Russian energy politics at a crossroads
Dwindling oil and gas revenues may turn out to be a considerable strategic disruption for the Kremlin.
In a nutshell
- The U.S. has imposed new sanctions on Gazprom Neft and Surgutneftegaz
- Seaborne oil deliveries to countries like India and China have halted
- The fallout from decreasing revenues will have long-lasting repercussions
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In Russia, the saying goes, everything is about oil. If so, then it was bad news for the Kremlin that one of the Biden administration’s last actions was to target the Russian oil industry. In a landmark decision, the United States Treasury imposed sanctions on two of the main Russian oil producers – Gazprom Neft and Surgutneftegaz – and on 183 vessels that form part of the notorious “shadow fleet” of decrepit old tankers used to evade sanctions.
The impact was immediate. Faced with the threat of being hit by secondary sanctions, countries that had been doing brisk trade with vessels in the shadow fleet no longer found the deal to be worth the risk. Dozens of tankers en route to destinations in India and China dropped the anchor.
Economic and political damage
With the world’s largest reserves of natural gas, Russia has a vast extraction and transportation complex. At the peak of its glory, in 2008, national gas champion Gazprom was on the cusp of becoming the most valuable company in the world. Given its control over pipelines that supplied a large share of Europe’s natural gas, it was also one of the most important tools of Russian foreign and security policy.
The energy complex has long been crucial to Russia’s economic development. The country has remained heavily dependent on primary sector activities like digging, drilling and pumping, which contribute little added value and have limited impact on human capital development. Around 90 percent of its exports are commodities, with oil and gas accounting for two-thirds.
Facts & figures
Vessels carrying Russian crude oil in January 2025
In this context, oil and gas play two fundamentally different roles. Gas has been used mainly for domestic purposes. Gazprom has been tasked with national “gasification” programs, meaning supplying cheap gas for central heating systems and energy-intensive industries like aluminum production. While this has been extremely beneficial to producers like Rusal, which has exported large volumes of heavily subsidized aluminum, the combined effect rendered Gazprom’s domestic business unprofitable. The losses were recuperated via a de facto monopoly on lucrative exports of pipeline gas to Europe.
This state of affairs ended when Ukraine stopped the transit of Russian gas via its territory at the end of 2024 – likely resulting in $5-6 billion losses in annual export revenue for Russia. Gazprom’s domestic business will no longer be viable. The company’s share price has tumbled by 70 percent since before the full-scale invasion in 2022 and is now at levels comparable to those during the 2008 financial crisis. Some 40 percent of staff at its lavish St. Petersburg headquarters may be laid off.
Oil, by contrast, has provided the lion’s share of much-needed export revenue, traditionally accounting for more than half of total Russian exports. The importance of oil for economic performance has been so overpowering that nearly every macroeconomic indicator, from exchange rate and budget balance to real wage development, has tracked its price.
Oil was the main driver behind the economic success of the first two terms of Vladimir Putin’s presidency. With prices rising from about $10 per barrel when Mr. Putin took office, to a peak of $148 per barrel in the summer of 2008, the total windfall gain has been estimated at $600 billion.
Energy exports and the invasion of Ukraine
Given its inherent dependence on oil and gas, it was imperative for Russia that the flows of those commodities be maintained despite its aggression against Ukraine. As the Kremlin had likely expected, Western governments did not allow the illegal capture and annexation of Crimea to interfere with their Russian energy imports.
Depending on Russia for about a third of its total gas use, the European Union declared that sanctions were off the table. Germany was especially aggressive in demanding that Russian gas must be allowed to continue flowing, that ventures like the Nord Stream pipelines must not be sanctioned and that Gazprombank must be exempt from financial sector sanctions. Gazprom thrived and continued to blackmail its customers at the Kremlin’s orders.
Oil was a different story. Given the pivotal role of revenues from oil in supporting the war against Ukraine, it was politically impossible for Western governments not to retaliate against the Russian oil sector. However, sanctions were watered down to near irrelevance. When a price cap of $60 per barrel for Russian exports was finally agreed upon, it was set at a level acceptable to Russia. When the Kremlin began assembling its shadow fleet of sanctions-busting tankers, European leaders looked away.
