Former Secretary of Defense Rumsfeld was know for his comments about knowns, known unknowns and unknown unknowns. The economic impact of the sanctions on the Russian oil and gas industry and Putin’s patrons can be reasonably known. The potential effects on European nations can also be known within reason. Those effects will not be trivial, even if the sanctions do not produce a series of unintended consequences.
How Putin reacts, how impacted oligarchs react, and how affected businesses react and how those reactions affect their governments are among the known unknowns. Black Swan events, like the shooting down of the Malaysian airline plane, represent the category of unknown unknowns which if they occur will likely alter the political and military dynamics at play.
Companies that operate in Russia entered into commercial arrangements with Russia with their eyes wide open and certainly engaged in their own risk assessments. Energy companies make decisions reflecting their long-term business and economic interests and long term those investment decisions in Russia are likely to come to fruition.
Most companies and countries are trying to manage the Ukrainian crisis in ways that achieve Ukraine’s territorial integrity, contain the risk of military escalation, and prevent any escalation from spiraling out of control.
Russia’s untapped oil reserves are believed to be enormous and the sanctions are targeted at the technologies that are needed to develop them and perhaps increase the production from already known discoveries. While the sanctions won’t directly impact Russia’s current production, they will cause many of the countries that import Russian oil and gas to look elsewhere for supplies because Russia is not a reliable supplier in times of crisis. It has been willing in the past to cut off supplies, even though it relies on oil and gas exports for most of its foreign revenue.
Although the end game from the sanctions cannot be determined at this time, Putin’s ambition and intent to re-establish Russia as a super power is sufficient reason for EU nations to seek other sources of supply and to stand firm against further aggression. The US can play a significant role in reducing EU dependence on Russian oil which currently provides 30% of its supplies. The US is producing large quantities of light sulfur crude oil which is not well suited for most US refineries but is well suited for European refineries.
The Obama administration’s foot-dragging on allowing increased oil exports is counterproductive as it denies EU countries a reliable alternative to Russian oil. Actions to increase exports would impact world markets and incentives even if the amount of oil exported is not initially significant. That is also true of LNG exports which would take longer to achieve.
Vladimir Putin has proven himself to be a dangerous person who is willing to take big risks because of judgments that he has made about the US and our allies. But he is not a fool and he is not likely to take actions that seriously undermine his objective of restoring Russia’s stature in the world. And he knows from recent history that attempting an arms race with the US would again bankrupt the Russian economy. His goal, where possible, is to achieve with intimidation what otherwise would require military action.
The challenge for the US and EU is to help him find an off ramp to de-escalate tensions in the Ukraine without losing face. That won’t be easy and history has demonstrated that Black Swan events can lead to the escalation of conflicts that no one intended. Behind the scenes diplomacy combined with Churchillian like tenacity and a willingness to develop oil and gas resources in Europe and on federal lands in the US is probably the best hope of getting Putin to blink.
The time has come to give the “green agenda” a much lower priority and the development of fossil energy a higher one. That would send an unmistakable message to Putin.
This article appeared on the National Journal’s Energy Insiders website at http://disqus.com/wokeefe/