liabilities and the sources to cover them. What happens when the conflict is over, but Russia refuses to pay the reparations that Ukraine has been demanding? Will the US and the EU have to finance the reconstruction of Ukraine without much hope for getting their money back? Amid these concerns the plans to confiscate Russia’s export earnings have emerged.
The freezing of about $300 billion of Russia’s hard currency reserves in western banks was
the first act but there will be others. One such plan is to introduce an import tariff on the Russian
energy exports.
Another is the idea to pay for the Russian hydrocarbon exports to escrow accounts in the Western banks and only allow Russia access to the funds
on a limited and conditioned basis.
To make Russia bend under pressure and accept the West’s terms, the increasingly tougher restrictive trade measures have been introduced as the European Commission announced that it would stop importing Russian energy as soon as possible.
Firstly, the EU countries introduced an embargo on imports of Russian coal, to take effect on August 10, 2022.
The volumes of Russian coal exports would go down in the near term because of the logistical problems related to re-directing supplies to other markets but the
record price of coal in 2022 would result in Russia getting much more revenues than from the previous three years combined even by exporting less coal this year.
Secondly, the EU wants to introduce an
oil embargo against Russia but runs the risk of hurting its own economies much more than Russia’s because of
spikes in crude oil prices and possible physical shortages of diesel fuel that is critical for moving goods across Europe.
Thirdly, the EU announced its plans to gradually wean itself of Russian gas, boasting the targets (reducing Russian gas exports by two-thirds in 2022 and freeing itself of Russian gas by 2030 altogether) that require miracles to occur on both supply and demand sides if this
ambition is to be realized.
Even more importantly, in contrast with the situation with coal and oil, Gazprom and the European companies have in place long-term gas contracts with take-or-pay obligations some of which extend well into the 2040s. If Gazprom’s counterparties do not take the amounts of gas stipulated under the contract, they still must pay for it (the take-or-pay is usually 80% of the average contract quantity with some grace period that allows to carry forward the obligation for a few years). A unilateral breach of the long-term contracts incurs heavy fines, so the political directives by the EU regarding the abrupt termination of the Russian gas supplies put the European companies on a collision course with Gazprom and open up the Pandora’s box of litigation and wealth destruction.