By Andy Tully:
Ukraine is planning to impose sanctions on Russia that might include an effort to starve its larger and richer neighbor of income by stopping the flow of Russian gas through Ukraine to customers in Western Europe.
Ukrainian Prime Minister Arseniy Yatsenyuk told reporters on Aug. 8 that his government is proposing sanctions against 172 citizens from Russia and other countries, as well as 65 Russian companies “for financing terrorism” by supporting the efforts of Russian separatists in eastern Ukraine.
Other options being considered include closing Ukrainian air space to Russian aircraft, reducing cooperation between the countries’ defense industries, and restrictions on Russian ships in Ukrainian waters. And he mentioned a “partial or full ban on the transit” of resources from Russia through Ukraine.
Asked if that could include Russian gas shipped to Western Europe via Ukrainian pipelines, the prime minister replied, “I spoke about all the measures which could be included in the [proposed] law. This includes the possible halting of all types of transit, from air flights to transit of resources.”
These proposals bring Ukraine into a growing tit-for-tat sanctions war being fought for the past several months by the European Union, the United States and Russia over the Ukraine crisis. Two rounds of EU and U.S. sanctions have limited travel for several influential Russians and denied Russian oil companies access to Western capital and technology.
Russia has responded by banning produce from Poland, an EU member, and said it is considering bans of other foods from the West, citing food safety. Russia is the EU’s biggest customer of fruit and vegetables, buying more than 2 billion euros worth of produce from the bloc each year. It has previously been accused of such bans from countries with which it has had political disputes.
Yatsenyuk said he expects more of the same from Moscow. “There’s no doubt that Russia will continue its course – started a decade ago – aimed at banning imports of Ukrainian goods, limiting cooperation with Ukraine, pressure and blackmail.”
And the costs, he acknowledges, could be high for Ukraine. “In the most negative scenario for Ukraine, losses during the first year may reach $7 billion, not only because of sanctions but also because of the Kremlin’s aggressive policy.”
But a complete shutoff of oil and gas flowing through Ukraine also could hurt Russia. In 2013, Moscow reports, Russia used Ukrainian pipelines to transport 86.1 billion cubic meters of its gas and 15.6 million metric tons of oil. That includes about half of Russia’s annual exports of gas, though less than 7 percent of its oil exports.
Also at risk, of course, is Western Europe, which receives about 30 percent of its gas from Russia, half of it piped through Ukraine. Twice, in 2006 and 2009, that flow has been interrupted. Gas flows to Europe through Ukraine are intact today despite the fighting in Ukraine, but a shutoff of the pipelines to punish Russia would hurt Ukraine’s Western supporters, as well.
This piece is cross-posted from OilPrice.com with permission.