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US election could reshape Russian sanctions, energy ties

US election 2016: A Platts news and analysis feature

By Meghan Gordon and Rosemary Griffin

Published online 03 Nov 2016

  • Clinton seen holding Russia to international agreements
  • Trump expected to take softer stance on sanctions
  • ExxonMobil's partnership with Rosneft at stake

US economic policy toward Russia, including sanctions restricting Western oil companies' operations there, could take two sharply different paths, depending on who wins Tuesday's presidential election.

Among oil companies, ExxonMobil could have the most at stake, since sanctions halted its partnership with Rosneft, Russia's largest crude producer.

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Analysts in Russia and the US expect a Trump administration to take a softer approach, potentially easing sanctions the Obama administration leveled against Russia in 2014 over its involvement in the Ukraine conflict.

A Clinton administration would likely hold Russia to its international agreements and only let up on the sanctions if Moscow made positive steps at reconciliation.

Analysts also see the possibility of Clinton tightening sanctions in response to any new Russian provocation around the world.

The US sanctions against Russia represent more of a wild card than sanctions against Cuba and Iran, for example, because no legislation from Congress currently hamstrings the White House from taking executive action to change them.

The key casualty of the sanctions has been ExxonMobil's partnership with Rosneft on Arctic, shale and deepwater crude production. Exxon was forced to suspend its involvement in drilling at the Pobeda project in Russia's Arctic Kara Sea.

In March 2015, CEO Rex Tillerson estimated potential losses from the sanctions at up to $1 billion. He said they affected joint venture activities with Rosneft, including "exploration in Russian Arctic waters, exploration in the deepwater Black Sea and evaluation of tight oil potential reservoirs in West Siberia." ExxonMobil declined to comment for this story.

Rosneft CEO Igor Sechin highlighted the differences between the two US presidential candidates at a speech at the St. Petersburg Economic Forum earlier this year, saying the US energy sector was at a crossroads due to their different positions on climate change, domestic energy production and renewables.

Other areas of cooperation between Exxon and Rosneft remain unaffected by sanctions, including the Sakhalin 1 project in Russia's Far East.

In contrast, BP, which holds a 19.75% stake in Rosneft, has seen its cooperation with Rosneft grow since sanctions were introduced.

BP has entered new upstream projects including Taas Yuryakh in East Siberia, and set up a services joint venture with Rosneft and Schlumberger.

While Russian producers have had to adapt, the sanctions have not had as much bite as expected.

The country's output increased 147,222 b/d from 2014 to 10.73 million b/d in 2015, despite an International Energy Agency estimate it would fall 80,000 b/d. Growth has continued this year, averaging 10.91 million b/d from January-October.

Clinton vs. Trump

Analysts expect Russia/US relations to get off to a tense start if Clinton wins, given rocky relations when she served as Secretary of State as well as claims during the campaign that Russian hackers were behind leaking damaging emails from her top staffers.

"One can assume that it would be somewhat harder for the Clinton administration to maintain a productive working relationship with Russia than it would for a potential Trump administration," said Grigory Birg, an analyst at Moscow's InvestCafe, pointing to Clinton's heated campaign rhetoric.

Joe McMonigle, president of The Abraham Group and former Energy Department chief of staff under President George W. Bush, saw similar risks.

"If Clinton wins, obviously there is going to be a lot of bad feelings at least over the perceived involvement of Russia in the WikiLeaks situation. It is probably one of these areas [where] if it could it get worse, it could get worse under Clinton just because of what has happened in the election."

David Goldwyn, president of Goldwyn Strategies in Washington and formerly the State Department's top energy diplomat under Obama, expected a Clinton White House to require strict compliance with the 2015 Minsk agreement that cooled tensions in Ukraine.

If Russia took positive steps to comply, it could see a relaxation of sanctions.

But Goldwyn said Russia faces tighter sanctions if it uses the occasion of a new administration to make additional provocations.

"Those are most likely to be financial sanctions because they have proven to be most effective, the most in our control and the least controversial with our European partners," he said. "The severity of those sanctions would depend on the severity of any potential Russian provocation."

Russian and US analysts said any easing of sanctions would be more likely to come from a Trump White House.

"If Trump wins, it would be an improved picture just because Trump thinks he can cut better deals and negotiate better with Russia and Putin on a whole host of issues," McMonigle said.

Role of Congress

Goldwyn said there will be enormous pressure on Trump from Congress and European allies to avoid unilateral concessions in the face of Russian aggression.

"The more he takes an accommodating position with a country like Russia in the absence of a meaningful concession or act of cooperation, then that is exactly the recipe which has motivated Congress to legislate sanctions on its own in the past," Goldwyn said, adding such legislation would draw bipartisan support.

"The rudest awakening for any Trump administration is likely to be the power of Congress," Goldwyn said.

In Moscow, analysts were cautious to forecast what a Trump presidency would mean for sanctions, saying his policy was a lot less predictable given his lack of experience dealing with Russian officials.

"I do not believe that he would do a 'relaunch' of the relationship with Russia in the absence of support of the political establishment," Birg said.

"It is feasible, though, that a Republican candidate would choose to lift those sanctions which directly negatively affect US businesses and focus on political sanctions and other means of influencing Russia's policy," he said.

Russian policy will also play a key role, with Moscow-based analysts saying geopolitics will be another factor in any sanctions changes.

European role

McMonigle said there would need to be a catalyst for changing the sanctions regime, perhaps an area of geopolitics where the White House sees Russian cooperation as a key to getting something done, such as in Syria, Ukraine or the Iran nuclear deal.

"It has to be big, global problems that [the Russians] are a part of the solution on," he said.

Another catalyst could come from Europe, where the business community has been more directly affected by sanctions and Russia's counter sanctions, and some appear eager to resume investment in Russia.

McMonigle said that was more of a long-term scenario, as he doubts the EU would take unilateral action at the beginning of a new US administration.

Dan Newcomb, a sanctions lawyer at Shearman & Sterling in New York, said not enough is known about either candidate's foreign policy plans to predict what they might do in this area.

"Sanctions are a foreign policy tool -- sanctions will follow the foreign policy," he said.

Platts news and news analysis is independent, objective and neutral.

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