Polar whack-a-mole

The sanctions war reaches Arctic shipping

Efforts by the United States and the European Union to knock out key industries in northern Russia through sanctions continue.

As a reminder, the Arctic oblasts and regions play a crucial role in Russia’s national economic development strategy. Home to about 1% of the Russian population, they generate roughly 15% of the country’s GDP and 25% of its exports. In 2020, 80% of Russia’s natural gas and 17% of its oil were produced on Arctic extraction sites. On top of that, 65-70% of Russia’s officially undiscovered hydrocarbon deposits are assumed to be located above the Arctic Circle. 

Russia has no meaningful climate policy to speak of, and has been unable to diversify its economy away from the export of extractive resources at large scale. Revenue streams from Arctic oil and gas sales support Russia’s wartime economy and provide it with the financial means to continue its assault on Ukraine.

This is why the United States, and to a lesser degree the European Union, have tried to pull the plug on Russia’s planned and yet uncompleted Arctic energy projects - specifically, Novatek’s Arctic LNG 2 on the Gyda peninsula. While Europe long dragged its feet on targeting Arctic LNG 2 - French TotalEnergies holds a significant stake in the site - U.S. sanctions on the project were first introduced in late 2023, to devastating effect. As a result, the Russian Arctic is now one of the world’s most dynamic theatres of economic warfare.

Photo: Arctic LNG 2 (Source: Novatek)

Here is a chronology of recent events, with special thanks to Malte Humpert, the most authoritative investigative journalist covering Arctic shipping and sanctions (follow Malte on LinkedIn).

In June, U.S. sanctions for the first time aimed at Russia's ice-capable liquefied natural gas (LNG) carriers. They also included the Chinese construction yard Penglai Jutal Offshore Engineering Heavy Industries (巨涛海洋石油服务), which has played an important role in the assembly of liquefaction modules for Arctic LNG 2.

In July, the European Council tied together a 14th Russian sanctions package. For the first time, European measures also targeted the Russian LNG sector, which - three years into the war - remains a major energy supplier for several EU member states. The ban on Russian LNG transshipments introduced by the Europeans represents a compromise solution between member states, albeit one with a less destructive thrust than the comparatively more gloves-off approach of the U.S.

Although Novatek has kept up its optimism regarding the completion timeline for Arctic LNG 2, in July, U.S. sanctions forced a stop to the delivery of LNG modules produced by Wison New Energies, a Chinese production yard. This eventually brought construction works at Arctic LNG 2 as a whole to a halt, and indefinitely delayed the launch of construction at Russia’s planned Murmansk LNG site.

In November 2023, U.S. Treasury speaker Geoffrey Pyatt had spoken of his department’s intention to “kill” Russia’s Arctic LNG 2 project. With good reason, U.S. officials expressed their satisfaction over having essentially succeeded in that task.

The future of Russia’s LNG industry looks increasingly shaky. U.S. sanctions now encompass not only existing LNG projects, but also all three of Russia’s major planned future Arctic sites - the Obsky LNG, Arctic LNG 1 and Arctic LNG 3. The Kremlin plans to increase Russia’s production capacity to 100 million tonnes of LNG by 2030, but an industry forecast by Rystad Energy shows that Russia will miss this target by as much as 60 million tonnes. At the EU level, pressure is rising to fully sanction Russian gas, signalling that European states will be unlikely to enter potential future opportunities within the Russian LNG sector.

To make matters worse for Moscow, Western measures now also take aim at LNG shipping operations in the Russian Arctic. To circumvent the oil price cap introduced in 2022, Russia has assembled a ‘dark fleet’ of self-concealing tankers to operate out of Arctic oil sites. Similarly, in August Russia began to employ select unregistered LNG carriers to collect sanctioned gas from the Arctic LNG 2 site.

Photo: LNG carrier Asya Energy spoofed signals near Norway, was sanctioned by the U.S., and had its license suspended by Palau (Source: Sungreen Logistics Group)

A cat-and-mouse game ensued: While unregistered LNG carriers in Russian Arctic waters mushroomed, Western authorities generally expanded sanctions to include ‘dark’ vessels as soon as they were identified. Following a suspension of the flag of three LNG carriers by Palau in early September, the Russian gas ‘dark fleet’ ground to a temporary halt. At an immense risk to its maritime environment, Russia has since allowed non-ice class LNG carriers to operate on the Northern Sea Route.

Meanwhile, EU imports of LNG from the operational Yamal LNG site continued to rise. In the first months of 2024, France, Belgium, and Spain again received record-breaking amounts of Russian gas. At the European Council, Germany and Sweden lobby for a total phase-out of Russian LNG imports to Europe, but the EU struggles to find a common position on Yamal LNG. Its sanctions on Russian Arctic shipping have, however, started to impede deliveries of LNG cargoes bound for EU markets.

In other energy news, recent record losses prompted Gazprom to halt the entirety of its Arctic gas exploration projects. The future for the gas giant is bleak. China, Russia’s only remaining major client for pipeline gas, refuses to conclude negotiations over the planned Power of Siberia II pipeline. Even Putin’s frequent tributary treks to see Xi Jinping in Beijing have brought little luck, as the Chinese insist on paying no more than domestic Russian prices for deliveries. This would render the pipeline unprofitable for Gazprom. In August, Mongolia, the key transit country of the pipeline, left Power of Siberia II out of its new national energy strategy plans until 2028, signalling the degree to which the project is now in troubled waters.

For Rosneft, fewer immediate obstacles appear on the horizon. Global demand for Russian crude remains high. The oil giant in July appointed Andrei Lazeyev as the new head of the enormous Vostok Oil project on the Taimyr peninsula. The change in management is aimed at spurring faster development at the oilfields, as was reported by Kommersant’. Vostok Oil will be serviced via the Northern Sea Route and become one of the largest operational oil fields in the world. It is expected to primarily service Indian and Chinese markets.

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