Russian Takeover Isolates Crimea, May Further Isolate Russia

Russian President Vladimir Putin has made great sport of mocking sanctions imposed by the United States and the European Union in the wake of his annexation of Crimea by force. That doesn’t mean the sanctions aren’t working or won’t work, going forward. And other results of Putin’s aggression may yet prove more surprising and isolating for Russia.

Let’s start with the fact that though it may originate in Russia, Crimea relies entirely on gas pipelines and hubs within and controlled by Crimea. Crimea and the Black Sea are, of course, rich in natural gas reserves—the likely “real” reason for Putin’s incursion—but not yet producing and now stalled in their production efforts, leaving Crimea isolated from its energy source for the time being. Ukraine has not threatened to cut off Crimea’s supplies, but control of the energy hub pumping energy into Crimea is one of Ukraine’s only bargaining chips.

The greater threat to Russia is further isolation from the rest of the developed world. Fifty or 60 years ago, this would not have mattered to Russia, but Russia’s economy is now inextricably tied to other major world economies.

Decline in Trade with EU Could Cripple Russia

Russia relies heavily on trade with Europe, its top trade partner. However, Europe does not rely as heavily on trade with Russia, which ranks as Europe’s third largest trade partner. European consumers boost the Russian economy by about $100 million per day, or about 3 percent of the country’s economy.

In addition, the Russian economy is heavily reliant on its gas and oil exports to Europe. Europe isn’t currently positioned to turn off the Russian tap in favor of other sources, but continued aggression certainly incentivizes European Union members to explore all alternatives to Russian energy. If members of the EU get serious about finding other sources of energy, it could prove catastrophic for Russia, which sends about 70 percent of its oil and gas to Europe, or about 7 percent of its economy.

Because Russia needs its European exports more than Europe does, analysts have said it’s unlikely that Russia will cut off supplies to the Ukraine or Europe.

Signs of damage from Russia’s actions are already evident: Russia’s credit rating was downgraded and the value of the ruble has declined. The US and the EU have placed economic sanctions against top Russian officials and others linked to the Russian government, and the US has frozen assets at Bank Rossiya and related European banks to block its ability to conduct business in US dollars.

Russia’s Energy Dominance Could Dwindle

Then there’s the fact that Europe itself has its own reserves. The Energy Information Administration has estimated that the UK has nine times more technically recoverable shale gas resources than it annually consumes. Geological and geographical differences between the US and the UK could limit the UK’s ability to achieve an American-style energy boom, but the UK’s reserves are such that it could fuel itself for 50 years on just 10 percent of the reserves in the Lancashire area alone.

Europe has already signaled its solidarity with Ukraine, covering its debts with Russia in an attempt to undercut Russia’s threats to cancel discount contracts with Ukraine due to unpaid debt. And Europe has the option of blocking Russia’s South Stream pipeline project, which would connect the Black Sea and Southeastern Europe. Indeed, negotiations between Russia and the European Commission over the pipeline have now been halted.

Ultimately, the end result of Russia’s continued aggressions could be a more energy secure Ukraine, UK and US. Each has ample reasons of its own to develop its shale resources; now Russia may well be providing the tipping point each has needed to accelerate their efforts.

Activity Already Heating Up

The writing is already on the wall: a large collection of university economics professors in the UK have called on politicians of all parties to support immediate responsible development of shale gas resources; the federal government in the US is now under increased pressure to speed natural gas export permits and lift the export ban on crude oil.

Efforts in the US aren’t likely to undercut Russia in the form of exports to Europe (Europe can import LNG from nearby nations like Qatar and has been installing specialist terminals for that purpose and already receives most of it gas from Norway) but they could certainly break Russia’s grip on the pricing of natgas and oil to Europe. Even without exports, America’s shale gas boom has already impacted the global market and created competition for Russia.

Though the White House has said that the recent first release of crude oil from its emergency stockpile since 1950 is not related to the crisis in Ukraine, this test sale of crude from the strategic reserve happens to come at a time when the US is well supplied and not in need of tapping into its own reserves. It also happens to be just enough to telegraph a clear message to Russia, whose economy has been so heavily driven by its oil and gas exports.

It all adds up to bad news for Russia and greater energy independence for Ukraine, the UK and the US. It was most definitely was not his intention, but Putin may well have done us a great favor in forcing us all further down the path to full development of our own resources and energy policies.