IEEJ：February ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (573)

February 24, 2022

New Ukraine Situation after Russia’s Recognition of Pro-Russian Regions
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn February 21, Russian President Vladimir Putin announced that Russia would recognize
the independence of two regions controlled by pro-Russian rebels in eastern Ukraine. The
pro-Russian rebels earlier declared the independence of the Donetsk People's Republic and Luhansk
People's Republic, seeking Moscow’s recognition of the regions as independent countries. Inresponse, President Putin convened an emergency meeting of the Security Council, discussed therecognition of their independence and eventually signed decrees for the recognition.
President Putin also ordered the Defense Ministry to send Russian troops to the regions forpeacekeeping missions. Furthermore, he signed mutual assistance treaties with the two republics thatallow Russia to construct and use military bases there and provide for mutual defense obligations.
So far, tensions have remained extremely high between Russia, which has amassed
100,000 to 200,000 troops near its border with Ukraine to increase military pressure, and Ukraine
and its Western supporters such as Europe and the United States. Meanwhile, major Westerncountries and Russia held meetings of their top leaders and foreign ministers to explore diplomatic
solutions. Russia, though supporting the pro-Russian rebels in eastern Ukraine secretly and openly,
has positioned conflicts in eastern Ukraine as a civil war and refrained from intervening directly inthe conflicts. Through the unilateral recognition of the two pro-Russian regions as independent
countries, however, Russia has made a major step forward from the traditional stance, creating a newsituation. The step would also nullify the 2015 Minsk agreement that set out a ceasefire and peace
process in eastern Ukraine.
In response to the recognition of the two pro-Russian regions, Russian troops are expected
to be deployed into the regions. Some analysts say that Russian troops could launch an all-out
invasion into Ukraine. Depending on future developments, the Ukraine situation could transition to anew phase, heightening Russia’s tensions with Western countries and the international community
rapidly.
U.S. President Joe Biden harshly criticized Russia’s recognition of the pro-Russian regions
as representing the launch of Russia’s invasion into Ukraine. British Prime Minister Boris Johnson
and other European leaders also condemned the Russian action as a grave infringement of Ukraine’s
sovereignty and territorial integrity running counter to international law. They are concerned that theRussian action would unleash an all-out invasion into eastern Ukraine.
Responding to the Russian action, Western countries have taken their first step to toughen
economic sanctions, considering a ban on trade with and investment in the two pro-Russian
republics, sanctions on major Russian banks and individuals engaged with their independence,
restrictions on the Russian government’s debt issuance for blocking Russia’s new fundraising deals
and other sanctions. U.S. Secretary of State Antony Blinken called off his planned meeting with his1

IEEJ：February ©IEEJ 2022
Russian counterpart Sergey Lavrov on February 24. Depending on future developments, economicsanctions on Russia could be enhanced further.
In reaction to the rapid situational change and destabilization, energy markets became
unstable. Crude oil futures prices scored substantial gains on February 22. The front-month Brent
contract rose by a steep $1.45 per barrel to close at the year-to-date high of $96.84/bbl. It briefly rose
to $99.50/bbl, close to $100/bbl. The key West Texas intermediate futures contract soared by$1.28/bbl to $92.35/bbl. As market players became strongly conscious of geopolitical risks emerging
from intensified tensions over Ukraine, crude oil futures tested a rise above $100/bbl.
As a matter of course, a low oil inventory level has remained as a fundamental factor
behind crude oil price hikes. Given the hikes since late last year, the fundamental factor’s influence
is seen as great. Furthermore, the OPEC-plus group of oil-producing countries has failed toimplement its planned monthly production increase of 0.4 million barrels per day, leading to
insecurity about the OPEC-plus supply increase and contributing to boosting crude oil prices.
However, the biggest factor that currently pushes up crude oil prices is the combination of Ukraine
developments and concern over their impacts on Russian oil and natural gas exports.
Russia is an extremely important oil exporter to the European Union, providing some 2.4
million bpd to the region. Russian crude oil accounts for about 30% of total EU oil supply. Whether
Russian oil supply would be disrupted depending on future developments or how much and longsuch disruption would be are uncertain. Given the importance of oil exports for Russia and thesignificance of Russian oil supply for Europe and the rest of the world, it is difficult to predict any
easy disruption to Russian oil supply. As far as the situation is uncertain, however, market players
may have various potential events including the worst one in their mind. If a Russian invasion into
Ukraine comes, crude oil prices may rise above $100/bbl in response to geopolitical risks. However,later crude oil price fluctuations may depend on the scale of and period for the invasion, the details
and effects of Western economic sanctions, and whether and how Russian oil supply would bedisrupted. If a large-scale oil supply disruption comes, crude oil prices may shoot up far beyond$100/bbl. In the absence of any oil supply disruption, however, crude oil prices may fall back below$90/bbl after topping $100/bbl.
If oil supply is disrupted, we will have to watch potential oil production expansion by suchproducers as Saudi Arabia to stabilize the market, Iran’s oil supply increase through its successful
nuclear deal negotiations with the United States, a possible U.S. shale oil production rise reacting tohigh oil prices and oil consuming countries’ release of oil reserves. Depending on a future Russian
military invasion, however, the international oil market could be rapidly destabilized, fuelinguncertainties.
International natural gas and LNG markets could become more destabilized and uncertain
than the oil market. Particularly, Europe that depends on Russian imports for about 40% of its gas
supply has great insecurity about future gas supply from Russia. Already, Europe has tried tocooperate with the United States, Qatar and Asian LNG importers such as Japan to substantially
increase LNG procurement. If Russian gas supply is disrupted on a large scale, however, thesupply-demand balance may tighten to push up gas prices and even LNG prices substantially. Given
the significance of gas exports for Russia and the importance of Russian gas supply for Europe,
however, any large-scale disruption to Russian gas supply to Europe among various conceivable
developments is difficult to expect, as is the case with oil. However, no one can deny a potential
unpredictable development. Concern on such development may move market players. The future2

IEEJ：February ©IEEJ 2022
Ukraine situation is the most important factor to exert decisive influence on international energy
markets.

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

3