Following Russia’s invasion of Ukraine, the West and its allies imposed a series of sanctions to cut dependence on Russian oil and gas imports, as well as hit Russian import earnings. Ihor Moshenets at the Central European University points to a serious sanctions blind spot: Rosatom, Russia’s nuclear major. Rosatom has avoided sanctions because it is ostensibly a nuclear technology provider, with long term commitments to Europe that do not involve oil and gas. But Rosatom has subsidiaries that provide key LNG technologies, including cryogenic systems for LNG liquefication, LNG loading arms, turboexpanders, valves and heat exchangers. And Rosatom is being backed by the Kremlin to achieve its goals of expanding LNG exports to substitute for lost European customers, and creating home-grown LNG support technologies to substitute for lost EU and US suppliers of key elements of the production chain. The next rounds of sanctions should obstruct the Russian state’s growing localisation of LNG equipment manufacturing, and that means targeting the Rosatom subsidiaries, says Moshenets. The designers of Western sanctions should not forget their initial idea of targeting the whole Russian LNG production chain, including manufacturing equipment.
Russian oil and gas revenues down to a three-year low
To begin with, liquid natural gas (LNG) development is one of the key elements of the current Kremlin energy strategy aimed at ensuring the stable inflow of budget revenues to ensure the smooth functioning of Putin’s regime and its ability to conduct wars.
The main Kremlin headache in this regard: the loss of a large part of the European market to its natural gas exports. According to the data from Bruegel, the Russian pipeline gas exports to Europe dropped fivefold from 155 bcm in 2021 to only 27 bcm in 2023. Due to the fact that the European market had accounted for nearly half of total Russian exports, that posed a substantial problem for Russian elites on how to substitute for these lost amounts in conditions of dropping prices after their abnomally high crisis levels in 2021-2022. In 2023 Russian oil and gas revenues dropped by 24% to a three-year low. Recent financial problems at Gazprom, which announced annual net losses of $ 6.9 billion and a decrease in gas output by 9%, are additional illustration of this tendency.
Building pipelines in the eastern direction was the most obvious solution, but is a costly enterprise. This was shown by the lack of progress of Russo-Chinese talks about the launching of the Power of Siberia-2 pipeline; Beijing with its diversified import portfolio is not interested in a substantial increase of deliveries via the Russian route. Putin’s visit in May hasn’t brought about any breakthrough on this issue, despite being much anticipated by Russians.
LNG as the Kremlin’s savior
SOURCE: Center on Global Energy Policy at Columbia SIPA
LNG is, however, a different story. Rapidly developing East Asian markets are one of the key drivers of global LNG production growth. This region is traditionally offering the highest prices, forcing producers to compete for the share of the most lucrative market.
Therefore, Russians are extremely ambitions in their push for LNG: the Kremlin announced plans to produce 100 million tons of LNG until 2030 – a substantial increase from current 33 million tons of production in 2023. This amount will allow them to replace the largest part of lost Gazprom revenues in Europe by transporting natural gas via sea elsewhere.
This replacement is foremost targeting the lost pipeline export market, since LNG was left outside the scope of European energy sanctions, and only recently the situation started to change. Despite the February 2022 invasion, Russian LNG exports to the EU increased by almost 40% and remained stable, equaling approximately 35 bcm. In May 2024, European Commission finally announced the proposals for sanctioning this industry, however sanctions are concentrating on transshipment, non-connected to the gas grid LNG-terminals and investment bans. A full-scale import embargo is not being considered yet, similar to the one announced by the US in March 2022 (although the US, unlike the EU, was never a significant importer of Russian LNG).
Nevertheless, unlike Europe’s stalled progress on this issue, recent rounds of US sanctions in November 2023 and April 2024 appeared to successfully cause additional hurdles for Russian LNG projects. For example, the sending of force majeure notices to clients of Novatek’s Artic LNG-2 project at the end of the previous year and sources of Reuters claimed in April that the project has stopped its production .
Faced with new sanctions challenges, Kremlin elites began to elaborate plans for adaptation to the new realities. These plans combined counter-sanctions, a diversification of export routes, and import substitution for manufacturing technological equipment.
