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Sergei Vakulenko, a graduate of the Moscow Institute of Physics and Technology, PhD from the Fletcher School of Law and Diplomacy in Massachusetts, is a veteran of the gas and oil industry. Before leaving Russia a few months ago, he worked from Moscow for 25 years for consulting firms and some of the largest Russian and international companies in the industry. It was the first in recent weeks to (correctly) predict that Gazprom would cut supplies to the European Union. Few understand the interplay between Vladimir Putin’s energy tension strategy and Western sanctions as well as he does.
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Dr. Vakulenko, you wrote at the beginning of May that Gazprom would stop deliveries to the European Union. Now do you expect me to reduce them to zero?
“I don’t know, I don’t have any inside information. But the logic of the conflict would dictate such a move. The logic of the conflict should suggest to Putin that the sooner he moves in this direction, the better for him. So far, Europe has managed to maintain some balance in gas supplies, albeit with some problems. However, things will look different next winter, when both new supplies and withdrawals from the warehouses are constantly required. At this point, insufficient stock levels would make Europe much more vulnerable to supply disruptions. Logically, for this to happen, Russia should now prevent a restocking. But I repeat, I have no idea about Putin’s intentions ».
Do you think the Russian industry could be harmed in the long run by the lack of parts and components now subject to western sanctions?
“I cannot go into detail about all sectors, but Russia has a modern and technologically complex industry. Like any other modern economy, it depends on large and complex supply chains. Today, in global supply chains, the production of many components is largely dominated by one or a few operators. This is how the world economy works: The interdependence is very strong. Russia needs basic imports from the rest of the world, as well as some basic inputs from Russia and not just in energy ».
“Boeing uses titanium parts that come from Russia, just as Russian industry will need Western components that, thanks to other suppliers, would be difficult to replace.”
So, will the shortage of industrial components in Russia be felt as early as autumn?
“In the short term, there are probably very few machines that need to be replaced. Inventories of materials and spare parts are high enough in most areas to cover demand at least until the end of the year. There may be isolated difficulties, but overall I don’t expect any major disruptions in the coming months.”
“Even in the oil industry there will be wear and tear. In the beginning, one or two pumps, one or two turbines, one or two drilling rigs can fail. But I don’t think that’s going to be the general situation in the industry any time soon, even if spare parts stocks are depleted. At first, as in aviation, spare parts could be made from specially sacrificed equipment. And some imperfections could affect the quality of the product in refining, or the precision and efficiency in drilling or fracking. But it will take time for these effects to build up. I think it will take about two years for the impact of the sanctions on industrial and technology exports to be felt and become more evident.”
Is it true that China and India buy most of the Russian oil that Europe no longer imports?
“Europe has significantly reduced its imports, but there are some schemes that allow Russian oil and petroleum products to be exported to Europe somewhat covertly. So far there is no formal import ban in Europe, only voluntary boycotts. And since there are Russian-controlled refineries in Europe that have not joined the boycott, sea imports have not stopped and pipeline imports remain significant. A large quantity of oil, which was exported from Novorossiysk on the Black Sea mainly to Sicily and from Primorsk in St. Petersburg Oblast mainly to Antwerp and Rotterdam, is now being loaded onto tankers bound for China and India via Gibraltar, Suez and the Gulf of China drive Aden to bring crude oil to Asia. There is the oil pipeline from East Siberia to China – Espo – with a capacity of 80 million tons per year, a third of all Russian export ».
But isn’t it more expensive to ship crude oil to Asia?
“The trip to Europe took two weeks, now it’s two months to Asia. Transport costs more and exporters need four times as many tankers. But the cost increase is less than $10 a barrel, so margins are still substantial.”
In essence, do Western sanctions affect 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 exchange on Western markets has declined. Even India and China may be reluctant to accept payments in euros and dollars and supply Russian industry with the spare parts they need, as the West threatens them with secondary sanctions.
So what developments do you expect?
“In the end, Russia will lack the necessary imports, and some enterprising figures will look for a way to circumvent the sanctions, albeit partially and at great cost. In any case, it will still be some time before the full effect of the sanctions can be 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 independence for Europe. In the short term, European consumers will incur costs and all of this will be bad for the economy. But all of this will also spur more investment and reduce Europe’s payments to foreign oil or gas suppliers. So, in the long term, the situation is bad for Russia and better for Europe.”
Discussions are under way in the G7 and in the European Union to examine a price cap for oil and even gas. What do you think?
“I am working on this topic. In summary, I don’t think these price caps will work. In the market at this moment, the bargaining power is on the side of those who sell ».
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