Russian resilience amid sanctions may falter in face of technology gaps: experts

Russia has been surprisingly resilient in the face of oil and gas sanctions, but that resilience may not last too long because Russia has not found a market for its fuels as profitable as Europe was and because it lacks some key technology for the sector, experts said April 26.

"When you look under the hood, and you look at the different sub-sectors within the oil and gas industry, you see a surprising level of distress," Craig Kennedy, an associate at Harvard University's Davis Center for Russian and Eurasian Studies, said during a webinar hosted by the Center for the National Interest.

Over the last 25 years large refineries in Russia have installed a lot of advanced equipment from Western suppliers, and they can no longer get spare parts or services, Kennedy said. "So, there's degradation going on there," he said.

On the gas side, Russia is in talks to build a large new pipeline to China but neither Russia nor China have the compressor technology to make this kind of pipeline work, Kennedy said. That kind of project would also require a large investment that Gazprom is not able to make right now, he said.

Europe provided several things as a gas market that it has not yet been able to get from Asia: premium pricing, low transportation costs, and private equity-driven financing, Kennedy said. "The reason Russia has stuck with Europe for so long was it was just such a good deal. Asia is very much a consolation prize," he said.

Russian creativity

For the next several years, the oil and gas industry will not face dramatic problems, said Tatiana Mitrova, a research fellow at Columbia University Center on Global Energy. But technological issues will accumulate with time, and at a certain point it will lead to some more painful consequences, she said.

Russia will also get creative, for example, by taking compressors from pipeline projects that used to serve Europe and repurposing them for projects to serve China, Mitrova said. "Don't underestimate creative thinking of the Russian companies which find themselves cornered," she said.

Tankers are also a hurdle for Russia, Kennedy said. On the eve of the Ukraine invasion, Russia had the ability to move about 15% of its seaborne oil, and the rest was going through primarily coalition-owned or coalition-insured tankers, he said.

After sanctions, Russia had to go to the second-hand market and spend billions to build a shadow fleet that still amounts to less than 50% the capacity it needs, Kennedy said. And the shadow fleet has an average age of 18 years, which means that over the next few years those tankers will need to be replaced, he said.

"Yes, Russia has been responding, but the overall trajectory is one of an industry which is in increasing levels of distress," Kennedy said.

But Paul Saunders, president of the Center for the National Interest, argued that Russia has largely succeeded in redirecting its oil flows. Russia has managed to reorient its coal exports, but the coal sector, which is largely privatized, faces huge economic pressures from higher taxes and higher rail tariffs, Saunders said.

However, the Russian economy is certainly not collapsing, Saunders said. "From a political perspective, that means that efforts to apply political pressure to Russia via economic pressure on the energy sector are not yet succeeding, and we may need to come up with some new ideas if that is something we want to do in the future," he said.