The United States has imposed new sanctions on Russia as punishment for that country’s use of nerve agents in a March 4 attack on former spy Sergei Skripal and his daughter in the United Kingdom. The sanctions are required under the 1991 Chemical and Biological Weapons Control and Warfare Elimination Act, which mandates punishment of countries that use chemical weapons in violation of international law. This wave of sanctions is set to take effect on August 22 and could be followed, under the law, by a more severe set of sanctions within 90 days.
This comes just days after a group of Republican and Democratic senators proposed a law mandating even more stringent sanctions to punish Russia for interfering in U.S. elections. Those proposed sanctions would include a ban on purchases of new sovereign debt and on Russia’s big state banks.
The measures and the proposed Senate act drove the ruble to its lowest level since 2016. Russia stocks such as Aeroflot and VTB that are most exposed to the sanctions fell by as much as 6%.
So far, though, the market hasn’t reacted to the damage that the sanctions could deal out to the Russian oil industry. The sanctions set to take effect later in August would ban the export of “sensitive” good and technologies that would include the most up-to-date oil drilling and service equipment. The impact on the Russian industry could be especially large if European countries follow the ban.
In the short run, oil industry analysts say, Russian oil companies simply don’t have an alternative source to replace the most advanced U.S. and European products. It may take as much as five years for Russian oil companies to almost fully switch to Asian and local equipment, while for refineries and gas producers the timeframe is at least seven years, Dmitry Marinchenko, oil and gas director at Fitch Ratings, told Bloomberg.
The Russian oil industry is already running at record production for the post-Soviet era. It would be extremely difficult to increase that production without U.S. and European equipment and it’s not clear how long it would be before sanctions would make maintaining current production a problem.
As of 2:30 p.m. New York time West Texas Intermediate crude was off 0.12% to $66.86 a barrel. International benchmark Brent was down 0.32% to $72.05 a barrel.