Manufacturing LNG equipment in Russia
The last dimension was especially important for LNG. The exit of foreign companies, such as the US’s Baker Hughes and Air Products, Sweden’s Linde and France’s Technip created substantial hurdles for expanding the liquefaction capacity of Russian facilities, especially concerning the flagship Arctic LNG 2 project.
According to Russian data, at the start of full-scale invasion of Ukraine, the Russian LNG industry was 70% dependent on the deliveries of foreign equipment. The new Russian strategy presumes the attainment of full self-sufficiency in this sphere by 2030. In 2022, based on consultations with Novatek and Gazprom, Russian decision- makers defined 18 technological priorities of import substitution in LNG sphere (as of 2024, the list was expanded to 22 positions).
Map of Russian LNG projects, 2020 / SOURCE: Researchgate.net
These developments are also partially addressed by previous western sanctions. A special role in this regard is played by US restrictions targeting many important actors in the Russian LNG industry by imposing on them the highest level of US sanctions – inclusion in the Specially Designated Nationals and Blocked Persons List (SDN-List) administered by the Office of Foreign Assets Control by the US Department of Treasury.
The SDN-List included such Russian companies as:
major private LNG developer Novatek;
Ruschemalliance, co-owned by Gazprom, which constructs LNG plant in Ust-Luga (potentially the largest Russian LNG production facility);
NIPIGAZ, EPC contractor for Novatek’s Artic 2 LNG project;
Kriogenmash and Kazankompressormash, equipment suppliers for Novatek’s Yamal LNG project;
Rostec’s subsidiary United Engine Corporation which has manufactured Russian substitutions for Mitsubishi Heavy Industries’ gas turbines.
However, a large part of import substituting activities remain unsanctioned due to the important loophole in the sanctions regime – Rosatom which is becoming one of the key drivers of localisation of LNG equipment in Russia.
Rosatom is a driver of LNG import substitution
Unlike other branches of the Russian energy industry, the Russian civil nuclear industry was left outside of the scope of the sanctions due to the limited number of alternative suppliers of fuel and services on world markets. The recent embargo on Russian uranium imports voted by the US Senate at the beginning of May became the first important move to change the status quo for this industry.
Despite that, only some Rosatom’s subsidiaries were put in US SDN-list. These entities are predominantly dealing with shipping or cooperation with military industry (procuring microelectronics), leaving the main technological activities of the group untouched. Hence, the unsanctioned Rosatom’s subsidiaries are continuing to expand their activities. If left without attention, this tendency will have a huge negative impact on Western sanctions against other industries in the Russian energy sector, while they designing their new rounds of sanctions.
Why is Rosatom a critical element of the Kremlin’s LNG strategy? There are three main reasons for that.
…Rosatom subsidiaries manufacture LNG equipment
First, Rosatom subsidiaries are manufacturing various types of LNG equipment, which are playing a crucial role in the previously mentioned lists of 18-22 strategic priorities of Russian LNG import substitution. Being the pioneering manufacturer of cryogenic equipment for large-scale liquefaction projects, Rosatom has a unique role in the Russian economy as a key pillar of the commissioning of massive LNG export-oriented projects without the involvement of western technologies. Of course, the creation of pilot examples of localised technologies are not guaranteeing that their quality would be on the same level as respective Western models, but the seriousness of Russian attention to this dimension should not be ignored.
Half a year before the full-scale invasion of Ukraine, Rosatom’s mechanical engineering division Atomenergomash opened a test rig for LNG equipment in St Petersburg. Moreover, Atomenergomash is manufacturing cryogenic (working under conditions of extremely low temperatures) LNG pumps (pumping LNG from the liquefaction facility to the floating carrier), valves and medium coil-wound heat exchangers (aluminium process tubes cooling natural gas) – all the elements needed for the process of liquefaction – transforming natural gas into its liquid form under low temperature. According to an interview of the company’s officials, the main priorities of Rosatom’s subdivision after February 2022 regarding the import substitution plan was to launch production of turboexpanders (which are cooling the natural gas to liquid form during the later stages of liquefaction process ), LNG loading arms (tubes in which LNG is transferred to the tanker) and large-capacity spiral heat-exchangers.
