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US Mulls More Sanctions: Another Gift to Russia?

New sanctions could help further diversify Russia's energy sector

This post first appeared on Russia Insider

Recently thought up and expanded additions to Russian sanctions, due for review and signing on July 10 might turn out to be another US gift to Russia with unintended consequences. The new sanctions Bill No. 232 has been written with the assumption the US is empowered to prevent non-US companies from trying to invest in advanced tech drilling such as Arctic, offshore drilling or fracking in Russia. Democratic principles and free trade aside, to what practical or pragmatic end? Punishment or in fact reward?

Russia’s economy has not only emerged from a two-year recession, but is now trying to diversify from its historically heavy reliance on oil and gas. To date and from latest economic figures to hand, the Russian economy excluding oil & gas is in fact growing faster than the hydrocarbon sector.

Renewable or green energy does not (yet) fall under any sanctions restrictions if components used are not termed ‘dual use’. This allows for easier access to Western funds and technology if they are needed.

One company doing significant alternative energy business in Russia is Enel S.p.A. (“Enel”), acting through its subsidiary PJSC Enel Russia ( Enel was awarded two wind projects for a total capacity of 291 MW within the 2017 Russian government tender for building up 1.9 GW of wind capacity in the country. The overall investment in the two Enel wind farms is approximately 405 million euros. The two plants will sell their energy in the Russian wholesale market. This tender is just part of the Russian government program to achieve its targets of 4.5% of energy generation from renewables and 5.5 GW of installed renewable capacity by 2024.

A number of industrial projects are being developed in Siberia and the Russian Far East, which will require according to conservative estimates additional power by a factor of 20-23+% in those areas by 2022. This is only one factor at play easing market entry and use of expanded energy renewables in this mostly hydrocarbon country.

Today hydropower comprises almost half of Siberia’s installed generating capacity and its share of output is expected to increase from 48% in 2016 to 51% by 2022.

Sanctions have certainly improved Russia’s Agribusiness sector strongly, and the prioritization for further improvement in domestic food supplies both in produce and livestock. It should not come as a surprise that both biomass and biofuels are starting at very early stages to play a growing role in energy production. This is especially true in livestock farming and the reutilization of animal waste to generate local power.

According to the USDA’s Foreign Agricultural Service Global Agriculture Information Network, they say biofuels make up only 1.2 percent of energy production in Russia, with biomass accounting for only 0.5 percent. Nonetheless, Russian companies are tapping into various natural resources, wood pellet production for domestic use and export is one such example.

Growth in pelletized wood has increased on average since 2014 by 10% pa, and will likely continue to increase by 10%, or to 1.45 MMT during 2017. This has been driven by European demand, steady increasing interest from the Asian markets plus strong local consumption. In Russia, producing wood pellets is largely much less expensive than gas.

Closer to large urban areas such as Moscow, we are now seeing alternative energy companies like JSC MDT ( who have set up a biodiesel production facility using various bio-organic feeds like used vegetable oils and organic waste. This development has been demand driven and fueled by the need to legally dispose of certain types of organic wastes. It is also a byproduct of new laws being enacted governing responsible waste disposal and use.

Recently a major scandal surfaced in Moscow’s ‘Balashikha’ neighborhood that had national news coverage and resulted in the closure of a massive waste landfill known as the ‘Kuchino polygon’ for a number of serious polluting violations. The dump was opened in 1964 and was used primarily as an open waste disposal depot covering an area of 50+ hectares which became wholly surrounded over the years by residential high-rises.

The dump was so large that photos were taken of it from space, and until this past week was accepting over 600,000 tons of Moscow and surrounding area garbage per year. The stink as well as a significant increase in respiratory and other illnesses finally forced resolution of the issue with the personal intervention of President Putin.

As is the way of most such bizarre, health-hazardous happenings, I am certain that a large number of similar landfills throughout Russia will now be found and named by the citizenry and the press to be in serious violation of the law, it is a start. It is also a major opportunity for those companies who specialize in managing and utilizing such waste.

The dump scandal has re-emphasized the acute need for common sense waste utilization technologies and techniques. It has been estimated that if the dump were lined and capped, the resulting methane capture, when converted to say methanol, could power the city of Balashikha and still export power to Moscow proper, cheaply and cleanly.

While purists as may not consider flared gas a ‘green’ source of energy, it is in fact wasted potential energy and money going up in smoke (that is a pollutant). Russia is the largest source of flared gas in the world.


Fig 1: Global Top-20 Gas Flaring Countries Determined by Satellite Sensing.


As one can see from the above chart, there is no shortage of gas being simply flared in Russia. Inroads have and are constantly being made among the majors who can concentrate some of the flared capture and process it at large GTL facilities.

The problem however is that the vast majority of these flaring sites are remote, not large, and barely accessible. The difficulties in capturing and doing something about flared gas is the same in the oil fields of North Dakota as the remote oil fields of Siberia, offshore and the Arctic in converting such waste gas to commercially viable liquids.