Sanctions were limited to this price cap, with no ambition to curtail Russian oil output. The American service company Schlumberger was allowed to remain active in Russia, making good money from helping Russian oil companies squeeze the last remaining reserves from brownfield operations.
The full-scale invasion of Ukraine cast a spotlight on the hypocrisy of Western governments. Although the moral imperative to support Ukraine was strong, the readiness to take tough action against Russian energy exports remained weak. Europe was under strong pressure to reduce its imports of Russian gas, but doing so was fraught with major political complications.
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The sabotage against the Nord Stream pipelines in September 2022 did have an impact on Russian export capacity, destroying three out of four pipes, but it was not a crippling blow. Since Nord Stream was designed to enable direct gas exports from Russia to Europe, bypassing transit through Ukraine, Gazprom could maintain its export levels using that route.
Several countries in Central Europe remained insistent that gas must continue to flow. Russian liquefied natural gas (LNG) from fields on the Yamal Peninsula also grew in importance.
Russia’s LNG exports were drastically curtailed in 2023, as the U.S. began supplying large volumes to Europe. However, in early 2024, President Joe Biden signed an executive order “pausing” those exports. Russian exports received a substantial boost. During the first two weeks of 2025, the EU set a record for purchases of Russian LNG, with imports rising to 837,300 metric tons from 760,100 tons during the same period in 2024.
Sanctions on Russian oil were undermined because the Biden administration feared high gasoline prices during an election year. Little was done to interfere with the Russian shadow fleet shipping large volumes of oil to India and China. It has also been reported that the U.S. warned Ukraine against striking the Russian oil export terminals out of concern for higher global prices.
Scenarios
Likely: Further restrictions cripple the Russian oil and gas industry
The Trump administration’s promises to “drill, baby, drill” could substantially expand U.S. hydrocarbon exports. If Saudi Arabia bows to pressure to increase its output, the effect of higher U.S. production will be magnified.
Russian oil will likely be tightened. In his Senate confirmation hearing, Treasury Secretary nominee Scott Bessent was clear in his views about this: “I believe the sanctions were not fulsome enough. If President Trump requests ... I will be 100 percent on board for taking sanctions up, especially on the Russian oil majors.” The combined outcome will not be limited to downward pressure on oil prices. A boost in U.S. LNG exports will also severely damage Russian sales to Europe.
Gazprom has already lost the European market for pipeline gas, which was the mainstay of its operations. It is now left with two lines to Turkey, and one to China. What remains is Russian LNG. In recent years, the private company Novatek has done brisk business, with special-purpose ice-class LNG tankers serviced at wharfs in Denmark and France. If this practice is brought to a halt, the Yamal Peninsula gas fields will be crippled.
The future of Russia is now in the hands of President Trump, whose promise to end the war in 24 hours has been replaced by “several months.” Presuming that he is serious in his ultimatum to Russia of either agreeing to a deal or facing ramped up “taxes, tariffs and sanctions,” and that President Putin is equally serious in refusing any deal that may not be construed as a victory, the most likely outcome is swift decline in Russian export revenues.
Given that fiscal reserves are already nearing exhaustion, this will have major consequences for economic performance. Although the short-term impact is unlikely to force an end to the war, the longer-term consequences of a protracted Russian refusal to make a deal will be devastating.
Less likely: Restrictions on Russian oil and gas loosen
A deal to end the war could have different results. One is a loosening of sanctions on Russian oil and vessels in the shadow fleet. Another would be for Turkey to allow Russian gas to be mixed into its own export of gas from the Caspian Basin to southeastern Europe. Hungary and Slovakia might be successful in pushing Ukraine to reopen transit of Russian gas. China could agree to complete the construction of a second gas pipeline, the Power of Siberia 2, and plans for major gas exports to Iran could become a reality. While some or all of these developments would allow Russia to start rebuilding its energy complex, and therefore its military, this is not a likely outcome.
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