IEEJ： March 2014

ｃ○ IEEJ 2014

Special Bulletin

A Japanese Perspective on the International Energy Landscape (165)

March 20, 2014

Tense Ukraine Situation and Its Impact on Energy Market (3)Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

In a manner to attract global attention on March 18, Russian President Vladimir Putin
decided to annex Crimea into Russia. Before Russian upper and lower house lawmakers,
government officials, the prime minister of the Crimean Autonomous Republic and the mayor ofSevastopol, who gathered at the Kremlin, Putin declared the annexation of the autonomous republic
into Russia, noting that the March 16 Crimean referendum was lawful and that Russia and Crimea
have maintained close relations. Putin and Crimean representatives immediately signed a treaty on
the annexation.

The international community including Western industrial nations, Japan and Ukraine has
criticized the referendum as invalid and raised opposition to Russia's annexation of Crimea. Putin's
decision to brush off the international criticism has shaken the world and international order. Russia,
one of the five permanent members of the United Nations Security Council, has implemented aregime change by force and a challenge to post-Cold War international order. The Russian action
represents a problem expected to seriously affect stability in the world. Some people believe that thedevelopment could be an epoch-making turning point.

In response to the Russian action, Western industrial countries as well as Japan havefurther toughened their anti-Russia attitude which had grown severer since the Ukraine situation'sdestabilization. The United States threatened to take measures in addition to earlier-announced
sanctions including the suspension of visa issuance and assets for 11 Russian nationals such as
government officials and noted that it was convening an emergency Group of Seven summit
excluding Russia on the occasion of the Nuclear Security Summit opening next week in The Hague.

The European Union, which has closer economic, trade and investment relations with
Russia than the United States, is also expected to toughen economic sanctions on Russia. Afterannouncing the present sanctions including the suspension of visa issuance and assets for 21
Russians, the EU is considering expanding and toughening these measures. The United States and1

IEEJ： March 2014

ｃ○ IEEJ 2014

Europe are likely to consider far tougher economic sanctions if Russia indicates any move to expand
its control into eastern Ukraine beyond Crimea.
Economic sanctions on Russia have so far remained in a predictable range, falling short ofcausing any great market turmoil. In Russia, the stock market and the ruble have plunged since
Ukraine's destabilization. Other markets in the world have grown nervous about the Russian andUkrainian situation. Nevertheless, economic sanctions within expectations have not affected global
markets so seriously.

But the growing possibility of tougher economic sanctions after the Russian decision toannex Crimea has increased market uncertainties and fears. Details of the tougher sanctions arenaturally attracting attention now. In this sense, great matters of concern include how the energy
sector as the backbone of the Russian economy would be treated, how Russia-Ukraine-Europe
energy relations would change and how the world and Asia would be affected.

Europe, which has close relations with Russia's energy sector, is expected to refrain fromimposing any severe sanctions on the sector. Sanctions on the most important sector of the Russian
economy would be useful for increasing pressure on Russia. Once such sanctions are imposed,
however, Europe and Russia may be locked in a serious dispute. Although the winter energy demandseason has ended, Europe that depends heavily on Russian energy supply may see sanctions on theRussian energy sector as too risky unless substitute energy suppliers are secured. Europe still suffersfrom an economic slump despite long-awaited signs of recovery and seriously fears that sanctions onthe Russian energy sector could boomerang. In a sense, Europe will find it difficult to impose
sanctions on the Russian energy sector without a grave decision to tolerate any boomerang effect.

As argued by the Financial Times on March 19, however, opinions are growing forresolute actions against Russia after the Russian action brought about serious concerns in theWestern world. Recently, I have had opportunities to exchange views with Russian and European
energy experts. We reaffirmed that the chance is slim for Europe to subject the Russian energy sector
to sanctions, though it cannot be denied flatly, and that sanctions on the energy section would havean impact that would be very great and dangerous. We may have to regard such sanctions as one of
the tail risks and closely watch relevant future developments.

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html
2