Sanction on Russia is like a double edged sword.



Major oil companies around the world announcing their exit from Russia, it focuses mainly on two companies that is the British energy sectors biggest oil company that is Shell announced that they will exit Russia. Now the British company Shell actually works in Russia in a joint venture with a Russian energy company called Gazprom, which is owned by the government of Russia only. These two have a joint venture, in which they extract the liquefied natural gas from Sakhalin-2 gas project, apart from exploring new energy fields in Siberia.


This announcement came after one of the other major British company that is British Petroleum, announcing that they will also exit from Russia and will end joint venture with Rosneft. Rosneft, also, just like Gazprom is a major gas company in Russia that is owned by the Russian government. So much so that all their profits are transferred to the Russian government and it is said that because of these huge profits, the Russian government is able to sponsor the wars and buy the weapons which are responsible for attacking nations such as Ukraine.


Now, there are many reasons behind why these companies have decided to finally exit from Russia. Despite a lot of pressure from their government since 2014 when Crimea was annexed by Russia, ever since Russia has attacked Ukraine, a lot of Western nations have imposed sanctions on Russia, which have resulted in cutting off number of Russian banks from the SWIFT network. SWIFT network, as you know, is a network of international banks that helps in multi currency transactions from banks of one country to the other. Now, a lot of Russian banks would not be a part of the swift and that is why there might be a problem for the companies that are doing their business in Russia to convert the currency or profit to some other currency. Also, the dollar assets of the Russian central banks have also been frozen and that is why the companies from the Western nations are now having second thoughts about doing business in Russia. Russia mainly earns from two sectors, one defence and second the energy sector, so much so that Russia's energy sector contributed more than 1/3 of Russian government's budget last year and these two companies had a major role to play in that.


Shell company that has announced its exit now has assets worth $3 billion in Russia, and the British Petroleum also has major assets in Russia. In fact, these two companies used to have a lot of profit from their operation in Russia and it still remains to be seen how they cope up with the losses, because obviously, when they're announcing that they're going back from Russia, it will lead to a lot of loss specially because the Russian government might also seize their assets in the country, and might not allow them to sell their assets.


There have been pressure on these companies of Britain and US to come out of Russia since 2014. The reason why they were not doing this is because doing business in Russia for them was highly profitable, although it did damage their image and reputation that they are working in a country that is not really giving a lot of liberty to its people that is attacking the other nations. But still, these companies had always thought that the damage to their reputation is not as much as the damage to their accounts would be. But finally now when Russia has done the unthinkable, and taking the world on the brink of the Third World War, these organisations have decided to pull the plug finally, even though it would most certainly result in a lot of losses for these companies.


The impact on Russia specifically will not be immediate, but will only be long term. These foreign companies that collaborate with the Russian organisations, they offer important technical knowledge about how to extract the most of the natural gas at the best possible cost. These companies also use to bring a lot of investment into the energy sector of Russia, which will be a long term impact that Russia will see. Not just this, there were trading houses such as Trafigura and Glencore that helped Russia to sell its natural gas and other energy products in Europe. These will also most notably withdraw from Russia, which will lead to further restrictions on the Russian energy sector. It will not just impact Russia, but also the entire world. Since if the Russian supply of natural gas decreases in the world, it will lead to a problem in supply chain and the prices of gas and oil will increase in the near future.


The other question is why did Vladimir Putin take such a drastic step when he knew that his energy sector would come under sanctions? The reason was that he was playing a gamble that the entire European continent is heavily dependent on Russian gas and oil. So if Europe or US put sanctions on Russia, they also would have to suffer economically. So it is not just Russia or the Russian companies that would suffer, Europe also would now have to see from where can it import more gas and at what prices because Russian gas was the cheapest source of energy that European nations were getting. Russia supplies 40% of Europe's gas but now they have to look for the alternative and at a price that energy prices are just increasing, it will greatly impact the bill of European nations for importing the natural gas. So putting these sanctions on Russia is not a win win, but it's actually a lose lose situation for both the sides right now.


European nations actually dependent on Russia, for instance smaller Eastern European nations such as North Macedonia, Bosnia Herzegovina, Moldova, Finland, are almost 100% dependent on Russia for the supply of the natural gas. Then we have nations such as Germany, which played a very crucial role in deciding whether or not sanction will be put on Russia 49% of natural gas supplied to Germany comes from Russia, 46 from Italy, 44 Poland, 24 from France that is why for these nations also to decide not to import natural gas from Russia, they will also have to take a lot of efforts and see how their supply of natural gas can be fulfilled by other nations across the world.


Recently, the German Chancellor Olaf Scholz visited the US a few months back, and the US president at the same time had invited the leader of Qatar and they were news stories that maybe the US is trying to mediate a deal under which Qatar would supply gas to Germany but that detail has not been made public. So we will have to see in the future whether this happens or not. Now, the other question is why is it that all of a sudden Europe has become so dependent on Russia for natural gas, there are some very important reasons for that. One reason is the depletion of natural gas resources in the North Sea. So in 1960s and 70s, Europe had good supply of natural gas because they were extracting it from the North Sea. However, it did not really have the kind of reserves that are seen in nations such as Qatar or in Russia. That is why once these resources from the North Sea depleted, natural gas could not be extracted from there, not just this, Netherlands also used to be an important country from where natural gas could be extracted. However, the Netherlands decided to shut down there Groningen gas fields because of the fear of earthquakes. Since then, Europe has not had any prominent source of natural gas within their own continent and that is why they had to be in touch with Russia for supplying of natural gas, not just this, as the developed nations have promised, Europe wants to achieve carbon neutrality by 2050, and cut down their emissions by 55% by 2030 that makes them all the more dependent on natural gas as a durable source of energy. Currently, about 20% of Europe's electricity comes from coal production, and they want to reduce it even further.


The reason why Germany specifically was not able to take a very strict stand against Russia was because Germany's dependency on Russia is considered to be much higher as compared to other Western European nations that was because in 2011, Germany passed the Atomic Energy Act under which they decided that we will cut down all our nuclear energy power plants because of the Fukushima incident in Japan in 2011 which saw many people losing their lives in Japan. In Europe now 13% of its energy only comes from nuclear power, while 25% comes from natural gas. This requires a constant supply of natural gas at competitive prices. Today, if you look at the import of natural gas in EU, you will see that the cheapest ones comes from Russia, with about 41% of the import of natural gas coming in from Russia. Then there are nations such as Norway and Algeria, which also supply natural gas to Europe, but not as much as Russia does. The push for renewable energy within Europe has made it much more dependent on the Russian natural gas as compared to the others since 2010 specifically and that is why the sanctions are like a double edged sword that will not just harm Russia but also the European nations.

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