LNG Supply Chain Model / SOURCE: Energy Education
A special role in these Atomenergomash activities comes from the manufacturing facility of OKBM Afrikantov located in Nizhny Novgorod – the administrative center of the Volga Federal District. This entity created the first Russian large-scale cryogenic LNG pump, is working on LNG loading arms, and since 2022 was cooperating with Novatek on the elaboration of Russian turboexpander.
Zio-Podolsk located in the Moscow region is another Rosatom unit heavily involved in LNG industrial development. It has pioneered for Russia the technology of spiral heat-exchangers. Also, it supplied ethane evaporators, essential for the process of liquefaction for Novatek’s Yamal LNG Projects. Together with already sanctioned Gazprom-connected Ruschemalliance, Zio-Podolsk is one of the main players in localising Linde’s LNG technologies, especially turboexpanders. Rosatom’s subsidiary expertise is based on its earlier contracts with Cryostar, the French Subsidiary of Linde. Therefore, it is not surprising that an external meeting in November 2022 of the Industry Committee of the Russian Parliament on LNG import substitution was held on the territory of a Zio-Podolsk facility.
Both Zio-Podolsk and OKBM Afrikantov are involved in the manufacturing of the RITM-200 small modular reactor. This model line is considered by the Atomenergomash leadership as an important element of developing Russian nuclear-powered shipping and is planned to be further expanded. When the technologies of small modular reactors enter the market by the end of this decade, RITMs will be competing with western projects developed by EDF, NuScale, Rolls-Royce, Westinghouse, etc. and will become an important factor in expanding Rosatom’s presence abroad.
Another challenging task for Russians is developing their own LNG tankers, especially after sanctions stalled their orders in South Korea. Russian ships of Arc7 type are currently constructed at the Zvezda Shipbuilding Complex. Despite that, Rosatom’s entities are also playing a the crucial role here: Atomenergomash and OKBM Afrikantov together with the Krylovskiy State Scientific Center are elaborating fully localised autonomously produced cargo containment systems for Russian LNG tankers – an effort to provide an alternative to the French GTT which has a world monopoly in manufacturing this kind of equipment. Russian substitution is manufactured with the use of synthetic materials produced by another Rosatom subsidiary Umatex (which, unlike Atomenergomash and OKBM Afrikantov, has already been put on the SDN-List).
…Rosatom is one of the largest recipients of state funds for LNG R&D
Second, Rosatom is one of the largest recipients of state funds for R&D in the LNG industry and, strengthened by its own financial prosperity, will only expand these types of activities.
The previously mentioned LNG test rig took almost half of the financing of the state program aimed at developing novel models of Russian LNG equipment – 1.3 billion out of 2.8 billion rubles, envisioned for 2018-2021.
These amounts of support for import substitution were substantially lower than the amounts preferred by Russian developers, which were almost ten times larger. In August 2022 the new program provided only 1 billion rubles. Nevertheless, in April this year, after the winter round of US sanctions against the Russian LNG industry, Kremlin officials made the decision to expand substantially the funding of the LNG equipment development program to 24.3 billion rubles on a co-financing basis with Novatek.
Taking into account the substantial role of Rosatom’s entities in existing production, one might assume that the state funding of its LNG programs will also increase. At least, Rosatom subsidiaries are very positive about expanding activities: The Atomenergomash leadership have already announced that the company’s personnel had grown by 1,000 in 2023, and they envision adding 2,200 new jobs in 2024. This reflects the overall trend of Rosatom’s prosperity after Russia’s full-scale invasion of Ukraine – the corporation’s total annual revenues doubled in 2022 compared to the year before and revenues from foreign projects increased by one third.
…Rosatom is well connected with other Russian energy majors
Third, Rosatom is well connected with other Russian energy majors, making it much easier to help their peers avoid sanctions.
In March of this year, Putin made a public statement calling for the state security service, the FSB, to help Russian companies circumvent Western sanctions. That centralisation of state efforts might increase the likelihood of instrumentalising companies as intermediaries in the creation of new shadow production chains, outside the scope of the sanctions.
Rosatom has all the needed preconditions to perform such an intermediary role, especially taking into account the increased militarisation of internal company governance after the full-scale invasion, explored in detail by the European environmental organisation Bellona, and the precedents of exploiting its non-sanctioned status for importing components for weapons and other military equipment, investigated by journalists from Washington Post.
