Report

U.S. Sanctions More Russians

Washington blacklists more Russian officials, companies over Ukraine.

The Obama administration moved Monday to ratchet up sanctions against Russian officials and companies, saying Russian President Vladimir Putin and the Kremlin have done "precisely nothing" to meet the terms of a recent agreement to help de-escalate the tense situation in neighboring Ukraine.

The latest round of sanctions includes seven Russian government officials and 17 Russian companies. The short list incrementally deepens earlier sanctions by further restricting politicians and businesspeople close to Putin, but the designation of top oil executive Igor Sechin is a symbolic shot across the bow of an industry that is crucial to the Russian economy and Putin's power.

Obama administration officials specifically noted the inclusion of Sechin and Sergei Chemezov, on Monday, saying the inclusion underscores the severity of the sanctions. Sechin is president of the state-owned Rosneft oil company and a key Putin adviser, according to Treasury. Sechin's personal assets will be frozen, but Treasury officials said the designation wouldn't impact U.S. companies' ability to do business with Rosneft because Sechin does not control the firm.

Chemezov is the CEO of the Russian state development organization Rostec Corp. and the former director general of Rosoboronexport, Russia's state arms dealer. Rostec also is involved in selling some military equipment, however, including helicopters and the ubiquitous Kalashnikov rifle.

"Russia is the world's largest producer of military helicopters," Chemezov told Bloomberg News in an interview in March. "They're cheaper than European or American helicopters, and the quality is no worse."

Monday's move extended the reach of earlier sanctions by adding several banks and firms to the list that the Treasury Department says are controlled by people who were blacklisted last month.

Ratings firm Standard & Poor's downgraded Russia's debt Friday, saying that the economy faced increased risk because people have moved so much money -- $51 billion so far this year -- out of the country. That compares to $63 billion in all of 2013. Following the downgrade, Russia's central bank increased benchmark interest rates a half point to seven percent to combat inflation caused by the declining value of the ruble, which has fallen almost eight percent against the dollar so far this year.

The financial hits, however, have failed to persuade Putin to reverse his annexation of Crimea or remove any of the tens of thousands of troops he's massed along his country's border with Ukraine.

U.S. officials hope the new measures will have more bite. Two banks and a pipeline company were added to the list Monday because they are owned by billionaire brothers Arkady and Boris Rotenberg, who were sanctioned on March 20. Three other firms were listed because they are alleged part of Bank Rossiya, which Treasury said is the personal bank for Putin and his associates, when it was added to the list. Eleven companies belonging to Gennaddy Timchenko were also designated, including at least four construction firms, a company that makes soft drinks and an oil transport business.

In March, Treasury blacklisted Timchenko, the founder of commodities business Gunvor Group, saying that Putin had investments in the firm, which the firm has denied.* The U.S. effort to pressure Putin through sanctions highlights the murky nature of the Russian leader's financial holdings, which the New York Times reported Sunday could be as high as $70 billion.

Standard Bank analyst Tim Ash, who has followed the Ukraine crisis closely, said the list mainly included smaller "pocket" banks.

"What is striking is the relative absence of any banks/corporates at the ‘commanding' heights of the Russian economy," Ash said in a research note.

Visa and Mastercard shut down service to two banks, SMP Bank and InvestCapitalBank, that were added to the list Monday. The card companies already stopped processing transactions for Bank Rossiya and one of its subsidiaries after that bank was sanctioned last month.

U.S. officials warned that even harsher economic penalties against Moscow - including sectoral sanctions that would likely hurt the global economy if imposed - are still on the table if the Kremlin launches a full-blown invasion of eastern Ukraine. Their implementation could make it illegal for Americans to do business with certain industries, like energy, finance or defense.

"What we're doing is having a very significant impact," one U.S. official said. "These are calibrated and firm moves... that have had significant impact on the Russian economy."

The U.S. Commerce Department also expanded earlier restrictions on what American companies can export to Russia. The department stopped issuing new licenses in March, but will now explicitly deny some applications and could revoke earlier issued permissions. Any applications from U.S. companies that want to export items that could contribute to Russia's military capability will be rejected, Commerce said. Thirteen Russian companies were also added to a further restricted "entity list," which means permission to export to them will likely be denied.

