Oil-and-gas exports make up 70% of Russia’s $515 billion annual exports, and 52% of the federal budget, according to America’s Energy Information Administration. Europe’s role as Russia’s largest gas market already gives it a certain strength, as can be seen in the increasingly hard-nosed way EU competition officials are taking on some of Gazprom’s practices.
Oil (unlike gas) is easy to store, ship and trade, which means a single customer has less scope for action. But to sell its oil easily, Russia needs access to the world financial system. Its companies need to borrow on the bond market, and want their shares traded on international exchanges. They also need to process payments in dollars (the currency in which almost all international energy transactions are priced).
This gives Europe and America considerable leverage, if they choose to exert it. Rosneft, Russia’s biggest oil company, would be badly damaged if it were to be delisted on the London and New York stock exchanges. Financial sanctions could also make it hard for Russia to sell its oil to third parties. Sanctions have hurt Iran not by stopping it getting oil to customers, but by stopping it from receiving payment (though Russia would be harder to isolate).
In theory, Russia’s gas exports to Europe are a weapon that points the other way. If Russia were to push farther into Ukraine, or to try its chances in Moldova, Georgia or the Baltic states, and Europe to take strong action in response, it could shut down exports completely, thus doing huge damage to the EU. But barring immediate, permanent and total victory, that would also doom Russia as a gas exporter. China already has worries about Russia’s dependability as a supplier. Even with $475 billion in foreign-exchange reserves, the Kremlin cannot continue to run Russia’s ramshackle and uncompetitive economy without its most important export revenues.
The shock of the Crimean annexation should speed up sluggish European decision-making on storage, interconnection, diversification, liberalisation, shale gas and efficiency. And though the decision-makers may detest Mr Putin, in private they will admit that he may thus have done them a favour. They already knew what to do. They just didn’t want to do it.