Widening net: New US sanctions to affect supply of Russian energy

In a parting shot, the departing administration of United States (US) President Joe Biden has extended the scope of its sanctions on the Russian energy sector. The new measures, announced last week, go much further than the existing sanctions and have the potential to create additional volatility in an energy ecosystem that is already under considerable pressure. This decision, coming as it does just a couple of weeks before the start of the Donald Trump presidency, throws a political challenge to the new administration, which is known for its pro-Russian bias. Mr Trump will therefore be put to the test on its proximity to Russia and how he responds to this challenge remains to be seen. But the collateral implications for energy-dependent Europe and India will be substantial and policymakers will have to deal with these eventualities. The new aggressive sanctions span multiple domains. Two large producers and exporters have been brought into the sanctions net: Surgutneftegas and Gazprom Neft. The million barrels that these two shipped in the last year together represent almost a third of current Russian maritime exports, and are a significant proportion of the current supply in the market, including to India. In addition, sanctions against specific oil-tanker ships have been set up, including those that shuttle oil and gas across the Arctic Ocean to the main Russian regional port at Murmansk. The medium-term impact of these sanctions is unclear. Certainly, it will raise costs, since transshipment of various sorts may be required. 

Another arrow in the US’ quiver is new restrictions on maritime insurance providers in Russia, in particular Ingosstrakh Insurance Company and AlfaStrakhovanie Group. The former is a major supplier of insurance to cargo destined for India in particular, and its removal from the market may lead to delays in existing shipments. India will have to come up with a suitable set of responses to these new measures that are not too disruptive. This is urgent because the safety of the shadow fleet that ships Russian oil has already become a problem. Sanctions against specific ships render them difficult to repair and make accidents more likely; and the absence of insurance means that accidents, when they occur, create major losses. They also have a major effect on the ecosystem. The Black Sea is currently threatened by leaks from two damaged Russian oil tankers, and Germany this weekend had to deal with an abandoned tanker, part of the shadow fleet, in the Baltic Sea. 

To an extent, these additional measures were anticipated, though their aggressive nature is something of a surprise. Indian purchasers of fossil fuel, alongside their counterparts in China, have in fact stepped up their dependence on Gulf and Atlantic sources for oil in the past weeks. Indian state-owned oil refiners have reportedly snapped up contracts for February delivery of six million barrels of crude oil from the Gulf in particular, partly as a response to the lack of availability of Russian crude oil on the spot market. Two million barrels have also been secured, according to reports, of West Texas Intermediate. It is likely that it will take a few more weeks or months for the Russian sources of crude oil to work out modalities for supply that go around the new sets of sanctions. Until then, India will be exposed to some volatility in supply and prices. It is also possible that the new normal for Russian supply will be higher cost, less reliable, and more dangerous than existing routes. Indian refineries’ dependence on the sanctions-enabled carry trade may not be possible for much longer.