ECONOMY
‘We Will Continue to Tighten the Noose in the Oil Shadow Market’
April 25, 2024
- Geoffrey PyattThe US Assistant Secretary of State for Energy Resources
-
Anna Klishina
The Russia Program at GW
Geoffrey Pyatt, the US Assistant Secretary of State for Energy Resources, discusses US plans to reduce Moscow’s earnings from energy exports, expand sanctions on LNG and nuclear energy, and why China is unlikely to become a close partner of Russia.
The original version in Russian can be read on The Bell.
An embargo and price caps have already been imposed on Russian crude oil and oil products, but Russia's earnings remain high. What further measures does the US plan to take to limit Russia's earnings from energy exports?
We are going to continue to enforce the price cap on Russian oil, which is working. The Kremlin's oil tax revenue is down by 30% (according to the Russian Ministry of Finance, in 2023 the decrease was 24% in rubles and almost 40% in dollars). And what we've been trying to do from the beginning is to reduce revenue to the Kremlin without disturbing the global markets, because the worst outcome is if we shock global markets, [and] oil prices go up more. And then the Kremlin gets more money for selling less oil.
Through the price cap mechanism, we are effectively pushing Russian oil away from the regular global market. There is now a globally traded crude oil market that is transparent, secure and well-regulated, contrasted with a shadow market that is opaque and where Russia faces high premiums for tanker insurance and other services. We will continue to tighten the noose in the oil shadow market, as demonstrated by our sanctions against trading companies, ships and shipowners found to be operating outside the price cap. This will persist; you'll see a steady drumbeat of such sanctions.
At the same time, we are focusing on other categories of Russian energy. For instance, in the nuclear sector Russia will soon lose the US as a market for its nuclear materials. We currently spend about a billion dollars a year on nuclear materials from Russia, but this is going to end. Our Department of Energy is investing more than $2 billion to revive the US enrichment industry so we can reduce our reliance on Russian materials.
Russia has lost Europe as a market for its pipeline gas.
We are going to continue to enforce the price cap on Russian oil, which is working. The Kremlin's oil tax revenue is down by 30% (according to the Russian Ministry of Finance, in 2023 the decrease was 24% in rubles and almost 40% in dollars). And what we've been trying to do from the beginning is to reduce revenue to the Kremlin without disturbing the global markets, because the worst outcome is if we shock global markets, [and] oil prices go up more. And then the Kremlin gets more money for selling less oil.
Through the price cap mechanism, we are effectively pushing Russian oil away from the regular global market. There is now a globally traded crude oil market that is transparent, secure and well-regulated, contrasted with a shadow market that is opaque and where Russia faces high premiums for tanker insurance and other services. We will continue to tighten the noose in the oil shadow market, as demonstrated by our sanctions against trading companies, ships and shipowners found to be operating outside the price cap. This will persist; you'll see a steady drumbeat of such sanctions.
At the same time, we are focusing on other categories of Russian energy. For instance, in the nuclear sector Russia will soon lose the US as a market for its nuclear materials. We currently spend about a billion dollars a year on nuclear materials from Russia, but this is going to end. Our Department of Energy is investing more than $2 billion to revive the US enrichment industry so we can reduce our reliance on Russian materials.
Russia has lost Europe as a market for its pipeline gas.
“We are determined to ensure that this pipeline gas does not find new markets as LNG.”
Novatek's LNG infrastructure in the Gydan Peninsula in YNAO, Russia.
Source: Novatek
Source: Novatek
Why is there such attention from the US toward Russian LNG, particularly toward Novatek's Arctic LNG 2 project, given that earnings from LNG sales are significantly lower than those from oil sales? Is your policy due to the upcoming launch of similar American projects in the market?
So, this is a sector that is extremely vulnerable for Russia. Russian gas has not traditionally been a globally traded commodity that moves from market to market around the world, allowing us to apply significant pressure without causing price shocks. This is aided by the fact that there is a lot of new capacity coming online from Qatar, the US and new markets such as West Africa. As I mentioned earlier, you have seen a very strict US regime of sanctions targeting new projects like Arctic LNG 2 and Ust-Luga and against arctic class ships, as well as against shell companies established by Novatek. The fact that the production timeline for Arctic LNG 2 has been delayed indicates that our approach is effective, and LNG remains one of the sectors with the highest technological demands. We acknowledge that Russia is a highly capable, technological country — they know how to build cryogenic engines… which is essential for constructing a liquefaction train. However, we can impede their progress because there are certain highly advanced technological aspects of the production process, serviced by a very limited number of international companies, most of which have now ceased operations in Russia.
There has been a tremendous change across Europe. For example, the gas storage facilities in Latvia, which used to be filled with Russian molecules, are now filled with American LNG. This signifies a strategic defeat for Putin.
Under what circumstances will the US lift sanctions against Russia?
