Author: Davit Shatakishvili

 

On June 24, the European Union approved its 14th package of sanctions against Russia. 28 months after Russia’s invasion of Ukraine, these unprecedented Western sanctions are impacting crucial sectors, including energy, financial institutions, infrastructure, manufacturing, and foreign trade. Despite the significant economic challenges posed by these large-scale restrictive measures against the Kremlin, they have not yet led to a political decision to end the war. Indeed, Russia has managed to adapt to the sanctions, finding alternative export markets for its sanctioned products and, with the help of partner countries, bypassing the sanctions to obtain critical production components. Discussing the 14th EU sanctions package and its potential consequences is particularly interesting, as it includes sanctions on Russian liquefied gas for the first time.

What Does the New Package of Sanctions Include?

Under the new energy restrictions, the EU has banned the transshipment of Russian liquefied natural gas (LNG) to third countries within its territory, including both ship-to-ship and ship-to-port operations. Notably, this restriction does not affect the import of Russian LNG into the European Union; it only applies to re-exports to third countries. According to the European Commission’s statement, it will actively oversee this process and make changes as necessary. Additionally, the EU has banned new investments, the supply of goods, and the provision of production technology and services for ongoing LNG projects in Russia, such as Arctic LNG 2 and Murmansk LNG.

The European Union places special responsibility on European “parent companies” (corporations that own more than 50% of the assets of different companies and have the authority to make decisions affecting the operations of subsidiaries), which must ensure that their subsidiaries do not engage in activities prohibited by the sanctions. In addition, European military companies are required to implement diligence mechanisms to assess and mitigate the risks associated with third countries selling weapons to Russia, and they must take appropriate actions based on these assessments. Furthermore, European companies that transfer industrial know-how to their commercial partners in various countries for the production of weapons are urged to tighten their agreement terms. These agreements should include specific restrictions to prevent the transfer of such know-how to Russia.

Under the 14th package of sanctions, the European Union has decided to prohibit the use of the Russian System for Transfer of Financial Messages (SPFS), which the Russian Central Bank began developing as an alternative to SWIFT in 2014. This means that EU companies will be forbidden from conducting financial transactions with certain entities using the SPFS. Additionally, the EU prohibits transactions with specific credit and financial institutions, as well as with crypto-asset providers, that facilitate Russia’s transactions involving dual-use goods, arms, and other munitions trade.

In this latest package of sanctions, the European Union has, for the first time, decided to prohibit certain types of ships, involved in aiding Russia’s actions against Ukraine, from entering or receiving services in EU ports. This restriction specifically targets ships transporting military equipment for Russia, those involved in transporting stolen Ukrainian grain, and those carrying components for liquefied natural gas. Additionally, the ban extends to tankers entering Russia’s Dark Fleet, which assists Russia in circumventing the oil price ceiling imposed by the European Union and G7 member states, currently set at 60 USD per barrel.

Under the new package of sanctions, the European Union is broadening flight restrictions for Russian planes, which currently affect private and charter flights. Simultaneously, the EU is expanding restrictions on road transport with Russia, now encompassing European transport companies where Russia holds more than a 25% ownership stake.

Due to their support for Russia’s actions against Ukraine, the European Union has sanctioned an additional 61 companies, resulting in further restrictions on exports. Some of these sanctioned companies are located in third countries like China, Kazakhstan, Kyrgyzstan, Turkey, and the United Arab Emirates. They have been identified for their role in aiding Russia to circumvent trade restrictions and acquire essential materials used to support the aviation sector and other military operations. The EU has further expanded its restrictions on exports to Russia, now including chemicals, plastics, mining machinery, and various types of electrical equipment. Additional restrictions have been imposed on the import of helium from Russia to the EU, which represents a significant source of income for Russia.

 

Liquefied Natural Gas – First Time as an EU Target

After Russia’s full-scale invasion of Ukraine, the EU significantly reduced its dependence on Russian natural gas by about two-thirds. However, it continued to import and re-export Russian liquefied natural gas (LNG). France, Belgium, and Spain purchased the largest volumes of Russian liquefied natural gas last year. Despite Russian LNG constituting only 5% of the EU’s gas consumption, this translates to a payment of approximately 8.2 billion Euros to the Kremlin. Chart 1 illustrates the monthly export figures of Russian LNG to the EU countries from 2021 to 2023.

 

Chart 1.

Source: Center for Research on Energy and Clean Air (CREA)

European ports play a crucial role for Russia in transporting liquefied natural gas (LNG), particularly in facilitating the transfer from Arctic icebreakers to conventional tankers. For instance, to optimize shipping costs, projects like Yamal LNG in the Arctic heavily rely on ports in Belgium and France for these operations. For Yamal LNG, intermediate stops are essential to facilitate the return of highly specialized ships to the Arctic plant after the transshipment of liquefied natural gas. While Europe does not prohibit ships loaded with Russian LNG from entering its ports, the new sanctions complicate the shipment of LNG to third countries, including major Asian buyers such as China and India. Consequently, this may lead to supply delays, thereby increasing prices. Alternatively, suppliers may seek different, more costly alternative routes, which will also contribute to price increases for Asian countries.

The sanctions are expected to complicate Russian shipping routes, potentially requiring specialized ships to travel longer distances. Directly moving cargo from Yamal LNG to Asia would evidently raise freight and logistics expenses. In response, Russia may explore several alternative strategies. Russia could utilize the port of Murmansk for ship-to-ship operations to offload highly specialized vessels and return them to the plant. Additionally, during the summer months, when the Arctic ice melts, Russia may consider using the Arctic Ocean route, allowing non-specialized ships to access the plant.

With these sanctions, European ports are indeed poised to suffer financial repercussions. For instance, Fluxys SA, the operator of the Zeebrugge LNG terminal in Belgium, had invested in a specialized storage tank and secured a 20-year contract with Yamal LNG.

In 2023, the EU imported a total of 134 billion cubic meters of liquefied natural gas (LNG), with Russia accounting for 18 billion cubic meters. According to forecasts by the Agency for the Cooperation of Energy Regulators (ACER), LNG demand in Europe is expected to peak in 2024, influenced by a declining trend in gas demand due to the EU’s decarbonization objectives.

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Since Russia’s invasion of Ukraine, the European Union and its allies have been seeking ways to reduce the Kremlin’s revenue from energy resource sales without raising energy costs for their own populations. In this context, the latest decision is to prohibit the use of EU ports for the re-export of liquefied natural gas. Currently, it remains uncertain which alternative routes Russia will select to supply its liquefied natural gas to third countries. In terms of price increases, Europe faces lower risks because it continues importing Russian LNG, whereas Asian countries may be more vulnerable to potential disruptions in supply. The 14th package of sanctions is not anticipated to have a direct impact on the conduct of the war. Instead, it represents another measure aimed at inflicting financial harm on Russia, although significant immediate results in this regard are unlikely.