Petropolitics

Putin signals that he’s ready for an oil war

May 1, 2014
May 1, 2014

The US and Europe have yet to fully deploy their bluntest weapon against Vladimir Putin. But if stronger sanctions are deployed against him, the Russian president is vowing to make life very painful for the western oil companies doing business in his country.

The US this week quietly targeted some Russian oil industry bosses in its latest round of sanctions, and Europe has altogether avoided oil in its list of new targets. But on April 29, Putin suggested that he’s prepared to mount an oil war if antagonized further.

“We would very much wish not to resort to any measures in response,” Putin said. “I hope we won’t get to that point. But if something like that continues, we will of course have to think about who is working in the key sectors of the Russian economy, including the energy sector, and how.” The remark appeared to be a swipe at lucrative long-term Russian projects being carried out by oil majors BP, Shell, France’s Total and ExxonMobil.

Obama administration officials have told the New York Times’ Peter Baker that Putin’s personal wealth is the “nuclear” option in terms of sanctions. But that is true only if personal enrichment is Putin’s central concern. If his driving force is instead historical glory, which is arguably the case, then oil—and its pivotal importance to Russia’s economy—is more important.

The revenue from high-priced oil exports is why Putin can prosecute his shadow war of territorial expansion in Ukraine. Russia’s future production in Siberian shale and Arctic oil will underpin the country—along with the political careers of Putin and his successors—through the 2020s. That future production is also why the western oil majors have all publicly said it is business as usual with Putin.

Specifically, oil and petroleum product exports account for an estimated 41% of Russian state budget revenue—$167 billion this year alone. Russia’s projected overseas 2014 oil and oil product sales of $275 billion will make up three-fourths of the country’s total exports.

But that picture could be altered significantly should the US and Europe sanction Russia’s two big energy companies, Rosneft and Gazprom, and thus prevent the western oil majors from helping Russia to develop the shale and Arctic plays. Many analysts believe that Russia’s ability to exploit the Arctic would be crippled without western expertise.

Further sanctions will be a central topic when US president Barack Obama meets for four hours in Washington tomorrow with German chancellor Angela Merkel. But, even if Obama is prepared to strike Russia’s oil companies, few believe that Europe will go along.

That hesitancy is at least partly why Russia and its supporters continue to swallow up town after town in eastern Ukraine as the days count down to competing elections to define Ukraine’s future—a May 11 referendum for the sovereignty of at least two Ukraine cities, and a May 25 Ukraine presidential election. Those elections are likely to make official what Putin has made plain: that he believes that eastern Ukraine is already his.

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