I do not want to speculate about the future. However, I can say it will take a very long time. Many of the sanctions have been codified into law, meaning they are not solely at the discretion of the White House. Changing them would require an act of Congress.
There's profound and widespread outrage in Congress on both sides regarding Russia's actions. Often, when dealing with Congress and in the State Department's interactions with Congress regarding Russia, we advocate for caution and request more time to pursue diplomatic solutions. Therefore, I believe these sanctions will not be lifted soon. As long as I am involved in these matters, and certainly while Russia occupies internationally recognized Ukrainian territories, the US will not recognize such actions. This stance was established in the spring of 2014 following the invasion and annexation of Crimea, and it remains just as valid today.
Contrary to Putin's expectations that Kyiv would fall within two weeks, he has utterly failed. As someone who has spent the past decade focused on various aspects of Russia's invasion of Ukraine, I foresee this period being remembered as a tragic episode of self-harm by Russia, once the world's largest oil and gas exporter, which has now permanently lost its European market. NATO has grown stronger and more resolved than ever to fortify the alliance and invest in defense.
During my tenure as ambassador in Kyiv (2013-16 — RP), I often wished that Moscow's leadership would take the time to stroll through the streets of Kyiv. They might then understand what the Ukrainian people truly seek — not a war or confrontation with Russia, but control over their own futures. Nobody said “we want to be in NATO” or “we want to have a confrontation with Russia.” They all used the same word – “normalno” — we want to live in a normal country, because Yanukovych, supported by Vladimir Putin, had built a government that was corrupt, undemocratic, silencing journalists. And Ukranians wanted to live in a normal European country. And when they say “European,” it's not Brussel’s Europe. It's rule of law. It's freedom of speech. It's the ability to hold your political leaders accountable.
Russia is increasingly selling its oil to China and accepting Chinese yuan instead of US dollars for these transactions. What is the US's stance on this shift?
Looking at history, you can see many fundamental strategic differences, which make me very skeptical of any kind of long-term strategic relationship between Moscow and Beijing. Moreover, having lived in China and worked in Hong Kong,
So, this is a sector that is extremely vulnerable for Russia. Russian gas has not traditionally been a globally traded commodity that moves from market to market around the world, allowing us to apply significant pressure without causing price shocks. This is aided by the fact that there is a lot of new capacity coming online from Qatar, the US and new markets such as West Africa. As I mentioned earlier, you have seen a very strict US regime of sanctions targeting new projects like Arctic LNG 2 and Ust-Luga and against arctic class ships, as well as against shell companies established by Novatek. The fact that the production timeline for Arctic LNG 2 has been delayed indicates that our approach is effective, and LNG remains one of the sectors with the highest technological demands. We acknowledge that Russia is a highly capable, technological country — they know how to build cryogenic engines… which is essential for constructing a liquefaction train. However, we can impede their progress because there are certain highly advanced technological aspects of the production process, serviced by a very limited number of international companies, most of which have now ceased operations in Russia.
There has been a tremendous change across Europe. For example, the gas storage facilities in Latvia, which used to be filled with Russian molecules, are now filled with American LNG. This signifies a strategic defeat for Putin.
Under what circumstances will the US lift sanctions against Russia?
I do not want to speculate about the future. However, I can say it will take a very long time. Many of the sanctions have been codified into law, meaning they are not solely at the discretion of the White House. Changing them would require an act of Congress.
There's profound and widespread outrage in Congress on both sides regarding Russia's actions. Often, when dealing with Congress and in the State Department's interactions with Congress regarding Russia, we advocate for caution and request more time to pursue diplomatic solutions. Therefore, I believe these sanctions will not be lifted soon. As long as I am involved in these matters, and certainly while Russia occupies internationally recognized Ukrainian territories, the US will not recognize such actions. This stance was established in the spring of 2014 following the invasion and annexation of Crimea, and it remains just as valid today.
Contrary to Putin's expectations that Kyiv would fall within two weeks, he has utterly failed. As someone who has spent the past decade focused on various aspects of Russia's invasion of Ukraine, I foresee this period being remembered as a tragic episode of self-harm by Russia, once the world's largest oil and gas exporter, which has now permanently lost its European market. NATO has grown stronger and more resolved than ever to fortify the alliance and invest in defense.
During my tenure as ambassador in Kyiv (2013-16 — RP), I often wished that Moscow's leadership would take the time to stroll through the streets of Kyiv. They might then understand what the Ukrainian people truly seek — not a war or confrontation with Russia, but control over their own futures. Nobody said “we want to be in NATO” or “we want to have a confrontation with Russia.” They all used the same word – “normalno” — we want to live in a normal country, because Yanukovych, supported by Vladimir Putin, had built a government that was corrupt, undemocratic, silencing journalists. And Ukranians wanted to live in a normal European country. And when they say “European,” it's not Brussel’s Europe. It's rule of law. It's freedom of speech. It's the ability to hold your political leaders accountable.