In 2019 and 2022, the nuclear giant signed two memorandums with Novatek, the largest Russian private gas extracting company and key player in the country’s LNG market. Apart from cooperation on logistics decisions for North Sea Route shipping, significant also for LNG transportation, the two companies are also close partners on liquefaction processes: Novatek is the main client for cryogenic equipment manufactured by the Atomenergomash unit OKBM Afrikantov.
Map of Novatek’s Arctic LNG 2 Project / SOURCE: NS Energy
Rosatom’s entities are also supplying some oil and gas equipment technologies to other Russian companies, such as oil giant Rosneft – operator of the Sakhalin-1 project and the third major corporate force in Russian LNG export potential. Rosneft’s role in Kremlin LNG plans is also expected to be increased, especially after the law allowing LNG exports from the Arctic region was signed by Putin in November last year, opening an opportunity for 36 Rosneft-owned hydrocarbon fields. In 2015, Rosatom and Rosneft signed a comprehensive cooperation agreement and the website of Atomenergomash lists Rosneft as one of its main clients in delivering equipment for the oil and gas industries.
The way forward: granular sanctions and macro-decisions
To conclude, in order to be effective in stopping the development of the Russian LNG industry, the Western sanctions regime needs to become more granular and be expanded to cover smaller and emerging producers of equipment, as well as on subsidiaries of Russian energy majors, such as Rosatom’s Atomenergomash and its subunits OKBM Afrikantov and Zio-Podolsk.
The improvement of the sanctions regime could stick with the initial Western approach where restrictions on imports in the form of embargoes or creating logistics problems (via insurances, sanctioning shippers) is coupled with measures aimed at not allowing the transfer of Western technologies or their localisation. Both elements are essential parts of the success of the sanctions, and the next rounds of sanctions should reflect the Russian state’s growing attention to the localisation of LNG equipment. It is worth noting that there are already precedents of selective sanctioning of Atomenergomash units without targeting the whole company. In July 2023, the US Department of State imposed sanctions on AEM Propulsion which produces propulsion systems for shipping.
Of course, one needs to be aware of the broader political implications of such granular decisions requiring broader diplomatic coordination. It is clearly observable that previously established economic ties with US allies and NATO members are instrumentalised by Russia to make sanctioning specific entities of its nuclear industry politically harder. Atomenergomash still has production facilities on EU territory. Since 2007, a Rosatom subsidiary has owned Czech company Arako, which produces valves and valve fittings for nuclear power plants and other types of industrial facilities. Additionally, via its holding structures, it owns Hungarian company Ganz Engineering and Energy Production Machinery LLC, oriented to support Rosatom’s Paks II nuclear power plant construction, as well as having contracts in Georgia and announced interest in other markets. Moreover, Atomenergomash (with the involvement of both OKBM Afrikantov and Zio-Podolsk) delivers equipment for the Akkuyu nuclear power plant in NATO-member Turkey, the first such facility in the country. In addition to that, sanctioning Atomenergomash needs reflecting on the effect on China, where Rosatom’s subsidiary is delivering technological components for the Tianwan and Xudapu nuclear power plants.
On the other hand, the unresolved issue of Rosatom’s impunity regarding sanctions will only create the incentive for the company’s leadership to expand its activities to capitalise on the opportunities to avoid sanctions. And that sanction avoidance has significance not only for the energy sector, since many of these facilities are also used for military purposes (as all of Russia’s military nuclear fleet is operating with OKBM Afrikantov’s reactor units). Therefore, the economic measures against the Russian energy sector need to have a holistic nature without leaving key industries outside the scope of sanctions, as it still does to a large extent with Russia’s civil nuclear energy industry, represented by Rosatom.
One might assume that the future effectiveness of the sanctions regime would be defined by something similar to the Darwinian theory of “evolving adaptation” – who will be faster in responding to the measures of the other side by effectively circumventing existing restrictions or neutralising ways of circumvention by progressive adaptation of the rules. And the recent financial hurdles of Gazprom and reported problems with oil payment collection demonstrates that the West is in a very strong position to win this race.
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Ihor Moshenets is a PhD Candidate at the Central European University
