Despite new US sanctions against the Arctic LNG 2 project, Russian LNG exports to Europe have reached record levels. Russia continues to make money on LNG by avoiding sanctions through suspicious companies and corrupt links, writes Mykola Kolisnyk.

Ukraine seeks to maximise the effect of sanctions, especially in the energy sector, where, according to Ukrainian Energy Minister Herman Galushchenko, the key to the effectiveness of sanctions is in the energy sector.

LNG export is a vulnerable area of the Russian economy, but for sanctions to have effect it is required to prevent circumvention. Sanctions on LNG terminals have already shown their effectiveness because they found a weak spot in the Kremlin regime as traditional sponsors are becoming bankrupt.

As for the Russian LNG industry, the Sakhalin-2 and Yamal LNG plants are significant, exporting gas to Japan and Europe, respectively. The Sakhalin-2 plant began operations in 2009 with a design capacity of 9.6 million tons per year, and Yamal LNG in 2017 with a capacity of 16.5 million tons. Novatek is holding a controlling stake in Yamal LNG.

International Working Group on Russian Sanctions (Yermak-McFaul Working Group) in its latest report on energy sanctions calls for eliminating all purchases of LNG and banning Russian gas flows to Europe. This matches closely with an official appeal from the Committee on Energy, Housing, and Utilities of Verkhovna Rada of Ukraine sent to key Western leaders last week with an urge to take practical steps for tightening the grip of sanctions on Russian LNG exports.

Deep dive into Russia’s LNG

Russia’s LNG industry has been developing since the late 2000s, when the first export plant, Sakhalin-2, was launched as a joint venture between Gazprom and Japanese companies, with a significant portion of its output going to Japan.

Another important facility is Yamal LNG, which exports gas mainly to Europe, with a design capacity of 16.5 million tons, controlled by Novatek and international partners. Russia plans to control 20% of the global LNG market by 2035.

According to Reuters and LSEG, Russia’s LNG exports decreased by 6% to 31 million tons due to repairs, but in December 2023, a record of 3.2 million tons was reached, of which 1.9 million tons came from Yamal LNG.

Ambitious plans of the Russians: a bet on new LNG projects?

The need to develop LNG capacity, such as Novatek’s Arctic LNG 2 (with participation from TotalEnergies, CNPC, CNOOC, and JAPAN ARCTIC LNG), is emphasised by the loss of pipeline supplies. The project was supposed to start shipping at the beginning of the year with a design capacity of 19.6 million tons of LNG.

However, the US sanctions announced in November 2023 caused Novatek’s shares to fall by 5%. The sanctions, which included companies related to the construction and logistics of Arctic LNG 2, forced Novatek to declare force majeure, although this has not been officially confirmed.

After the sanctions, the American Baker Hughes refused to cooperate, and Chinese companies offered the United States to release the project from restrictions.

Despite the sanctions, China continues to cooperate with Russia on the project, with Harbin Guanghan replacing Baker Hughes as the turbine supplier. The sanctions forced the project to reconfigure production to operate at a lower capacity.

USA: “Arctic LNG 2 is Novatek’s flagship project. Our goal is to destroy it”

Jeffrey Payette’s speech in the US Senate, which followed the imposition of sanctions against Russia, emphasised the US strategy to reduce Russia’s energy revenues. He hinted that US sanctions against Russian companies such as Novatek not only punish aggression but also strengthen the US position as the world leader in LNG exports, pushing Russia out of the market.

Novatek, which is linked to the Kremlin and promotes its interests through the State Duma, has broken Gazprom’s monopoly on LNG exports, indicating Russia’s strategic reliance on LNG as a source of foreign revenue.

Sanctions: What will stop the Russian LNG invasion?

• Technologies: Arctic LNG 2 and the Russian LNG sector may face technological problems due to the need to redesign production lines. Novatek is trying to solve these problems by cooperating with Chinese companies and sourcing equipment, applying for sanctions exemptions.
• Project financing: Novatek is facing financing problems, especially after the cost of Arctic LNG 2 increased by 17% to $25 billion. With TotalEnergies withdrawing from investments in Russia, Novatek may bear the brunt of financing, partially covered by the Russian budget, which reduces resources for the war. Applying for tax breaks indicates that projects under sanctions are unprofitable. Foreign shareholders’ refusal to buy LNG and the lack of long-term contracts threaten default.
• Logistics: Sanctions against Arctic Transshipment and FSU complicate logistics for Arctic LNG 2, forcing Novatek to reconsider its supply chain. FOB terms and the risk of secondary sanctions for tankers may change the logistics of LNG sales. Mitsui OSK Lines (MOL) said US sanctions are preventing the delivery of vessels to a new Russian LNG plant, threatening LNG exports from Russia.
• Fleet: Restrictions on LNG tankers, sanctions on supplies, and technological limitations make it difficult to build the required fleet. Problems with tanker chartering and high costs underscore the difficulties for Novatek in implementing Arctic LNG 2 and other projects.

Ending Russian energy expansion

Arctic LNG 2 is a key revenue generator for Russia’s state budget in the energy sector, being at the intersection of geopolitical and energy challenges. This project illustrates how sanctions can limit Russia’s presence in international markets.

In the context of a coordinated sanctions policy of countries, our goal is to maintain sanctions against Russia in order to influence its economy and energy sector.

Already, Russia is facing the threat of comprehensive sanctions, and foreign companies are considering the risks of violating sanctions, which could significantly undermine its economic position.

The main goal is to remove Russia from the European market, as many Russian energy projects are oriented towards Europe.