Russia is increasingly selling its oil to China and accepting Chinese yuan instead of US dollars for these transactions. What is the US's stance on this shift?
Looking at history, you can see many fundamental strategic differences, which make me very skeptical of any kind of long-term strategic relationship between Moscow and Beijing. Moreover, having lived in China and worked in Hong Kong,
“I think the Chinese must look at Putin and his actions in Ukraine and think: this man is crazy.”
Russia has placed itself in a situation where its main military allies are now Iran and North Korea — two quintessentially failing states. That is not the role China envisions for itself. China aims to be at the center of the international system, a hub for biotechnology, artificial intelligence and manufacturing, and is on its path to becoming the world's largest economy. The US and China maintain a very important economic relationship.
The US and European governments have expressed concerns about some of China's actions vis-à-vis Russia affecting core interests. There is particular concern over emerging military relationships between Russia and China, especially regarding Ukraine.
Ultimately, however, I see this as part of the tragedy — the Russian tragedy of this entire period. It's clear to me that Russia is now the requester in this relationship. China will act in its own interests, and I do not believe China sees a long-term benefit in partnering with a Russia that has behaved in such a disruptive and revanchist manner. Based on my experience, the Chinese think strategically and long-term. They have high hopes for their future role in the international system. However, they are fundamentally a conservative society. And nothing about Russia's actions in Ukraine over the last decade is conservative. Quite the opposite, in fact — they are revanchist and disruptive.
The US and European governments have expressed concerns about some of China's actions vis-à-vis Russia affecting core interests. There is particular concern over emerging military relationships between Russia and China, especially regarding Ukraine.
Ultimately, however, I see this as part of the tragedy — the Russian tragedy of this entire period. It's clear to me that Russia is now the requester in this relationship. China will act in its own interests, and I do not believe China sees a long-term benefit in partnering with a Russia that has behaved in such a disruptive and revanchist manner. Based on my experience, the Chinese think strategically and long-term. They have high hopes for their future role in the international system. However, they are fundamentally a conservative society. And nothing about Russia's actions in Ukraine over the last decade is conservative. Quite the opposite, in fact — they are revanchist and disruptive.
The consequences of the attack on the CHPP-5 in Kharkiv in March 2024. Source: VK
Russian attacks have significantly damaged Ukraine's energy infrastructure. How severe is this damage in your view? And what does the assistance from the US and Western allies consist of in this area?
For the past two winters, Vladimir Putin has attempted to weaponize the winter against the Ukrainian people. These attacks on energy infrastructure commenced in October 2022. Shortly thereafter, the White House requested that I lead a coordinated effort across the US government and with our G7 allies to ensure Ukraine received the necessary support to prevail on this front of the war. Ukraine's success has been remarkable, due largely to the bravery of Ukrainian energy workers, despite continuous assaults by Kinzhal [missiles] and Shahed drones. Putin has not succeeded in his goal to cripple the Ukrainian energy grid.
Putin's reckless attacks, including those on nuclear infrastructure and the occupation of Zaporizhzhia — the largest nuclear power station in Europe — have been criticized as unprecedented by Rafael Grossi, the director general of the IAEA.
The US alone has contributed approximately one billion dollars in energy sector equipment, including replacements for autotransformers, grid equipment and generators, as well as emergency heating to prevent humanitarian disasters.
I believe Ukraine will survive. The resolve to support Ukraine was palpable at the recent Three Seas Summit, emphasized by the powerful presence of President Zelensky. I shared photographs from a central heating plant in Kharkiv — images sent from my colleagues in Kyiv — that elicited a unanimous call from the attending presidents and prime ministers to do more. This is an attack on the fundamental values Europe stands for.
For the past two winters, Vladimir Putin has attempted to weaponize the winter against the Ukrainian people. These attacks on energy infrastructure commenced in October 2022. Shortly thereafter, the White House requested that I lead a coordinated effort across the US government and with our G7 allies to ensure Ukraine received the necessary support to prevail on this front of the war. Ukraine's success has been remarkable, due largely to the bravery of Ukrainian energy workers, despite continuous assaults by Kinzhal [missiles] and Shahed drones. Putin has not succeeded in his goal to cripple the Ukrainian energy grid.
Putin's reckless attacks, including those on nuclear infrastructure and the occupation of Zaporizhzhia — the largest nuclear power station in Europe — have been criticized as unprecedented by Rafael Grossi, the director general of the IAEA.
The US alone has contributed approximately one billion dollars in energy sector equipment, including replacements for autotransformers, grid equipment and generators, as well as emergency heating to prevent humanitarian disasters.
I believe Ukraine will survive. The resolve to support Ukraine was palpable at the recent Three Seas Summit, emphasized by the powerful presence of President Zelensky. I shared photographs from a central heating plant in Kharkiv — images sent from my colleagues in Kyiv — that elicited a unanimous call from the attending presidents and prime ministers to do more. This is an attack on the fundamental values Europe stands for.
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