Russian oligarchs Gennady Timchenko and Leonid Mikhelson, close to the Kremlin, are counting on the newly elected US President Donald Trump to end the war in Ukraine next year. That is why they have already managed to make efforts to improve relations with Washington and lift sanctions on their company Novatek, which is the largest producer of liquefied natural gas (LNG) in Russia.

Ukrainian Energy has delved into the details and prospects of this plan, as well as the schemes that Novatek is using to strengthen its presence in the premium LNG market.

The desires of the oligarchs

Reuters, citing several sources, reported the other day that Gennady Timchenko and Leonid Mikhelson are concerned about the future of the flagship Arctic LNG 2 project - a liquefied gas production plant that Novatek is building in the Tyumen region on the basis of the giant Utrennye field. In November 2023, it was hit by US sanctions, which caused problems in its implementation.

Now, according to Reuters, Novatek's top managers are trying to improve relations with Washington, and therefore have begun cooperation with lobbyists. "In the coming weeks, the Russian company and American lobbyists plan to contact US government agencies," the agency's sources note.

Novatek intends to prove that it is not financing Russia's war against Ukraine. To prove this, it wants to use the argument about its "unprecedented preferential tax status" in Russia: the Arctic LNG 2 project is exempt from paying taxes until 2030, as are the gas fields that are its raw material base.

Gas ambitions

But from the very beginning of creating a business built on a partnership with the French corporation TotalEnergies, as well as Chinese and Japanese investors, the plans of Novatek's owners were different. By launching Arctic LNG 2, they hoped to help Russia capture more than 20% of the global LNG market by 2035, up from the current 8%. Last summer, Vladimir Putin took part in a ceremonial ceremony to send the first cargo of liquefied gas from Arctic LNG 2. The Kremlin called the event a “technological breakthrough” that demonstrates “independence from foreign technologies in the field of gas liquefaction” and Russia’s ability to achieve “technological sovereignty.”

In November 2023, Arctic LNG 2 was hit by US sanctions, which led to the suspension of liquefied gas production. On the other hand, one of the main owners of Novatek, Gennady Timchenko, also sought to challenge personal sanctions in a European court last year. He tried to prove that his acquaintance with Vladimir Putin did not mean his personal support for Russia's war of aggression in Ukraine, but the attempt was unsuccessful.

European loopholes

US Assistant Secretary of State for Energy Resources Jeffrey Pyatt says that the State Department is aware of the visit of Novatek representatives to Washington. However, he believes that it will not be possible to achieve "significant success" in improving relations with the Joe Biden administration of the company, since "it is too early to return to the old and conduct business as usual." "Russia is in the penalty box, so my job is to make sure that it remains there as long as possible - of course, while the illegal war continues," the diplomat noted.

However, changes in the presidential administration, expected in January after the inauguration of the newly elected US President Donald Trump, open a window of opportunity for Novatek to ease the sanctions pressure on its business.

In addition, the German market is a priority for Novatek - this country, whose economy was dominated by another Russian corporation, Gazprom, before the start of the large-scale war in Ukraine, is the leading gas consumer in Europe. Last week, the World LNG Summit was held in Berlin - a large-scale event that brought together the leading players in the global liquefied gas industry. Novatek's Singaporean subsidiary, Novatek Gas & Power Asia, was also among its participants, Desmog reported.

Although Germany does not currently receive Russian LNG directly, it can reach its consumers through pipelines from neighboring countries. In addition, the German state gas company SEFE, previously known as Gazprom Deutschland, has contracts for the supply of LNG with the trader Yamal Trade PTE - another Singaporean company owned by Novatek.

“Since the EU has not yet imposed sanctions on LNG from Russian sources, there is currently no legal basis for terminating (or suspending) the supply contract,” said Jan-Peter Haak, SEFE’s press secretary.

