Sergey VakulenkoA graduate of the Moscow Institute of Physics and Technology, a Ph.D. from the Fletcher School of Law and Diplomacy in Massachusetts, and a veteran expert in the oil and gas industries. Before leaving Russia a few months ago, he worked for 25 years from Moscow for consulting firms and some of the largest Russian and international companies in the sector. It was the first time, in recent weeks, that it (correctly) predicted that Gazprom would cut supplies to the EU. Few understand as well the interaction between Vladimir Putin’s energy strategy and Western sanctions.
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Dr. Vakulenko, I already wrote in early May that Gazprom will cut off supplies to the European Union. Now do you expect me to reduce it to zero?
“I don’t know, I don’t have inside information. But it is the logic of the conflict that dictates such a move. The logic of the conflict should suggest to Putin that the earlier he moves in this direction, the better for him. Europe has so far been able to maintain a certain balance in Gas supply, albeit with some problems.However, things will be different next winter, when there will be a need for constantly new supplies and withdrawals from storage.At that point, insufficient stocks would make Europe more vulnerable to supply disruptions.For This happens, the logic suggests that Russia should prevent the refilling of stocks now. But I repeat, I have no idea what Putin’s intentions are.”
Do you think that the Russian industry can be harmed in the long run due to the lack of parts and components now subject to Western sanctions?
“I cannot talk in detail about all sectors, but Russia has a modern and technologically complex industry. It relies on large and complex supply chains, like any other modern economy. Today in global supply chains, the production of many components is largely dominated by one or a few operators. This is how the global economy works: interdependence is very powerful. Russia needs basic imports from the rest of the world, and some of the basic inputs come from Russia and not just in the energy field.”
“Boeing uses titanium parts that come from Russia, just as the Russian industry will need Western components that will be difficult to replace thanks to other suppliers.”
Will the shortage of industrial components in Russia really be felt in the fall?
“In the short term, there will probably be very few machines that need to be replaced. Stocks of materials and spare parts in most regions are high enough to cover needs at least until the end of the year. There may be some isolated difficulties, but overall I don’t expect major outages. in the coming months.”
There will be some wear and tear, even in the oil industry. At first, one or two pumps, one or two turbines, and one or two excavators may fail. But I don’t think that’s going to be the general situation in the industry anytime soon, even after we run out of parts stocks. As in the case of aviation, spare parts could initially be made from specially sacrificed equipment. Some deficiencies can affect the quality of the product in refining or the accuracy and efficiency of drilling or fracturing. But it will take time for these effects to begin to accumulate. I think it will take about two years before the impact of the sanctions on industrial and technology exports becomes clearer.”
Is it true that China and India buy a lot of Russian oil that Europe no longer imports?
Europe has significantly reduced its imports, but there are some schemes that allow the export of Russian oil and petroleum products to Europe more or less secretly. So far there has been no official import ban in Europe, only voluntary boycotts. And since there are Russian-controlled refineries in Europe that did not join the boycott, sea imports have not stopped and pipeline imports are still significant. A large amount of oil that was exported from Novorossiysk on the Black Sea mainly to Sicily and from Primorsk in Saint Petersburg Oblast, mainly to Antwerp and Rotterdam, is now loaded onto tankers bound for China and India via Gibraltar, Suez and the Gulf of Aden to bring crude oil to Asia. There is an oil pipeline from East Siberia to China – Espoo – with a capacity of 80 million tons per year, which is a third of all Russian exports ».
But isn’t transporting crude oil to Asia more expensive?
The trip to Europe took two weeks, and now to Asia it took two months. Transportation costs are higher and exporters need four times as many tankers. But the increase in costs is less than ten dollars a barrel, so the profit margins are still large.”
In essence, do Western sanctions have an effect on the Kremlin’s ability to wage war and control the country?
“It depends on the time horizon. Sanctions will not be very effective in the first year. Meanwhile, Russia’s ability to spend foreign currency in Western markets has declined. Even India and China may be reluctant to accept payments in euros and dollars and supply the Russian industry with the spare parts it needs, as the West threatens to impose secondary sanctions on it.”
So what development do you expect?
In the end, Russia will find itself lacking the necessary imports and some enterprising personalities will look for a way around the sanctions, even partially and at a high cost. In any case, it will take some time before the full impact of the sanctions is felt.”
“The current economic war is accelerating the energy transition in Europe and beyond. A year ago we were only talking about climate change, today we are talking about energy security and the independence of Europe. In the short term, there will be a cost to European consumers and all of this will be detrimental to the economy. But all this will also lead to more investment and less Europe’s payments to foreign oil or gas suppliers. So, in the long run, the situation is bad for Russia and better for Europe.”
In the Group of Seven and in the European Union there is talk of studying a ceiling for the price of oil and even gas. what do you think?
“I’m working on this issue. In short, I don’t think these price caps will work. In the market, at the moment, the bargaining power is on the side of the sellers ».
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