It’s unclear which products will be restricted under the tighter export controls. Commerce oversees so-called “dual use” items, which can be used for civilian or military purposes, so if the new measure were interpreted broadly the restrictions could apply to all the products that the agency controls. A Commerce spokesman did not respond to requests for comment.

Tom Keatinge, an independent finance and security analyst, said the U.S. was probably sending few military items to Russia, even before the tighter measures.

“I cannot imagine that anything is being exported that can’t be sourced elsewhere from China or the like,” said Keatinge, who is also a former J.P. Morgan investment banker, in an email.

While the direct effects may be limited, export lawyer Farhad Alavi said the increased complication of sending products to Russia may discourage smaller companies from even applying for the licenses.

“They’re just going to say screw it, we’re not going to deal with Russia,” said Alavi, a partner with Akrivis Law Group.

President Obama said in Kuala Lumpur, Malaysia Sunday that the U.S. was opting to coordinate with Europe, rather than charging ahead alone.

"The notion that for us to go forward with sectoral sanctions on our own without the Europeans would be the most effective deterrent to Mr. Putin I think is factually wrong," Obama said at a joint press conference with Malaysian Prime Minister Najib Razak. "We're going to be in a stronger position to deter Mr. Putin when he sees that the world is unified and the United States and Europe is unified, rather than this is just a U.S.-Russian conflict."

The government in Kiev has pleaded for the United States to offer more military aid to Ukraine, including weapons, but U.S. officials said there is no scenario in which the Ukrainian military is going to be built up to the point that it can withstand Russian military might. The European Union is expected to announce similar economic sanctions soon.

Keith Johnson contributed this this article.

This article has been updated and corrected.

*Correction, April 30, 2014: The Treasury Department said on March 20, 2014 that the U.S. was sanctioning Timchenko because Putin had access to Gunvor funds, but did not sanction Gunvor.  An earlier version of this story misstated that the firm had also been blacklisted. (Return to reading.)

Scott Olson/Getty Images

Report

Burning Ice and the Future of Energy

The race to discover the game-changing clean fuel of tomorrow is heating up. Too bad it's deep beneath Asia's contested waters.

During their three-day meeting this week, Japanese Prime Minister Shinzo Abe again asked U.S. President Barack Obama to speed up exports of American natural gas to help his beleaguered and energy-poor economy. But the big energy revolution that could ride to Tokyo's rescue may not come on tankers from U.S. ports, but rather from deep underneath the sandy seabed off Japan's own shores.

Methane hydrates, which are chunky packets of ice that trap huge amounts of natural gas in the form of methane, are looming ever larger in Japan's plans to meet its needs for energy in the wake of the Fukushima nuclear disaster and skyrocketing bills for imported fuel.

Other Asian countries facing an energy crunch, including South Korea, China, and India, are also hoping to tap into the apparently abundant reserves of methane hydrates, also known as "fire ice." That could help fuel growing economies -- but it could also fuel further tensions in regional seas that are already the stage for geopolitical saber rattling and brinkmanship over natural resources.

Totally unknown until the 1960s, methane hydrates could theoretically store more gas than all the world's conventional gas fields today. The amount that scientists figure should be gettable comes to about 43,000 trillion cubic feet, or nearly double the 22,800 trillion cubic feet of technically recoverable traditional natural gas resources around the world. (The United States consumed 26 trillion cubic feet of gas last year.)

That raises the possibility of an energy revolution that could dwarf even the shale gale that has transformed America's fortunes in a few short years. It could also potentially have big implications for countries, including the United States, Australia, Qatar, and even Russia, which are banking on unbridled growth in the global trade of liquefied natural gas. The trick will be to figure out exactly how to profitably tap vast deposits of the stuff buried inside the seafloor.

"There's no doubt that the resource potential is enormous," said Michael Stoppard, managing director, global gas, at energy consultancy IHS. "I think it's the ultimate rebuttal to the peak oil and peak gas concept, but of course that's not much good unless you can develop it."

To that end, last week a 499-ton survey vessel nosed out of the port of Sakai, once home to fabled gunsmiths and the finest makers of samurai swords in medieval Japan and today the prospective launching pad for a new technological revolution.

For the next two months, the Kaiyo Maru No. 7 will survey the seafloor right off Japan's west coast, the first step in a years-long process that could end with significant production of natural gas in Japanese waters. A promising methane hydrate site off the southeast coast was the subject of earlier surveys.

