RIYADH: Moscow is feeling the heat. Tightening sanctions could cut Russia’s balance of payments by two per cent of GDP while lower oil prices could knock off another 2pc, Maksim Oreshkin, head of Russia’s Finance Ministry’s strategic planning department told the Fitch ratings agency conference last week. It could also reduce exports by $55bn per year, he emphasised.

The CEO of Russia’s second-largest oil company, Lukoil, too expects sanctions to affect 20pc of Russia’s total oil output. Some 100 million tonnes of annual oil production is at risk because of sanctions, Lukoil CEO Vagit Alekperov said last week.

Sanctions could stall the $500 billion of direct capital investment, expected into the Arctic shelf by 2020. Multiplier effects can add another $300bn in potential losses and cripple prospects for the development of offshore and hard-to-reach oil fields in Russia, Merrill Lynch reported .

Former Russian Finance Minister Alexei Kudrin is also warning. The curbs could send economy into a recession - leading to a 3-4pc economic drop.

In the worst scenario, if Russia is cut off from the SWIFT international banking payment system, Kudrin predicts a 5pc drop in GDP.

The World Bank has also lowered its GDP growth estimate for Russia in 2014 to 0.5pc, effectively signalling stagnation. In 2013, Russian economy expanded 1.1pc to $2.1 trillion.

Earlier this month, the United States and European Union strengthened the sanctions regimen further by barring US and EU firms from supporting Russian exploration or production activities in deep water, Arctic offshore or shale projects. As conventional Russian oil wells begin drying up, the importance of hard-to-reach deposits in Russia is on increase.

About a quarter of Russia’s oil production currently comes from hard-to-recover reserves with the help of the fracking technology — where powerful, mostly US-made pumps are employed to force oil out of the earth. Automated control systems and communications equipment the Russian energy industry uses today mostly come from the US and Japan. And these could now be at risk because of the new sanctions.

Russia has been luring energy majors in recent years. In recent years, Western energy giants like France’s Total, British-Dutch conglomerate Royal Dutch Shell and the US’s ExxonMobil brought in advanced technology, equipment, expertise and investment to the Russian energy sector.

With the new measures, most of these investments could be at risk. Exxon, which despite early waves of sanctions against Moscow began exploratory drilling this summer with state-owned oil giant Rosneft on Russia’s Arctic shelf, is now being forced to wind down its operations, Bloomberg reported last week.

Exxon in partnership with the Russian energy giant Rosneft was working on the $700 million well Universitetskaya-1, in Russia’s Kara Sea, an arm of the Arctic Ocean. The Kara Sea has estimated reserves of 9 billion barrels of crude oil worth about $885 billion at today’s prices.

Drilling suspension at Universitetskaya-1 would not affect the current oil output of ExxonMobil or Rosneft, since the project was aimed at exploring for the presence of oil in the Arctic field and deciding if future production would be economically feasible. But the drilling suspension, should it be lasting, would potentially hurt Russian production in the next decade. And this carries impact on the overall global balance, one can’t help pointing out.

Having poured billions of dollars into Russia, Western energy companies are definitely not happy with the ban and are in no rush to leave.

And Russia knows it well too.

Executives of both Total and Shell were quoted recently as saying they would continue working in Russia despite sanctions. “This is a long-term investment we are making and it will require 10-20 years to bear fruit. It is inappropriate to impose sanctions and then say, invest somewhere else,” said Jacques de Boisseson, the head of Total Russia, adding: “I call on politicians: Do not play with the energy industry, it is too fragile.”

And de Boisseson has a point. Playing politics with resource development could cost heavily in the years to come.

Published in Dawn, September 28th, 2014