Obama warns of energy sanctions if Russia escalates Ukraine crisis

In its showdown with Moscow over Ukraine, the West's 'nuclear option' is a matter of oil and gas.

Russian energy has appeared largely off-limits as a target of Western sanctions because of the far-reaching impact it could have on the global economy. But the idea is beginning to gain traction among Western leaders who may calculate they have more to gain than lose by constraining Russia's flow of fuel. The threat of energy sanctions, at least, might be enough to deter Russia from moving farther into Ukraine or elsewhere in Eastern Europe.

US and European sanctions against Russia in response to the Crimean annexation have so far been limited to wealthy individuals and a bank connected to Russian President Vladimir Putin's inner circle. But President Obama and European leaders warned Tuesday that could change if Moscow continues its incursions into eastern Europe.

The US has held off on more broad-based sanctions, Mr. Obama said in a press conference Tuesday with Dutch Prime Minister Mark Rutte, "but, should Russia go further, such sectoral sanctions would be appropriate." Those could include energy, finance, and arms sales, Obama added, and officials are currently analyzing the effect of far-reaching sanctions on the global economy. 

Targeting Russia's energy sector could have a devastating impact on Mr. Putin's government, which relies on its state-dominated oil and gas industry for about half of its federal revenues. But officials fear such a move could cause a "boomerang effect" that would have an equally significant impact on the economies of Eastern and Central Europe. The European Union relies on Russia for roughly 30 percent of both its imported gas and oil and has only had limited success in long-standing attempts to diversify its energy mix.

It's why both sides have so far steered clear of sweeping curbs on energy trade flows, opting instead to test the waters by targeting specific businessmen and politicians. But Western leaders sounded a more strident tone at a nuclear security summit in The Hague Tuesday, suggesting they were willing to expand sanctions if the situation escalates.

"[A] highly undiversified economy, like the Russian economy, which is so much oil and gas-dependent, which has not invested in infrastructure, invested in other areas of its economy – it will be worried if there is a risk in the financial sector, or in weapons, or in trade, or indeed in energy," Mr. Rutte said at the press conference. "There could be potential sanctions; it will hurt them. And as I said earlier, we have to design them in such a way that they will particularly hit Russia and not Europe, the US, Canada, or Japan." 

The remarks came a day after G7 leaders excluded Russia from upcoming G8 talks and said that the nations "remain ready to intensify actions."  

The heightened warnings suggest that after this week's discussions in the Netherlands, EU, and US officials are leaning toward the notion that energy sanctions would hurt Russia more than they would hurt the West. After all, while Russian natural gas makes up 30 percent of Europe's gas imports, natural gas as a whole only makes up about a quarter of Europe's energy consumption.

A mild winter means Europe has an unusually high level of natural gas in storage, and officials are increasingly looking at the possibility of shifting existing gas supplies around within European states. In the longer term, Europe is aggressively pursuing renewable energy capacity and could further develop its domestic resources and tap into liquefied natural gas from the US and elsewhere.

"The EU gas infrastructure constitutes a robust system for all European gas consumers, with many supply options," Gas Infrastructure Europe, an EU-wide association of pipeline operators based in Brussels, said in a statement earlier this month. "A potential disruption on the Ukrainian route could be mitigated via re-routing to other supply routes from Russia, or from other export countries (Norway, etc.), including LNG from many countries." 

That's not to say Europe would escape an energy trade war with Russia unscathed. The farther east one goes in Europe the more the nations (namely Poland, Slovakia, and Hungary) rely on Russia not just for energy, but for all kinds of vital economic trade. Meanwhile, Western European financial centers in London, Berlin, and elsewhere have deep economic ties with Rosneft and Gazprom, Russia's state-owned energy giants.     

"Some particular sanctions would hurt some countries more than others," Obama said in Tuesday's press conference. "But all of us recognize that we have to stand up for a core principle that lies at the heart of the international order and that facilitated European union and the incredible prosperity and peace that Europe has enjoyed now for decades."