Western Sectoral Sanctions on Russian Oil Industry Paper Example

Introduction

According to Kholodilin and Netsunajev (2016), the western sanctions on Russian oil industry have not been as effective as they were initially intended to be. Although the sanctions have made it difficult for oil parastatals to get western aid, they have not halted the growth of the Russian oil industry. Since the sanctions in 2014, the oil industry in Russia has stopped borrowing capital from western countries and has instead opted for banks owned by the state as well as its cashflow (Kholodilin, Ulbricht & Wagner 2014). As far as western technology is concerned, the oil industry in Russia has opted to develop its own as a replacement for services once offered by western firms (Neskavaya n.d.). The industry has also adopted Chinese technology.

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Even with the lack of western financial aid, the Russian oil industry has not been phased. China has stepped in to offer the required financial support to oil firms such as Total and Novatek (Christie 2016). The two firms recently launched the Yamal LNG plant worth 27 billion dollars with financial help from Beijing (Oxenstierna & Olsson 2015). Rosneft, for example, has seen a double increase in its drilling subsidiary, making the company almost self-sufficient.

Impacts of the Sanctions

The sanctions have prevented Russia from inventing challenging exploration projects. Russian oil fields are on the verge of depletion, but the country lacks the necessary technology to further its oil explorations into deep sea (Daiss 2018) and (Jura & Buruian 2015). Before the sanctions, the Russian oil industry depended on western technology for the exploration of gas and oil. Due to the sanctions, Russia has no access to the necessary technology required to venture into deep sea explorations to prevent impending oil shortages (Hoffman & Neuenkirch 2017).

Restriction on foreign investment: the sanctions have prevented Russian oil companies from getting financial aid from the U.S and EU, Mitrova (2018) and Morse (2002) say. The result of this is lack of capital to implement infrastructural energy projects that would otherwise be of great benefit to the oil industry. Oil firms such as Lukoil and Novatek saw a drastic decrease in oil production in 2016 due to a lack of capital (Nelson 2015).

Between 2016 and 2017, there was no single significant oil project launched by the Russian oil industry (Di Pace 2017). Oil companies instead focused on projects that were already operational. According to Kobzeva and Zhdannikov (2018) was primarily due to the lack of technology and equipment necessary to oversee the development of novice projects.

During the last months of 2014, there was a significant decrease in the price of oil. This caused put much pressure on the value of the Russian rouble (Dreger et al. 2016) and (Dragoi & Balgar 2016). Furthermore, the country was forced to use some of the reserves from foreign exchange to aid a majority of the state entities that had been sanctioned. The resultant was an increase in interest rates in 2014 December as the Russian central bank shifted its focus from protecting the Rouble.

SWOT Analysis

Strengths

Availability of capital. Majority of Russian oil companies are capable of supporting themselves financially.

Availability of state-owned banks that can offer oil firms financial support.

Large consumer market. Russia is the largest producer of oil in the world (about 11% of the fuel consumed in the world is from Russia.

Availability of already prepared oils that do not necessarily require western technology.

Weaknesses

Unavailability of technology to further exploration of oil fields and intensify production in the already existing ones.

Depletion of oil deposits. As exploration and mining go on, oil deposits in Russia are diminishing by the day.

Diminishing quality of crude oil. Due to the lack of appropriate technology necessary for oil exploration, the final oil produced is of low quality which poses a threat to the Russian oil industry.

Threats

Loss of foreign markets. The U.S is the largest consumer of oil in the world hence the most significant international market for the Russian oil industry.

Restricted access to foreign technology. The oil industry in Russia largely depended on technology from the U.S for oil exploration (hydraulic fracturing).

Reduction in corporate debt. By June 2017, organizational deficits by the Russian oil industry had decreased by 30% posing a threat to the county's economy.

Opportunities

Import substitution. The sanctions have opened a market for domestic technological companies in Russia. It has also forced oil companies to develop theirown technologies to replace those produced by western firms.

Tax privileges. The western sanctions have forced the Russian government to offer tax incentives to parastatal in the oil industry. This is in the move to reduce the cost of production thus increasing revenue.

Asian and Chinese investment. The sanctions have opened the Russian oil industry to Asian and Chinese investors who have since 2014 been very supportive of the oil industry.

References

Dreger, C., Kholodilin, K.A., Ulbricht, D. and Fidrmuc, J., 2016. Between the hammer and the anvil: The impact of economic sanctions and oil prices on Russia's ruble. Journal of Comparative Economics, 44(2), pp.295-308.

Morse, E.L. and Richard, J., 2002. The battle for energy dominance. Foreign Affairs, pp.16-31.

Mitrova, T, Western Sanctions on Russia's Oil and Gas Sector: a Damage Assessment, viewed on 7 December 2018, <https://carnegie.ru>.

Hoffmann, M. and Neuenkirch, M., 2017. The pro-Russian conflict and its impact on stock returns in Russia and Ukraine. International Economics and Economic Policy, 14(1), pp.61-73.

Nevskaya, A, n.d., U.S sanctions on Russian energy sector: first results and side effects, viewed 7 December 2018, <https://www.imemo.ru/files/File/ru/conf/2018/23012018/Neskavaya.pdf>.

Kholodilin, K.A., and Netsunajev, A., 2016. Crimea and punishment: The impact of sanctions on Russian and European economies.

Christie, EH 2016, Sanctions after Crimea: Have they worked?, NATO Review, Viewed 7 December 2018, https://www.nato.int/docu/review/2015/Russia/sanctions-after-crimea-have-they-worked>.

Kholodilin, K., Ulbricht, D. and Wagner, G., 2014. Are the Economic Sanctions against Russia Effective? (No. 28). DIW Roundup: Politik im Fokus.

Jura, C. and Buruian, D., 2015. International Sanctions. Case study. Acta Universitatis George Bacovia (Juridica), 4(1).

Kobzeva, O, and Zhdannikov, D, 2018, Russian oil industry would weather U.S. 'bill from hell', viewed 7 December 2018, <https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUSkBNiL2oGY>.

Dragoi, A.E. and Balgar, A.C., 2016. Economic Sanctions against Russia. A critical evaluation. Knowledge Horizons. Economics, 8(1), p.63.

Di Pace, M., 2017. Eu and USA sanctions and their impact on Russia: a logical-qualitative assessment. Argomenti, (7), pp.79-94.

Nelson, R.M., 2015. US Sanctions on Russia: Economic Implications. Washington, DC: Congressional Research Service.

Daiss, T 2018, Russia Struggles as Sanctions Choke Energy Sector, viewed 7 December 2018, <https://oilprice.com/Energy/Energy-General/Russia-Struggles-As-Sanctions-Choke-Energy-Sector.html>.

Oxenstierna, S. and Olsson, P., 2015. The economic sanctions against Russia. Impact and prospects of success./Swedish Defense Research Agency.-2015.-88 p.