Voices: If Europe wants to get tough on Russia, it needs to sanction Gazprom

Russia’s invasion of Ukraine produced multiple global shocks impacting financial operations, energy markets and food supply chains. In many cases, Moscow caused or exacerbated them directly by freezing shares and bonds held by foreign investors on the Russian domestic market or by blocking the Ukrainian ports.

In other cases, Western sanctions contributed to the turmoil, as happened with the embargo on Russian energy. This has resulted in the worst energy crisis Europe has seen in decades as oil, coal – and especially gas – prices have soared by 1.5, 2.7, and roughly 10 times, respectively, compared to a year ago.

Many European leaders have already announced that the coming winter may be catastrophic, with the average utility bill for a British household expected to more than double – from an average of £1,277 per year, to £3,549 from October 2021 to 2022.

The European Union will pay up to €300 billion in excess for its energy imports in 2022 compared to 2021 figures, and it is now obvious that the share of “dirty” fuels such as coal and oil in the EU’s energy balance will increase – while the share of natural gas is set to decline.

The issue of Europe’s preparation, or lack thereof, for decreasing its dependency on Russian energy has been discussed ad nauseum. Nevertheless, it must be reiterated that this was discussed as far back as the GMFUS’ Brussels Forum in 2015 – when Europe suddenly became concerned by its dependency on Russian gas and seemed to be willing to address it. Unfortunately, this was an ephemeral notion and nothing changed until Russian armies trundled towards Kyiv in 2022.

When they did, Europe responded in an almost illogical manner – one would have imagined that if Brussels’ aim were to punish Vladimir Putin and his closest allies, they may expect direct and critical sanctions against Gazprom to be announced immediately. The company was renationalised by Putin in 2000 and has been headed by his crony Alexei Miller ever since – contributing 14.1 per cent of Russia’s federal budget revenues in 2020.

Contrary to expectations, Europe refrained from sanctions against Russian gas and allowed Gazprom to organise a counteroffensive, decreasing supplies and causing a dramatic increase in gas prices in Europe that has hit new records 18 times since the end of June.

Instead, Europe introduced a partial embargo on Russian oil that should take effect by the end of the year – and a delayed but total ban on Russian coal, which was finally enacted earlier this month. All of these measures dramatically increased the demand for Russian fuel, allowing Russia to inch up its oil production and collect an incredible export revenue of $319.5 billion for H1 2022 (an increase of 37 per cent year on year) as the proceeds from the gas exports became greater than those from oil.

A basic assessment of Brussel’s coal-sanctioning rationale reveals the EU’s sanctions policy as fundamentally flawed. European imports of Russian coal account for just 2.9 per cent of total EU energy production.

Brussels’ actions impacted an industry that was insignificant for the Russian budgetary revenue as there is no export duty on coal in Russia, meaning these producers contributed only 0.2 per cent of federal budget revenues in 2020. Coal is also the most privatised among all energy industries in Russia – with no state controlled enterprises in coal production.

Comparatively, Russian state-controlled exporters increased their share to 64.2 per cent in oil, and to 67.5 per cent in natural gas. Lastly, coal is the energy commodity that can be most easily diversified, as the main Russian coal deposits are geographically closer to Asian markets and willing consumers. Despite Brussels’ actions, Russia remains one of the largest coal exporters in the world with 18 per cent share of the total.

Russian coal exports, if calculated in exajoules, are equivalent to 165 bcm of natural gas which exceeds Russian gas exports to all of Europe. By refraining from sanctions against Russian coal, Europe would secure quite a significant source of additional energy for their markets – which is also now 5.1 times cheaper than natural gas in terms of their respective thermal power. This would prevent the Russian state revenue from a significantly increasing but the economic structure of the Russian coal industry would make it more difficult for the Kremlin to block coal shipments to Europe compared to oil or gas.

Europe is now hunting for additional coal from as far afield as Australia and South Africa. As the EU only produces around half of the amount of coal they consume – and has outlawed Russian supplies which previously constituted half of their coal imports – Brussels is in deep trouble. In 2014, EC Council Regulation No 833/2014 was implemented, which excludes coal from sectoral sanctions together with all equipment and technology needed for its production and transportation. This is a far better policy than what we are witnessing now.

If one looks back when Russia first attacked Ukraine, from March 2014 to January 2015, oil prices fell by 56 per cent, gas prices decreased by 26 per cent and coal became cheaper by 22 per cent. This slide in energy prices that continued well into 2016 caused a long downward trend in Russia’s economic development that was correctly predicted to stay in place for years. Now, the creation of artificial shortages in one of the world’s largest energy markets helps the Kremlin to amass additional budget revenues from stable (and even decreasing) energy supplies to Europe.

Russian coal-producing companies have never been the Kremlin’s most prominent backers. The industry itself was born because of a comprehensive reform project supported by the IMF and World Bank in the early 1990s. Coal-producing companies like Mechel pioneered Russian listings on NYSE in 2004; SUEK, now Russia’s largest producer, was assembled from a myriad of almost bankrupt coal companies in early 2000s.

The Russian government has a difficult relationship with coal “oligarchs”: in 2008, Putin attacked Mechel’s main owner, Zyuzin falsely accusing him of breaking anti-trust laws that caused dramatic fall in company’s shares. In recent years, SUEK’s beneficiary owner, Melnichenko, moved his corporate headquarters to Switzerland. None of the owners of Russia’s largest coal companies appeared to support the Kremlin’s war in Ukraine, contrary to the managers of Gazprom, Rosneft or state-controlled banks.

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The EU must fundamentally reorient its sanctions policy with Russia by introducing firm sanctions against Gazprom to demonstrate the EU’s willingness to confront the Kremlin’s favorite company – and terminate its supplies to the European market.

This should be coupled with lifting all the restrictions imposed on Russian coal supplies – starting from the immediate ban and going as far as liberalising the regime of Russian coal shipments towards third countries via EU territory and allowing the use of European ports; and granting the producers full access to shipping and insurance services. Accordingly, a resolution stating that the involvement of a person in activities of the Russian coal industry should not be considered a reason for inclusion in sanctions lists should be adopted.

This will ease the European energy crisis, cause price drops in one vital segment of the energy market – and send a message to Russian entrepreneurs that Western authorities’ targets are state-owned Russian businesses or sycophantic oligarchs that make the greatest contributions to the federal budget, and have nothing against market-oriented private companies.

The war between Russia and Ukraine will end someday – but what Europe should learn from the events of 2022 is that state-controlled monopolies that can disrupt the markets for political purposes are a fundamental threat to not just energy security, but the international political and economic order.

Vladislav Inozemtsev is special adviser to MEMRI’s Russian Media Studies Project and foun­der and director of Moscow-based Center for Post-Industrial Studies