US Sanctions Gazprombank to Squeeze Russian Gas Exports

(Bloomberg) -- The US sanctioned Gazprombank, the last major Russian financial institution exempt from penalties, closing a loophole that Washington kept open over the course of the war in Ukraine because the lender is key for energy markets.

The Biden administration had previously decided not to levy sanctions against the bank, which European nations use to pay for the gas they still buy from Russia, for fear of causing turmoil in global commodity markets.

The sanctions increase the risk of a cut-off of some of the remaining Russian natural gas flows to a handful of central European nations. Although Europe has reduced its reliance on Russia, losing one of the last remaining routes for pipeline gas would increase competition for remaining supplies and increase prices across the continent at a time when storage levels are already depleting unusually fast.

Europe was already bracing for the potential end to flows of Russian gas through Ukraine when a transit deal expires at the end of the year. The sanctions will make it more difficult for President Vladimir Putin to profit from energy exports to Europe. European gas futures are at the highest for a year as the global supply outlook tightens.

“If Russian gas flows stop sooner than expected and demand remains high, for example, if the winter turns out cold, Europe could exit the winter with alarmingly low gas reserves,” said Arne Lohmann Rasmussen, chief analyst at Global Risk Management in Copenhagen.

OFAC said it is issuing two new general licenses, giving people in the US a wind-down period for transactions involving Gazprombank and divestment of equity and debt issued by the bank until Dec. 20. Payments to Gazprombank for energy transactions will be prohibited after the wind-down period, according to a person familiar with the matter.

The sanctions exempted transactions related to the Sakhalin-2 oil and gas project, to the north of Japan, through June 28, 2025. The Japanese government has remained committed to receiving liquefied natural gas from Sakhalin-2, calling it an important project for the country’s energy security. 

At the same time, the US has been looking to do whatever it can to cripple Russia and boost Ukraine in anticipation of President-elect Donald Trump’s expected push for the two sides to negotiate a cease-fire. 

“The United States remains committed to putting Ukraine in the strongest possible position, and we will continue to take all available steps to do so from surging security assistance to imposing and fully enforcing sanctions and other restrictions on Russia’s war machine,” National Security Advisor Jake Sullivan said in a statement.

The US held off sanctioning Gazprombank to make it possible for countries in Europe to pay for Russian gas. But the need for that exception has waned as European nations bolstered supplies, including liquefied natural gas from the US. With Trump soon in office, the move could be seen as a further push for the US LNG to increase its market share in Europe. 

The US is already Europe’s biggest provider of LNG, but imports from Russia remain solidly in the second spot. EU officials are looking for ways to curb imports with European Commission President Ursula von der Leyen mentioning that US LNG could replace Russian supply in a recent phone call with Trump. 

In 2022 Gazprom changed how it accepted payments from European buyers, demanding rubles via Gazprombank. Poland and Bulgaria were cut off in 2022 for refusing to comply but Slovakia and Hungary still get Russian gas.

Hungary’s Foreign Ministry said lawyers are investigating the impact of the US sanctions and if needed, the nation “will hold a discussion with the Russian company supplying the gas.”

“We will continue to secure Hungary’s energy supply, independently of any external pressure or intervention attempts,” the ministry said in an emailed response to Bloomberg.

Last week, Austria’s OMV AG warned it would stop paying for gas supplied by Gazprom PJSC to claw back an arbitration award, and deliveries stopped within days. That’s the situation central eastern Europe countries are potentially facing.

Putin can theoretically allow gas payments through other banks, amending his own decree made in 2022 but it remains to be seen if Russia is willing to move transfers elsewhere, including abroad.

“There is a potential that some transactions could be disrupted because of this, which can lead to delays and even reductions in gas supply,” Florence Schmit, an energy strategist at Rabobank, said. “Gazprombank still plays a relevant role in processing payments for Russian gas exports to Europe.”

Delays or disruptions of flows of any kind could affect prices in Europe and close “the already narrow window of opportunity for any Russian gas transits through Ukraine in the new year,” she said. 

Some 50 Russian banks with connections to the global financial system were also sanctioned Thursday, along with about 15 officials, the US Treasury Department’s Office of Foreign Assets Control said in a statement.

Trump’s return to the White House in January and his pledge to end the war in short order has created a new sense of urgency among Western allies to strengthen Ukraine’s hand ahead of any talks. The Kremlin said on Wednesday it’s prepared to discuss a potential cease-fire in Ukraine with Trump, an overture that met with immediate skepticism from Western officials. 

At the same time, Russia has intensified their bombardment of Ukraine in recent days and previous rounds of sanctions haven’t kept it from inflicting heavy losses in the last two and a half years.

Gazprombank is accused of helping Russia to pay for military equipment and material for the war in Ukraine. It has also allegedly paid the salaries of Russian soldiers, including combat bonuses, and helped to compensate families of Russian soldiers who have been killed in the fighting. 

Several other countries, including Australia, Canada, New Zealand and the United Kingdom, have previously sanctioned Gazprombank. UK made an exception for energy payments when it sanctioned the bank in 2022. 

(Updates the story with details on Sakhalin-2 in 7th paragraph)

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