Why Putin Isn't Worried About Sanctions

Europe is warning Russian president Vladimir Putin of reputational harm if he shuts off the natural gas flow to the West, but judging by the behavior of western oil chiefs, he is secure if he dismisses the admonishment as so much noise.

Energy—and not the deployment of incognito, ragtag or straight-out government troops—is the central actor in the drama playing out between Russia, Ukraine and the West.

If the West wants to ensure that Putin’s land grab stops at Crimea, it will impose sanctions that impair or halt the activity of foreign oil and gas companies in Russia and ignore his threats to suspend Ukraine’s gas supply. But as long as it is business as usual in Russian energy, look for the Putin crisis to continue.

Russia relies on oil and gas exports to support 52% of the state budget. It is no overstatement to say that oil and gas are the lifeblood both of the Russian economy and Putin’s rule. The current revenue, and the promise that it will continue in relative perpetuity, frees him up to remain how he prefers—unpredictable.

So it is that, with production on a natural decline, Putin has brought in western behemoths ExxonMobil, Shell, Statoil and others to break open the Arctic and the enormous Bazhenov shale field. It is their job to ensure the long-term continuance of Russia’s daily flow (pdf) of some 21.8 million barrels of oil and gas equivalent.

The signs are that they intend to. In a visit with Putin yesterday, Shell CEO Ben van Beurden pledged to continue the company’s work to expand Russia’s flow of liquefied natural gas (LNG) and break open the Bazhenov.

A few days earlier, Norway’s Statoil said it, too, would continue to explore and drill wells. France’s Total said its work with private Lukoil will go on. “For us, it’s business as usual,” BP CEO Bob Dudley said about his company, which owns a 19.6% share of Russia’s giant Rosneft.

ExxonMobil CEO Rex Tillerson seemed to sum up the mood when he said he perceives no new geopolitical risk in Russia, apart from more sanctions, with which the company is already accustomed from prior experiences.

In fact, global energy actors seem to be tripping over themselves to make Putin feel secure. After Russia annexed Crimea last month, the European Union put a hold on South Stream, a cherished Putin natural gas pipeline intended to bypass Ukraine. But now there are reports of a split among the Europeans on the subject, with Bulgaria especially coming to South Stream’s defense. Meanwhile, Turkey says that if Europe won’t go along, Putin can reroute his line to the south.

Some disruption has been caused by Japanese banks, which have begun a retreat(paywall) from Russia out of fear of new sanctions, the Financial Times reports. And US and European banks appear to be exercising caution short of actually halting any activity. But it is oil and gas that count, and—with good reason—Putin appears to feel fully confident on that front.