The sanctions have created some uncertainty and difficulties, but are unlikely to cause disruptions to gas flows, especially now that Russia has eased its own restrictions for payments. The end of Russian gas transits through Ukraine after December 31 is a much greater threat to Europe’s energy security.

WHAT: The Biden administration announced sanctions on Gazprombank, which handles Europe’s payments for Russian gas, on November 21, as part of a fresh wave of restrictions on Russia’s finance sector.

WHY: The move was aimed at increasing pressure on the Kremlin ahead of expected negotiations with the Trump administration on ending the fighting in Ukraine.

WHAT NEXT: The end of Ukrainian gas transit could push Europe into a new energy crisis, worsening its looming recession.

 

The Biden administration’s announcement of sanctions on Gazprombank, which handles all payments for Russian gas entering what Moscow refers to as “unfriendly countries” in Europe, understandably caused some ripples on the gas market. But the Kremlin has already loosened its own restrictions to prevent the sanctions from disrupting gas payments. And Washington’s objective with the sanctions was not ending Russian gas trade in Europe, and the Biden administration is already reportedly in talks with the EU on avoiding any fallout on energy supply. 

The much greater threat to Europe’s energy security is the increasingly likely end of Russian gas transits through Ukraine after December 31, which could trigger a new energy crisis on the continent.

 

OFAC designates Gazprombank

On November 21, the US Treasury Department’s Office of Foreign Assets Control (OFAC) imposed sanctions on Gazprombank, along with 50 internationally connected Russian banks, more than 40 Russian securities registrars and 15 Russian finance officials. 

While Gazprombank has long been on the Biden administration’s radar, it has previously avoided targeting the bank, primarily because of its critical role in facilitating payments for Russian gas supplies to Europe. Under a March 2022 decree, the Kremlin stated that buyers of Russian gas supplies to what it calls “unfriendly countries” would need to make payments for those supplies into special accounts in their name at Gazprombank. Those foreign currency payments had to be deposited into one account and then converted into rubles and transferred into another, before being sent to Gazprom.

OFAC has given US individuals and businesses until December 20 to cut all ties with Gazprombank. In light of secondary sanctions, European individuals and businesses must also comply with the sanctions. 

 

Then why target Gazprombank now?

In its final weeks in power, the Biden administration is ramping up sanctions pressure on Russia ahead of expected future negotiations between US President-elect Donald Trump and Russian President Vladimir Putin on ending the fighting in Ukraine, once the former enters the White House on January 20.

More sanctions means more leverage, at a time when Russia continues to gain more leverage of its own on the battlefield, as Ukrainian forces lose territory and low morale and high numbers of desertions raise the risk of their front lines collapsing. 

Europe receives far less Russian gas now than it did two years ago, and almost half of remaining pipeline supply is set to be halted at the end of this year, assuming Moscow and Kyiv’s deal for Russian gas transit through Ukraine expires without renewal, and alternative arrangements to continue flow are not made. The Biden administration may therefore reason that if most Russian gas flow will end anyway, there is less risk to Europe’s gas market from sanctions.

Ukraine’s government has repeatedly insisted it does not want to extend the agreement, and the European Commission says it views an extension as unnecessary. Several alternative arrangements have been suggested over recent months to continue Russian gas flow through Ukraine without a transit deal. Azerbaijan has proposed taking over transit, presumably by acquiring Russian gas at the Russia-Ukraine border. This could involve a swap deal, whereby Russian assumes an equivalent amount of Azeri gas heading to a similarly-priced market, such as Turkey. But it is unclear how Russia would benefit from this arrangement, and it would be complicated to organise.

Alternatively, European buyers could purchase Russian gas at the Russia-Ukraine border and take responsibility for its transit through Ukrainian territory. 

Both options would be complicated to finalise, and there are no public signs of progress on either and time is short. As such, most analysts assume that Russian gas supply through Ukraine will end after December 31, and the market has already priced in this expected disruption. 

Russia transited 14.3bn cubic metres of gas via Ukraine in 2023, which was roughly equal to 5% of Europe’s gas demand. The worst affected by the disruption will be Austria, Slovakia and Moldova, and to a lesser extent Hungary, which already uses the alternative TurkStream route to receive some of its Russian gas.

