The U.S. Treasury and State Departments have once again increased pressure on Russia’s critical liquefied natural gas (LNG) sector. On the eve of Ukraine’s Independence Day commemoration on August 24, a new wave of sanctions was introduced, targeting key individuals, companies, projects, and trading mechanisms crucial to Moscow’s LNG operations. This move aligns with earlier statements from U.S. Assistant Secretary of State for Energy Resources, Geoffrey Pyatt, who emphasized the U.S. commitment to intensifying sanctions on Russia’s major LNG projects, including Arctic LNG 2. Pyatt stated, “We’re going to keep tightening the screws. We’re going to continue to designate a broad range of entities involved in the development of other key energy projects, future energy projects as well, and associated infrastructure including the Vostok Oil Project, the Ust Luga LNG Terminal, and the Yakutia Gas Project.”
The U.S. and its allies have focused on crippling Russia’s ship-borne LNG sector because it has become a significant revenue source for funding the war against Ukraine. This shift followed a sharp decline in pipelined gas and oil exports to Europe after Russia invaded Ukraine on February 24, 2022. Russia earned nearly $100 billion from natural gas and oil exports during the first 100 days of the conflict, despite U.S.-led sanctions beginning to take effect. Higher post-invasion oil and gas prices allowed Russia to continue financing its war effort. However, as sanctions began to impact Russia more severely, and prices began to fall, the country’s financial strength and military capabilities were significantly weakened.
The International Energy Agency (IEA) predicts that Russia’s share of globally traded natural gas will drop to about 15 percent by 2030, down from 30 percent before the invasion of Ukraine. Additionally, the IEA projects that Russia’s revenue from natural gas sales will decline to less than $40 billion by 2030, compared to around $100 billion in 2021. The dire situation has forced President Vladimir Putin to seek greater cuts in OPEC oil production to boost Russia’s revenue, even at the risk of arrest during his December visits to Saudi Arabia’s Mohammed bin Salman and the UAE’s Mohamed bin Zayed al Nahyan.
With income from natural gas and oil sharply reduced, Russia has increasingly relied on its LNG sector to fund its economy. On November 22 last year, Deputy Prime Minister Alexander Novak announced Russia’s intention to raise its LNG market share to 20 percent (at least 100 million tons per year) by 2030, up from 8 percent (around 33 million tons in 2023).
Another major concern for the U.S. and its key allies is preventing Russia from regaining the political and economic influence it once had over the 27 countries of the European Union (EU). According to IEA figures, in 2021, the EU imported an average of over 380 million cubic meters (mcm) of gas per day by pipeline from Russia, totaling around 140 billion cubic meters (bcm) for the year. Additionally, around 15 bcm was delivered as LNG. The 155 bcm imported from Russia accounted for approximately 45 percent of the EU’s gas imports in 2021 and almost 40 percent of its total gas consumption. Germany, the EU’s de facto leader, relied on Russian gas for 30-40 percent of its commercial and domestic needs, depending on the time of year. It also imported the highest level of crude oil from Russia among EU countries, averaging 555,000 barrels per day (bpd), or 30 percent of its total oil imports, at the end of 2021 and the beginning of 2022. The U.S. and U.K. believe that this reliance on cheap Russian gas and oil was a key reason why Germany and the EU refrained from imposing severe sanctions on Russia after its invasion of Georgia in 2008 and its annexation of Ukraine’s Crimea region in 2014.
The U.S. is determined to prevent Russia from rebuilding such influence over key NATO member countries or its equivalents in Asia. This determination extends to the U.S.’s continued aggressive targeting of Russia’s LNG business, especially given the increasing geopolitical importance of LNG in the relationship between Russia and China. Since Russia invaded Ukraine in 2022, LNG has emerged as a crucial energy source in an increasingly insecure world. Unlike oil or gas transported through pipelines, LNG can be shipped anywhere in the world within days, providing reliable energy supply options through short- or long-term contracts or spot market purchases. In the event of another major global conflict—many expect tensions around Taiwan to escalate within the next three years—LNG’s importance will only grow, as existing oil and gas transportation routes from Russia to China may not remain functional for long.
Chinese authorities recognized LNG’s strategic value even before Russia’s invasion of Ukraine, securing multiple long-term contracts with several countries, notably Qatar, the world’s top LNG exporter. Russian President Vladimir Putin likely understood LNG’s growing significance in the global energy mix well before he ordered the invasion of Georgia in 2008 and Ukraine in 2014. Putin’s emphasis on advancing Russia’s LNG projects before these actions suggests he anticipated more severe sanctions on Russia’s pipelined gas and oil flows from the U.S. and Europe.
Despite the limited U.S. sanctions in 2014, Putin pushed forward with Russia’s Arctic LNG projects, securing financing from various heavyweight Russian entities. The Russian Direct Investment Fund, for example, established a joint investment fund with the state-run Japan Bank for International Cooperation, with each contributing half of a total of about JPY 100 billion (approximately $890 million). The Russian government itself funded Novatek’s Arctic LNG 1 from the state budget, later supporting it with bond sales and additional backstop funding from the National Welfare Fund.
Russia’s Arctic LNG sector holds immense potential, with over 35,700 billion cubic meters of natural gas and more than 2,300 million metric tons of oil and condensate, primarily in the Yamal and Gydan peninsulas, south of the Kara Sea. The region could also offer a quick transport route to China as Arctic ice continues to melt. This prospect has spurred Russia’s rapid development of the Northern Sea Route (NSR), which the U.S. is now targeting through its focus on Russia’s LNG sector, as evidenced by the latest sanctions from Washington.