Americas, Europe

Energy Markets and Sanctions

Hemispheres was honored to cover the “Global Repercussions of Russia-West Economic Warfare” academic conference hosted by The Fletcher School of Law and Diplomacy on September 26-27, 2024. The event was organized by the Fletcher Russia and Eurasia Program and brought together prominent scholars and policymakers to discuss the economic and political implications on sanctions and their specific impacts on the international financial system and energy markets.

Edward Fishman is a Professor of International Affairs at Columbia University, Senior Research Scholar at the Center on Global Energy Policy, Adjunct Senior Fellow at the Center for a New American Security, and a Nonresident Senior Fellow at the Atlantic Council. As a member of the U.S. Department of State’s Policy Planning Staff and previously the Russia and Europe Lead in the Office of Economic Sanctions Policy and Implementation, he has played a central role in recent economic sanctions policy towards Russia. In our exclusive interview, he unpacks energy market economics and the sanctions regime in the current context of U.S.-Russia relations.

To what extent is the unraveling of economic ties between Russia and the West irreversible?

It depends on what the time scale you are using is – in the very long run, I would hope that the answer is no. 100 years from now, we have no idea what the relationship will be like between the U.S. and Russia. If you’re looking at more of a 10, 15, 20 year time horizon, it is very difficult to see how the West and Russia could return to some sort of status quo ante, if you’re talking about what the relationship looked like before 2014. 

After the collapse of the Soviet Union, U.S. and European policymakers invested a huge amount of time, political capital, energy, and financial capital into bringing Russia into global economic institutions. Undoing that relationship was not something that happened overnight. It actually took a lot of time for the West to accept that Russia was not evolving in the way that we had hoped – Remember, the hope of all of this time, energy, political capital, and financial capital was that Russia would function more like a European country. Even after Russia invaded Georgia in 2008, there wasn’t a real reversal in the relationship. Fast forward to 2014 and that’s when this unraveling process begins. Russian banks, energy companies and defense companies are cut off from Western capital markets. But even after the annexation of Crimea, the West was not ready to fully turn its back on Russia. This is when the Nord Stream 2 pipeline deal was signed. So even after this annexation, Western Europe is basically doubling down on its energy relationship with Russia. Then, they invaded Ukraine in 2022 and tried to conquer the entire country. It was 14 years from the invasion of Georgia to the invasion of Ukraine, with a lot of bad things that happened in between – so the process of the unraveling of financial ties did not happen overnight; it took a very long time. Therefore, the idea that it is possible to return to the relationship like we had before is very unthinkable, because at this stage in the West, there’s a recognition that Russia is a threat, that Russia is an adversary in its current incarnation. Given this, it does not make sense for us to allow Western banks and companies to aid and abet the military machine of an adversary.

In both the short and long run, how do you think Russia’s exclusion from European energy markets affected the continent’s clean energy transition?

In the short run, you cannot bring on clean energy overnight. In the long run, almost undoubtedly, Russia’s exclusion from European energy markets will accelerate the continent’s clean energy transition. Pipeline gas is an incredibly cheap source of energy – the cost is all upfront. You spend billions of dollars to build these pipes, but then pushing the gas through the pipes is very cheap to do. After that, you have this fixed infrastructure — a ready supply of energy. So long as pipeline gas from Russia was a viable energy source for Europe, I think it would have been very difficult to quit that energy source because it’s cheap, it’s readily available, it’s well known, and well understood. The undoing of that gas relationship creates a hole in the European energy mix that I think is likely, over time, to be filled by cleaner energy sources. So in a sort of perverse way, Russia’s attempt to weaponize its gas exports to Europe will accelerate the clean energy transition.

Do you see Russia’s exclusion from European energy markets and Europe’s accelerated clean energy transitions as a catalyst for the West to reduce its overall dependency on authoritarian states for energy, specifically OPEC nations?

I hope so. The one thing that I have come to believe working on the intersection of foreign policy and economics and business for 15 plus years now, is that businesses, certainly in the West, are ultimately profit maximizing entities. They have a fiduciary responsibility to maximize shareholder value. If you put yourself in the seat of a CEO, it’s challenging for a CEO to say I’m not going to do X or Y because I think it’s immoral if it ultimately will make me more money. So I don’t think the West will reduce its dependency so long as it’s economically beneficial for Western companies to be dependent on authoritarian sources of energy. What we have shown is that if you do use regulatory and policy levers like sanctions to cut off certain oil supplies or energy sources, that we can be much more adaptable than we think. And this is a lesson of sanctions in general: when we think that a specific sanction is going to lead to catastrophic effects, we are actually more adaptable than we initially expected. So my answer is no if additional regulatory or sanctions measures are absent. But if there were an explicit policy to do so, I do think that we would figure out how to make up for it.

You brought up the Nord Stream pipeline. Now that many European countries have been jolted into a clean break from Russian energy, has Russia lost a valuable bargaining chip?

I think Russia lost its biggest bargaining chip. In a globalized economy, there are all kinds of things that look like choke points. But what we found is that natural gas exports were not as big of a choke point as Russia thought they were. So perhaps the lesson there is that you may sometimes think the threat of weaponization is more effective than actual weaponization. Especially because I do think, having dealt with European diplomats extensively around the original Ukraine crisis in 2014, they were petrified about getting cut off from Russian gas. And they really did think it was going to lead to people freezing in their homes, or factories grinding to a halt. That hasn’t happened. And so in some ways, it’s been shown that the Emperor has no clothes.

What do you think are the global implications of the strengthening economic and political ties between China and Russia in the wake of the economic warfare between Russia and the West?

The implications are significant – not just for Russia and China, but also Iran.  Some of my colleagues at the Center for New American Security have called it an axis of upheaval, where several countries that feel targeted by Western sanctions and rejected from key parts of the global financial system or technology ecosystem are banding together to insulate themselves from further penalties and compensate what they’ve lost from the West. There’s certainly a closer economic relationship between Russia and China. There’s also a closer relationship between Russia and Iran because Iran is selling drones to Russia. Additionally, China and Iran are growing closer, because China is buying nearly a million and a half barrels of Iranian oil every day – effectively all of Iranian oil exports. China has almost become this economic partner of last resort for global pariahs. Particularly in Russia’s case, they’re another military power being driven further into the Chinese camp. The caveat I’d give is that, from the Chinese perspective, China’s economic relationship with the United States, and even more so, their relationship with Europe, is much more important to China than its relationship with Russia or Iran. In some ways we have more carrots to use with China because they really want access to the U.S. market. They want to be able to use the dollar in their financial system, and even more so with Europe. People forget we still have almost $600 billion in bilateral trade between the U.S. and China every year, and that’s more than twice as much as what China and Russia have. In a scenario in which the U.S. was willing to threaten that relationship over Chinese support for Russia, I think there’s a decent shot that China chooses the United States over Russia, not because they love the United States, but because they have a lot to lose economically if there were to be a total break in U.S.-China economic relations.

Image: Edward Fishman Speaking at The Fletcher School of Law and Diplomacy at Tufts University (Fletcher Russia & Eurasia Program / Flickr)