Vladimir Putin and Russia Threaten to Cut Off Japan’s Gas Line

Japan is particularly vulnerable to the threat of being cut off from Sakhalin-2 gas, which currently supplies about 4 percent of its total gas needs. Poor Japan imports about 90 percent of its gas needs.

It is currently in the throes of a particularly acute energy crisis. Rising oil and gas prices since Russia’s invasion of Ukraine have been exacerbated in Japan’s case by the divergence of monetary policy – ​​negative policy rates and a zero percent cap on long-term bond yields – from rising interest rates and quantitative tightening that occurred in the US.

The value of the yen against the US dollar has fallen to its lowest level in nearly a quarter of a century. Since oil and gas are priced in US dollars, that has significantly exacerbated the rise in energy costs.

The threat of being cut off from Sakhalin-2 gas is accelerating Japan's efforts to encourage renewable energy supplies, while also pressuring the government to restart nuclear reactors that were shut down after the 2011 Fukushima disaster. to start.

The threat of being cut off from Sakhalin-2 gas is accelerating Japan’s efforts to encourage renewable energy supplies, while also pressuring the government to restart nuclear reactors that were shut down after the 2011 Fukushima disaster. to start.Credit:AP

Japan buys Sakhalin-2 gas under long-term contracts at relatively low prices due to the proximity of the project, which is located in the far east of Russia. That explains why the Japanese government has said it has no intention of abandoning the project, which it believes is extremely important for energy security.

However, Japan has joined the West in imposing sanctions on Russia and Russian individuals and is backing the G7’s recent plan to impose a price cap on Russian oil exports (and possibly its gas and coal) at about half of the international market price.

The decree appears to be in retaliation for that support, which this week threatened former Russian President Dmitry Medvedev that Japan would be kicked out of the project and cut off from supplies of Russian oil and gas if a price cap were imposed, which suggests Putin’s decree is intended to force Japan to change its stance and break the G7 unanimity.

With Europeans competing fiercely for limited supplies of LNG on the spot market that would otherwise have been sold in Asia, Japan’s problem if access to Sakhalin-2 gas is cut is that there will not be enough gas available on the global market to replace gas it buys from Russia.

Whatever the course and outcome of the war in Ukraine, it will permanently transform global energy markets – and significantly reduce Russia’s key pre-invasion role in it.

Breaking the contracts with Japan would not come at no cost to Russia, however, as Japan accounts for nearly half of Sakhalin’s exports and the sanctions and logistics of diverting the gas would complicate efforts to find alternative buyers.

An alternative would be to force Japan, since it has few European buyers, to pay for the gas in rubles, support its currency, circumvent financial sanctions and help fund the war.

It was always a possibility that the Kremlin would expropriate the Russian assets of foreign companies whose governments have supported sanctions or which, like most oil majors, have closed their Russian companies or announced plans to exit their Russian companies in response to the invasion.

Indeed, legislation has been proposed, but not yet passed, that would give the Russian government the legal power to nationalize foreign-owned assets without compensation. At some point in the future, that could lead to messy and lengthy lawsuits as the foreign companies try to get compensation.

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According to the Putin decree, the proceeds of any sale of the foreign interests in Sakhalin-2 would be deposited into special Russian bank accounts, unavailable to the outgoing shareholder, and used to repay the “damage” to the project. caused by foreign investors. All disputes related to the new corporate entity would be settled by Russian courts.

The threat of being cut off from Sakhalin-2 gas, latent since the start of the war, is accelerating Japan’s efforts to encourage renewable energy supplies, while also putting pressure on the government to shut down nuclear reactors that are the Fukushima disaster in 2011, to restart.
Whatever the course and outcome of the war in Ukraine, it will permanently transform global energy markets – and significantly reduce Russia’s key pre-invasion role in it.

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