Russia’s economy has buoyed Putin, but a key weak spot is emerging

Russia’s fortress economy has proven remarkably resilient to the onslaught of Western sanctions. Two years after the Kremlin invaded Ukraine, it continues to finance a costly war and prop up President Vladimir Putin.

But there is one place where the pain is very real.

The Novatek PJSC-led Arctic LNG 2 facility in the icy Kara Sea is a key part of Moscow’s plans to boost exports and replenish coffers. For months now, it has been poised to ship liquefied natural gas to new markets as an alternative to the once-lucrative European pipeline trade.

Still, vast new $25 billion The first part of Russia’s energy production complex to be effectively controlled by US restrictions remains virtually inactive.

Russia has long sought to increase its share of the global LNG market, but the war and subsequent sharp decline in onshore exports to Europe have reinforced the importance of these ambitions. Moscow wants to triple LNG production by 2030, adding at least $35 billion in annual revenue.

Thanks to older operations, Russia is currently the world’s fourth-largest LNG exporter, but restrictions on flagship Arctic LNG 2 are stifling its ambitions to go further. For Moscow, they have provided a blueprint for any future Western attempts to curb the Kremlin’s gas revenues, targeting operations in the Far East such as Yamal or Sakhalin II – still distributed to customers in Europe and Asia.

„US sanctions are working surprisingly well,” said Malde Humbert, founder of the Arctic Institute, who has been tracking Russia’s expansion in the region for more than a decade. „Here, they’re really ahead of the curve. They blocked Arctic LNG 2 before it started production, blocked it before the ships could deliver. With everything else, like oil or the shadow fleet, it’s always reactive.

Since the Biden administration blocked the Arctic LNG 2 facility Last year, buyers in China and India — places that buy and trade Russian oil and work around existing sanctions — have refused to buy even the discounted LNG. Meanwhile, lawyers in Singapore and London recused themselves from involvement in the scheme.

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too Shipbuilders Hundreds of millions of dollars worth of ships are currently stuck in dry docks in South Korea, stuck in embargoes. No one can buy or lease them. Gas, meanwhile, is trapped in the facility.

Unlike oil exports, despite the price ceiling and other limitations, it has continued to flow with vast amounts of aid „Shadow Fleet”LNG is tricky to keep moving because it requires more complex technology to load and ship the super-cooled fuel.

Now the European Union, still leaning on Russian LNG, is reluctant to restrict imports. Europe has not completely banned the fuel, but the camp’s discussions signal that gas is no longer off limits as the war enters its third year.

A proposal to ban the use of EU ports to re-export Russian goods destined for third countries is controversial. Because Russian LNG plants in the Arctic are exceptionally remote, the fuel is usually first delivered to Belgium or France for re-export to Asia or another European port. Limiting this practice would stretch Russia’s shipping fleet to breaking point.

The White House’s National Security Council has begun focusing on shutting down Russia’s LNG expansion plans by 2023, a year before war, according to people familiar with the strategy. Officials there worked with the U.S. Department of State and Defense to select the target, eventually entering the Arctic LNG 2 program. Then they brought it to the treasury.

Now, as part of a broader plan to prevent Russia from developing any new energy projects that could provide substantial revenue, the United States wants Confident The Arctic initiative is „dead in the water,” Assistant Secretary of State for Energy Resources Jeffrey Piatt told a briefing last month.

White House officials have good reason to target the facility, which is jointly owned by the Japanese government, Chinese state-owned oil companies and France’s TotalEnergies. While this will certainly irritate important allies, the freeze on Arctic LNG 2 will affect Moscow and make only limited ripples in global natural gas markets. As the election approaches for the Biden administration, the fallout for American consumers is contained.

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Washington has other advantages. The LNG trade requires expensive specialized vessels that can be tracked with satellite data, making it nearly impossible to build a replacement fleet. While approx 7,500 Oil tankers today are of various sizes, with the entire LNG industry numbering close to 700.

Arctic LNG 2 requires a unique vessel that can navigate through thick ice. Hanwha Ocean Co. of South Korea. And including vessels owned by Mitsui OSK, 21 ice class tankers were ordered for operation. These are now struggling to find new owners. Of course, Russia can bring its own capacity and LNG carriers are being built at the Zvesta shipyard – but they have been delayed by sanctions.

„The biggest obstacle to the development of Arctic LNG 2 is the availability of tankers,” said Thane Gustafson, a professor at Georgetown University who has tracked Russia’s fossil fuel expansion for decades, as a weak spot in Russia’s overall strategy.

„The long-term outlook is clouded by the fact that the primary objective is to develop LNG to East Asia via the North Sea route, which is not feasible at this time.”

Russia holds the world’s largest share of natural gas at around 20% of proven reserves, but it has yet to turn it into revenue. New pipelines aren’t being built fast enough to replace sales, leaving only LNG — which Putin has identified as the fuel of the future.

The Kremlin says it wants to export more than 100 million tons of LNG by 2030, up from 31 million last year — with or without sanctions. Arctic LNG 2 is not the first project to be hit with restrictions, and limitations on technology transfer and hydrocarbon exploration equipment in 2014 spurred some local alternatives.

Yet, as barriers pile up and technology slows to replicate, the government is beginning to recognize the scale of the challenge. Figures in an Economy Ministry document released earlier this year and seen by Bloomberg show that production could actually stagnate by 2027 under a conservative scenario, suggesting Arctic LNG2 levels will not increase rapidly.

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None of the traders and analysts surveyed by Bloomberg expected the facility — which has completed (started) construction on only one of three production trains — to reach full capacity as long as the curbs remain.

Novatek, the company behind it all, continues to press on. Founder Leonid Mikhelson, Russia’s fourth-richest man and a close Putin ally, successfully completed construction of the first phase of the Arctic LNG 2 project last year – defying the industry. expectations Missing technology will stop it. New supply chains were built after companies such as Technip Energies of France left projectAlong with parts and equipment are brought from engineering yards in China.

„The fact that we are the target of sanctions is a signal of how they assess our capabilities,” Michelson said at the XVI Verona Eurasian Economic Forum in November shortly after the project was approved.

But now he must contend with the potential departure of more overseas partners as regulations tighten — and find customers.

Novatek has been hiring staff in China to try to improve the business and sent officials to India in February, according to people familiar with the matter. No firm deals have materialized yet, the people added.

With the next test coming in the summer, Novatek aims to send its first LNG cargo from the Arctic LNG 2, using ice thin enough to use a conventional vessel, according to the people, who spoke on condition of anonymity because they were not authorized to speak. to the media.

„There will be current expeditions, but it will be very limited,” said the Arctic Institute’s Humbert. „Where does Russia go from here?”

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