This is now changing with the advent of companies like GasTechno (, who recently have begun to work in Russia (GasTechno Energy). Until now, the costs associated with implementing traditional gas-to-liquids technologies kept mid-level and remote producers out of the gas conversion market.

The fact remains there are vast reserves of natural gas that cannot economically be distributed to local energy markets. GasTechno today brings to the market the ability to process flared gas at just about every oil &/or gas site by processing in small shipping container sized plants, with the added bonus of being able to self-generate the needed power to allow this and other processes. By converting this stranded gas into liquid fuels and chemicals it becomes possible to monetize these underutilized or flared reserves. Using the new technology the methane found in remote and undeveloped areas becomes a highly valued commodity: methanol.

The story and the commercial future of methanol is just now being written, it is one of the most important intermediaries in the synthesis of clean fuels and a number of petrochemicals. It is the 19th highest produced organic chemical, but it is a derivative for 17 of the top 20. The fastest growing uses of methanol are formaldehyde (resins), olefins (ethylene & propylene), gasoline, DME (a diesel and LPG substitute) and the blended or direct use of methanol as a fuel, (M15, M85, M100 and fuel cells.). Methanol blends make superior fuels; improve combustion, increase octane and burn cleanly. It can be blended directly with gasoline to improve its octane rating and combustion, reduce emissions (notably SOX and NOX). It is also a key additive to biodiesel to ensure stability, viscosity and clean burn in a range of climatic conditions.

The Russian solar sector is also attracting international investor attention. Since2014, China’s Solar Systems (, the subsidiary of Chinese electric equipment maker Amur Sirius, is investing up to $1 billion in Russian solar energy projects. Three projects with the total capacity of 175 MW are already underway, and the construction of a solar panel factory is now almost complete. China’s interest in the Russian solar market is based upon the large and growing potential of the Russian internal electricity market.

The other side of the coin is that the wind resource potential of Russia is viewed for its nearby export potential back to China. Development is becoming rapid with China’s State Grid Corp signing with the Russian Energy Agency for building high-voltage transmission lines the lack of which has been the key problem in enabling China to transmit renewable energy power generation from solar and wind in Russia to the cities in eastern China.

Russia is a late starter, but no novice to alternative energy. Back in the communist era, the USSR was the first nation in the world to construct utility-scale wind turbines, and that was in the 1930’s! In the 60s, the USSR launched a tidal electric plant and took the global lead in building geothermal power plants, even before Iceland took the title generating almost all its energy from geothermal and hydroelectric power sources. There are currently around 100 MW of geothermal power plants operating in Russia, and about 55 MW of planned additional capacity.

Some of Russia’s technological edge in solar is a byproduct of its space program which makes wide use of solar power generation. In transport also for example, through developing and building its electrified railroads Russia although decades later than the US, has now taken the lead. Today, 60% of Russia’s railway systems are electrified, several times that of the USA. If you look also at hydroelectric power, Russia generates 17% of its energy from renewable sources, compared to 12% in the US.

The door to Russia’s alternative energy world is wide open to the world, and Russia is a welcoming partner for pragmatic and well thought out projects in just about every area of renewables provided they make economic sense and can stand alone. The fly in the ointment is of course sanctions imposed by the USA and EU. Nevertheless, some pointers (courtesy of OKPO Russia Market Partners) for those who see the business case to set up their business in Russia and would like to determine if there is a business fit:

  1. Ensure that none of the technology or equipment that your company ships or sells to a purchaser in Russia could “conceivably” be put to military use.
  2. Obtain the name (and if an individual, the date and place of birth) of each Russian purchaser of any technology or equipment that will be shipped or sold by your company. Check the names (and if individuals, the dates and places of birth) of the Russian purchasers against the Russian individuals and entities listed in the regulations enacted by the Council of the European Union and US Gov’t.
  3. If none of the technology and equipment shipped or sold by your company can be put to military use, and none of the Russian purchasers appears on any of the lists, your company should be able to proceed with the transaction without concern.
  4. If, however, the technology or equipment shipped or sold by your company can be put to military use, or one or more of the Russian purchasers appears on the lists, then your company is advised to consider carefully the risk in proceeding with the transaction in Russia, and not stepping on the acutely tender toes of the US or EU.
  5. Think “localization” when working in Russia. If something can be built in Russia and not imported, it will make your business much easier in the long run, as well as being supportive of the local economy.

The old together with potentially new sanctions imposed against certain Russian individuals and companies can make doing business in Russia somewhat risky especially for those companies based in the US or EU. This has been a key driver lately in the growth of ultimately foreign owned yet Russia registered businesses. It is hard to make projections when you can’t tell when political petulance and fantasy crosses over the line and restricts open trade in the real business world.

However, by following the guidelines described above, you can minimize risk, and conduct your business operations in Russia without violating US or EU restrictions.

Always do your full due diligence and check with relevant professionals for updated restrictions impinging on the conduct of your business.

Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia

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