LNG from Novatek has become a key source of gas for Europe in 2024. According to estimates by the Bruegel think tank in Brussels, Russian LNG supplies have reached a record high: at the beginning of November, their volume amounted to about 19 billion cubic meters, which is 18% more than in the same period last year.

Oleg Savytsky, manager of the Ukrainian NGO Razom We Stand, which is pushing for an embargo on Russian hydrocarbons, believes that since the maritime trade in Russian gas is still not subject to EU sanctions, Novatek can continue its business with Europe without facing major problems.

“With the assistance of Novatek co-owner Leonid Mikhelson, other representatives of Vladimir Putin’s inner circle, Gennady Timchenko and Petro Kolbin, have made Novatek an alternative to Gazprom. Until Mikhelson is personally sanctioned, the Kremlin has a negotiator who can negotiate “deals,” and he is already reaching out to Donald Trump,” Oleg Savytsky noted in a commentary for Ukrainska Energetyka. At the same time, the expert added, companies such as Total Energies, which continue to import significant volumes of Russian LNG, “are both profiting from the brutal war in Ukraine and helping Putin stay in power.”

Schemes with intermediaries

Last month, satellite data published by Bloomberg showed that activity at the Arctic LNG 2 construction site had fallen to its lowest level since 2019.

It was a sign of how sanctions are hindering Russia’s ambitions to become a leading player in the growing LNG market. But the West’s efforts are not yet enough to completely block them.

Analysts at Arctida, a non-profit organization that monitors the transparency of climate finance in Russia’s Arctic region, last week published a study showing how Novatek is circumventing US restrictions to continue building Arctic LNG 2 through intermediaries.

The authors of the study, in particular, found out the role of the little-known company Waterfall Engineering Ltd, which was registered in the United Arab Emirates last year, in this case. If in the last three months of 2023 the volume of its supplies to Russia amounted to 103.6 million euros, then in the next quarter (January - March 2024) it increased more than threefold - to 313.2 million euros.

An analysis of customs data showed that Waterfall Engineering serves only one client - Arctic LNG 2. The first delivery ("steel products intended for the LNG production, storage and shipment plant" manufactured by the American company Bakers Hughes worth 17.3 thousand euros) fell on October 16, 2023 - a few weeks before US sanctions officially blocked the project.

"The company's very scheme of work demonstrates a sophisticated circumvention of sanction barriers. Deals are made in euros, equipment is purchased in third countries to avoid contact with American banks. But such a subtle game is always associated with risk: the company's too rapid growth and narrow specialization made it an easy target. In August 2024, Waterfall Engineering was added to the US sanctions list. This is like a warning to others: hide-and-seek games will not last long,” the study says.

How to increase sanctions pressure

Experts from the Ukrainian Trap Agressor project, which studies sanctions policy against Russia, concluded that it “resembles a game of tag or the cartoon “Tom and Jerry”: Ukraine's partners introduce new restrictions on Russian business, and it “finds new ways to circumvent sanctions in order to continue supplying its war machine.” In order for sanctions pressure to become more effective and bring about the desired results, representatives of the public have prepared a “sanctions to-do list” for partners, which includes several measures.

In particular, coordination of restrictions through synchronization of sanctions lists and information exchange; secondary sanctions for “third” countries that will prevent the supply of critical components and raw materials through intermediaries; increased pressure on the aggressor’s energy, logistics, and defense industry; timely updating of sanctions policy taking into account new threats, technologies, and changes in the international economy; introduction of standards of responsibility and accountability of businesses for compliance with sanctions.

The last item in the list of measures can become not only a real innovation in corporate governance, but also significantly weaken the economy of the aggressor country and its military potential. “While effective sanctions regimes cannot deter Russia from violating international law, they can ensure accountability for those who enable such actions and make it significantly more difficult or impossible to supply prohibited goods in circumvention of sanctions,” conclude Trap Agressor analysts.

Svitlana Dolinchuk, specially for Ukrainska Energetyka.