Japan is the epicenter of methane hydrates today not because it has so much of the resource -- quite the opposite, most methane hydrates appear to be in gas-rich North America -- but because it needs the resource so badly and is working faster than any other country to make fire ice a commercial proposition.

The United States and Canada are awash in methane hydrate resources, found both under the seabed such as in the Gulf of Mexico and in sub-Arctic permafrost. But both countries also have loads of conventional and shale gas, dampening industry enthusiasm for a complicated, lengthy research process.

Although some companies, such as Chevron, work alongside the U.S. government on methane hydrate research, "there's a little less space in the industry for enabling field experiments and data collection than there was 10 years ago," said Ray Boswell, technology manager for methane hydrates at the U.S. Energy Department's National Energy Technology Laboratory.

Not so in Japan. This spring, researchers in Japan reached a technical breakthrough, figuring out exactly how the gassy bundles of ice release 160 times their volume in methane as they are taken out of low-temperature, high-pressure environments. That could make commercial extraction, which experts estimate is at least 10 to 15 years off, an easier proposition.

Japan has sought to come up with a new energy blueprint in the wake of the 2011 nuclear disaster that shuttered the country's nuclear reactors, which led to a spike in imports of pricey fuel, especially natural gas. Japan's new energy plan, approved in April, puts nuclear energy back on the table. But Japanese officials concede that nuclear output will likely never reach the 30 percent or so of Japan's electricity output that it was before the disaster.

As a result, the government included methane hydrate development in its top five priorities for new energy supplies. Japanese officials say they are working on methane hydrates because they need an alternative to liquefied natural gas (LNG), which costs about three times as much as natural gas in the United States.

"It's very easy to understand the Japanese motivation, and with China, India, and South Korea you have very similar situations," said Tim Collett, a gas hydrate expert at the U.S. Geological Survey.

Because Japan and South Korea are the first- and second-largest importers of LNG globally, methane hydrate development "is potentially a significant long-term threat to the LNG industry," said IHS's Stoppard. "Even small-scale development of methane hydrate would slow down any growth in LNG sales there."

To be sure, the kinds of shale gas reserves that have made the United States an energy superpower exist overseas too. China is loaded with shale resources, as are parts of Europe and Latin America. But the shale gas revolution depends on a lot of things other countries don't have: small, nimble energy companies, thousands of drilling rigs, private ownership of land, and up-to-date financial and regulatory systems.

Getting methane hydrates out of the seafloor should be a more straightforward proposition, and because for now it requires close cooperation between industry and governments, it seems well suited to economies in the Pacific Rim.

The problem with methane hydrates isn't exactly technological. Conventional drilling techniques, rather than some fancy breakthrough, will likely enable producers to tap undersea deposits, remove the gas from the icy lattice that traps it, and pump it to the coast.

The problem is figuring out how to do so economically. All possible techniques for extracting gas from the hydrates -- such as raising temperatures to release the gas or depressurizing the deposits -- have their drawbacks. There are also other complications not found in conventional gas wells: The melting ice releases huge amounts of water, which producers must deal with, potentially raising costs.

And deposits are found at lower pressure than conventional gas deposits, meaning it will require more energy (and money) to pump the gas to where it needs to go, even if that makes less likely the prospect of catastrophic blowouts, like the one suffered by the BP-leased Deepwater Horizon drilling rig four years ago.

That's why Collett and Stoppard figure it will be 10 to 20 years before gas hydrates are extracted at commercial scale and make up a significant part of the energy mix.

Even if the commercial development of gas hydrates is a generation away, they could still elbow their way into Asia's messy disputes over who owns what in the South China Sea and the East China Sea, where China has faced off with countries such as the Philippines and Japan over territorial rights. That's because methane hydrate potential comes on top of the conventional oil and gas riches that are believed to lie underneath those waters.

While some experts estimate that the sheer size of the potential energy resources will serve to tamp down tensions in the region -- who needs to fight over a few oil and gas fields when there's so much in gas hydrates to go around? -- others worry that it will just add fuel to the fire.

"Abundance in and of itself won't remove the deeply political dimensions of these disputes," which tend to revolve around knotty problems of sovereignty over barren chunks of land, said Ely Ratner, deputy director of the Asia-Pacific Security Program at the Center for a New American Security.

Photo by Ian MacDonald - Florida State University