 

Did the US want to disrupt Russian gas flows to Europe?

Probably not. Besides the fact that Russian gas transit through Ukraine is expected to end anyway soon, using sanctions to disrupt Russian energy export volumes runs would be inconsistent with the Biden administration’s sanctions policy against Russia to date.

Note that the US-led price cap on Russian oil exports did not seek to cut Russian export volumes but only to reduce the amount of revenue Russia earned from them. Instead, Russian oil export volumes have fallen over the last two years primarily because of the country’s OPEC+ commitments.

Also note that the US has not imposed sanctions on any operational Russian LNG projects, such as Yamal LNG and Sakhalin-2, and instead targeted the new Arctic LNG-2 project last year. Washington’s aim here was to prevent Russia expanding in the LNG sector, while leaving existing exports untouched. Notably, OFAC provided a licence to allow continued transactions with Gazprombank when they relate to LNG supplies from the Sakhalin-2 project to Japan, recognising the importance of this trade continuing for Japan’s energy security.

Instead, Gazprombank was targeted for the reasons stated. In a statement, US Treasury Secretary Janet Yellen said the sanctions would “further diminish and degrade Russia’s war machine. This sweeping action will make it harder for the Kremlin to evade US sanctions and fund and equip its military.”

Yellen made no mention of Russian energy. The sanctions were about preventing Gazprombank’s use as a conduit for funding and equipping its military, and evading other sanctions.

 

Russia makes it easier to pay for gas

Russia responded on December 5 by amending its March 2022 decree. Now, buyers of gas supplies to “unfriendly countries” can pay for them using intermediary Russian banks, which will convert them into rubles for onward transfer to Gazprombank, which remains the sole authorised bank to handle payments for gas.

Nearly all major Russian banks are already sanctioned, but unlike Gazprombank, OFAC has already issued licences allowing continued dealings with some of them when energy payments are concerned. 

In other words, European customers will be able to continue paying for Russian gas, but the process will be more complicated. Notably, Turkey has also asked for a waiver on supplies.

To soften the impact of the sanctions further, the EU is in discussions with the US on mitigation measures, including potentially allowing payments for gas to be made legally via a Luxembourg-based subsidiary of Gazprombank, according to Bloomberg. The US could also issue a licence to allow continued energy payments via Gazprombank, to make the process even easier.

In a nutshell, all sides seem willing to ensure that the sanctions do not impact Europe’s energy supply.

 

Still, Europe’s gas market must brace for difficulty

The end of Russian gas transit through Ukraine after December 31 poses a much greater challenge to Europe’s gas market than the latest US sanctions. The disruption will take place in the middle of winter, when demand is typically much higher. Following the destruction of the Nord Stream pipelines and the end of flow via the Yamal-Europe pipeline in 2022, the only other route for Russian gas to Europe besides Ukraine is the TurkStream. Only one of its two 15.75 bcm per year strings sends gas to Europe, while the other provides gas to the Turkish  market. 

As noted, the market has already priced in the impact of the end of Ukrainian transit. This helps explain the recent surge in European gas prices, with front-month contracts at the Dutch TTF gas hub rising in recent weeks to their highest level this year. However, prices could surge even higher depending on weather conditions and wind power output, which has been lower than usual in recent months, driving up gas-fired generation. In Germany, the continent’s biggest wind power producer by installed capacity, output was 25% lower year on year in October and November, according to Reuters.

Europe still has significant quantities of gas in storage, with facilities filled to 82.4% of capacity as of December 7. But this is less than Europe had at the same point in 2023 and in 2022, as inventories have been withdrawn at a faster rate over the last month. If Ukrainian transit ends, this could propel the continent into a new energy crisis. 

Higher energy costs will only exacerbate high cost-of-living conditions on consumers and make Europe’s looming recession worse, say economists. Europe is already facing a crisis after the report from former Italian Prime Minister and ex-European Central Bank boss Mario Draghi warned that Europe has lost its competitive edge. Germany is particularly vulnerable,  as its energy costs are already the highest in Europe.