Why the Arctic Could Be the Achilles’ Heel of the Russian Economy

The Arctic: Russia’s (Potential) Achilles’ Heel

Western sanctions have so far not succeeded in sinking Russia’s economy.
However, a weak point in the Kremlin’s armor is emerging, and that is the Arctic.
Not just any region for the Russian government, but an area that provides almost 10% of the country’s economic production.

The reason for such figures is simple: about 80% of the country’s natural gas and 17% of the oil available to the Russian Federation are produced here.
Digging into the details, the continental shelf holds over 85.1 trillion cubic meters of natural gas and 17.3 billion metric tons of oil.

The Impact of Sanctions

The sanctions imposed on Russia from February 2022 onwards have indeed complicated Moscow’s Arctic development prospects.
The potential double blow for the Kremlin would coincide with a gradual embargo on purchases of Russian oil and gas, in addition to the fact that the potential commercial partners of the Russian government will likely refuse to use the Northern Sea Route for international transit of goods.

As a result, there is a drastic limitation in the demand for goods and services produced in the region.
In the first half of 2022, Russia has already reduced natural gas production by almost 7% compared to the same period in 2021.
In June, it also produced just over 39 billion cubic meters of gas, 23% less than the same month a year ago.
Oil production has also started to decline.

The Effect of Sanctions on Arctic Projects

The sanctions are starting to call into question the entire local mechanism.
For instance, the Arctic LNG 2 plant of Novatek PJSC in the Kara Sea is a key part of Moscow’s plans to increase exports and bolster its coffers.
However, as highlighted by Fortune, the complex is practically inactive.

Since the U.S.
sanctions have been imposed on the Arctic LNG 2 plant, buyers from China and India – two countries that have purchased and marketed Russian oil, bypassing existing constraints – have refused to buy discounted Russian LNG.

The Continued Challenges

Russia has long been trying to increase its share of the global LNG market.
Moscow aims to triple production by 2030, adding at least $35 billion in annual revenue.
However, restrictions on the flagship Arctic LNG 2 project are limiting the Kremlin’s aspirations to go further.

Furthermore, this modus operandi may have provided the West with a template for any future attempts to reduce the Kremlin’s gas revenues.
A template consistent with targeting operations like Yamal or Sakhalin II in the Far East, to stifle Putin’s new, hypothetical, commercial operations.

It seems that even shipbuilders have found themselves entangled in the sanctions, as ships worth hundreds of millions of dollars are currently stuck in the dry docks of South Korea.
No one can buy or rent them.
Meanwhile, the gas remains trapped in the Arctic plant.