Energy export fills a fundamental bearing function in the Russian economy. Besides the economic importance, it has long been used as geopolitical leverage to affect countries in a position of dependence. The desired effect of this set of measures is to reduce resources that the Russian state commands, and in particular, inflows of foreign currency, but also to limit this source of geopolitical power.
The Price Cap on Russian Oil
The price cap on Russian oil, which is currently set at $60 per barrel, is an important element of the EU and G7’s sanctions on Russia. The price cap is designed to limit Russia’s ability to profit from oil exports, while still allowing Russia to continue to export oil, which is important for global energy supplies. The cap works by prohibiting shippers and insurers from facilitating the transport of Russian oil if the price exceeds the cap. This makes it more difficult and expensive for Russia to export oil.
The price cap is estimated to have significantly reduced Russia’s oil revenues, though the exact impact is difficult to measure. Some estimates suggest that the price cap has reduced Russian oil revenues by around $5-10 billion per month, which is a significant amount, especially given that oil exports are one of Russia’s biggest sources of revenue. This reduction in revenue has had a knock-on effect on Russia’s economy. However, it’s important to note that Russia has been able to find other ways to export its oil, including through countries that are not participating in the price cap and by using a shadow fleet, so the full impact of the price cap is not yet fully understood. Various forms of manipulation in price information, insurance, and shipping mean that the price ceiling is more often avoided.
The price cap caused some disruption in global energy markets, especially in the beginning, as countries scrambled to find alternative sources of oil, and turbulence in prices.
The shadow fleet is also linked to a high risk of environmental damage.
Gas Embergo
Russia was previously one of Europe’s largest suppliers of natural gas. The fact that natural gas is typically transported via pipelines, rather than by tankers like oil, makes it a less flexible export good. Pipelines are fixed infrastructure, so gas can only be transported to countries that are connected to the same pipeline network. They are expensive and time-consuming to build and maintain, so it is not easy to switch buyers.
By building long-run commitments, pipelines also serve as instruments of geopolitical leverage. Russia has long used its natural gas pipelines as a tool to exert geopolitical influence over its neighbors and also in Europe, especially after the construction of Nord Stream 2.
Russian gas giant Gazprom and the broader sector were severely affected by the embargo. However, the EU remains the largest buyer of Russian gas in its liquefied form (LNG), which has partly offset the decline in pipeline gas imports over time.
In the short run, some European countries have struggled to find alternative sources of gas, leading to energy shortages, rationing, and price hikes. Norway and the US stepped in to fill part of the gap. European countries also increased their imports of LNG from other suppliers, including the US, Qatar, and Australia. These countries ramped up production and deliveries of LNG to help meet Europe’s energy needs. In fact, the EU saw a 60% increase in LNG imports from 2021 to 2022, with the US becoming the largest supplier. However, it’s important to note that LNG could not fully replace the lost Russian gas imports, as there are some logistical challenges to delivering LNG to Europe, such as the need for specialized infrastructure like LNG terminals and pipelines.
Financing, Investments, and Technology Restrictions
Limiting profits, the price cap on oil is already reducing the incentives to prospecting and investments in new developments. On top of this, restricting access to financing and investment makes it more difficult for Russia to expand and modernize its energy infrastructure. Cutting off access to advanced technologies makes it more challenging to develop and deploy new, more efficient energy technologies. Struggling to modernize the energy infrastructure may lead to lower efficiency and more environmental issues. Russia will likely become more dependent on non-Western sources of investment and technology, which could make it less competitive in the global energy market. All of this will have a very long-term impact on the energy sector in the future, lasting even whenever sanctions would be lifted.
Nuclear Energy
Nuclear energy is another energy market where Russia is a dominant player. Russia is currently supplying 12 percent of the United States’ uranium, and accounting for as much as 70 percent on the European market. On top of this, several European countries have Russian-built reactors. While the nuclear-related revenues for Russia today are quite small, the associated political and economic influence is much more prominent. The Russian nuclear energy agency, Rosatom, is building reactors in several countries, locking in technology and offering loans (e.g., Bangladesh has a 20-year commitment in which Rosatom lends 70 percent of the production cost). In this way, Russia exerts political influence on the rest of the world.
Explore more studies and research papers on the energy sector in the “Evidence Base” section.
