TDR April 18, 2024: Western Resolve Tested on Arctic-LNG Sanctions
THE DEKLEPTOCRACY REPORT
April 18, 2024
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BOTTOM LINE UP FRONT
Welcome to our eighth issue of 2024! In this issue, we follow-up on our January coverage of Arctic LNG-2, Russia’s giant energy project that the US comprehensively sanctioned late last year. Back then, we wanted to see if sanctions – which had prevented the delivery of specialized tankers and Western equipment – would “kill” the project as US officials had said was their goal. Fast forward to April, and several reports indicate that production has shut down due to the inability to deliver LNG to customers, at least until the facility can be reached by conventional vessels in the summer. Arguably, however, the bigger news is that construction continues at the facility, which was able to take delivery of a key component. It was shipped all the way around the Cape of Good Hope from Asia and within eyesight of a Norwegian Coast Guard vessel–yet no country inspected the vessel. Just as with the case of Putin’s “shadow fleet” of oil tankers, it reportedly spoofed its final destination – a Norwegian port – until the final leg of the journey. And just like with the shadow tankers, the ship’s cargo was no secret, civil society tracked and publicized the boat’s actual location, and no government did anything. Putin is relying on the Free World’s use of passive sanctions without active enforcement to save his project and secure Russia’s role as a key player in the global LNG market.
In the Digest, we look at Ukraine’s campaign to hit Russian refining infrastructure that has taken around 15% of capacity offline, upsetting both the Russians and the Americans, with the latter warning of the threat of Russian reprisals on Western energy infrastructure. The strikes also reflect the success of Ukraine’s domestic drone program and lead us to our second Digest story, an analysis of US drone performance in Ukraine that should serve as a wake-up call for US policymakers as costly gear is falling victim to Russian electronic warfare and tough operating conditions while Ukraine has become dependent on Chinese made drones and components.
In Qui Custodiet, we look at a worrying attack on US and European water infrastructure by a Russian hacking group with clear links to a notorious military intelligence unit but which also appears much less constrained in its actions. We also review a recent Washington Post exclusive about a leaked Russian foreign policy document that says the quiet parts out loud about Russia’s commitment to subverting the US and other “unfriendly states,” which is sobering reading in an election year. In Around the World, we hear about the outgoing Bulgarian prime minister’s concerns about corruption and Russian meddling and revisit Raiffeisen Bank International’s embarrassment when the Financial Times revealed it had posted hundreds of job ads in Russia talking about expanding its local business even as it claimed to be scaling down.
WESTERN RESOLVE TESTED ON ARCTIC-LNG SANCTIONS
In a January newsletter, we looked at the intensive, US-led efforts to slow down, even halt the launch of Russia’s flagship Arctic LNG-2 project and scupper Russia’s plans to triple its LNG exports in coming years. Since then, the American government has not relaxed its rhetoric about the project, with one official telling a conference this week: “Our role is to ensure Arctic LNG-2 is dead in the water.” Fresh reporting since the beginning of April does indeed suggest that LNG-2 suspended new production. At the same time, sanctioned operator Novatek also took delivery of a crucial module by ship despite Ukrainian and international groups alerting Norway of the shipment while en route. In the meantime, Novatek appears to be waiting for the summer thaw to resume production when it can ship LNG via conventional ships. These developments underline the limits of sanctions without accompanying enforcement on the ground or, in this case, on the high seas.
As previously reported, last September, following Ukrainian requests, the US began targeting entities linked to the project and, in November, with a sanctions package directly targeting the Arctic LNG-2 joint venture. The EU also banned the transfer of technology used for natural gas liquefaction. In response, the international participants in the venture cited force majeure on their contractual commitments, forcing future sales onto the spot market. At the beginning of 2024, the question for markets was whether Russia could launch production and deliver LNG to customers.
Reporting by the Wall Street Journal this week suggests that, while Russia scored a psychological victory with the launch of production at Arctic-LNG 2 earlier this year, it does not have the specialized Arctic tankers to deliver LNG to customers. This lack of shipping followed decisions by South Korea’s Hanwha Ocean and Japanese charter company Mitsui O.S.K. Lines to withdraw from the project due to sanctions. According to the newspaper’s sources, “LNG output has ground to a halt, and the facility is mostly recirculating already-produced gas.” Reuters also reported the halt in production in the first week of April.
Crucial delivery
But a production halt has not slowed down work on finishing the facility. At the beginning of April, the Chinese heavy-lift vessel Hunter Star delivered the final 14,000-ton liquefaction module for Arctic LNG-2 after a nearly three-month voyage. Unlike previous deliveries by vessels Audax and Pugnax (operated by Red Box, whose US-born founder has claimed is not breaking the rules) that used the Northern Sea Route, the Hunter Star traveled from Northeastern China to Murmansk via the Cape of Good Hope.
According to Ukrainian civil society sources and corroborated by reporting and analysis by High North News, the vessel displayed the Norwegian port of Kirkenes as its destination in its automatic identification system (AIS). The vessel altered the destination to Murmansk as it rounded the Nordkapp and proceeded to the Belokamenka yard. A Norwegian coast guard ship, the KV Jarl, reportedly monitored the Chinese vessel during the final stage of its voyage.
Multiple sources tracked the vessel’s long journey, and reported on its cargo and actual destination in January. Ukrainian sources described how they, Greenpeace Nordic, the Norwegian Helsinki Committee, and Ukrainian diplomats warned the Norwegian authorities about what they perceived to be the use of the Kirkenes destination in the ASI to evade coast guard scrutiny. They urged the Norwegian authorities to take steps to stop and inspect the vessel, given that its cargo appeared subject to international sanctions. Ukraine issued a circular noting a “narrow, 24-hour window of opportunity for Hunter Star to be intercepted by Norwegian Coast Guard for inspection of the cargo” and even named the KV Jarl as the vessel in position to intercept it.
For Ukrainian civil society activists, the Hunter Star episode represents a lost opportunity to send a powerful signal about enforcement to shippers and the Chinese producers of LNG infrastructure that have replaced South Korean, European, and US manufacturers. One activist pointed out this lack of enforcement also endangers the global shipping industry. Russian suppliers can manipulate AIS signals to obfuscate their destinations. They can transmit false satellite tracks, including positioning data and time stamps. Actual positions retrieved by private VHF antennas and sent to Marine Traffic can be deleted and replaced by manually inserted positions. All these actions imperil safe traffic and raise the potential for a major environmental disaster.
Springtime in Murmansk
While the pause in production at Arctic LNG-2 is a welcome development for US policy, the plant is continuing construction work and preparing to welcome vessels after the spring thaw, when it will no longer depend on scarce Arctic-class tankers. According to High North News (HHN)’s unmatched reporting, the Hunter Star delivery was accompanied by the arrival of hundreds of Chinese workers, apparently to help install up to 20 Chinese-made 300kW ceramic turbines. This equipment will drive the LNG plant’s second train, replacing original plans for a train run by turbines made by America’s Baker Hughes.
HHN also reported that the Northern Sea Route administration granted the first permit to a non-ice class LNG carrier last week. Under recently relaxed navigation rules, vessels without any ice protection could head for Arctic LNG 2 for four months between July 1 and October 31, providing a four-month window for LNG exports.
Overall, the picture is a mixed one, but less rosy than the initial reports of a production halt at Arctic LNG-2 had suggested. The first rounds of sanctions late last year dealt a severe blow to the project but did not prevent it from launching. The continued flurry of activity at the plant suggests that Russia believes it can find a way to deliver the gas once it completes the project. Novatek’s continued ability to receive shipments – not just through the costly northern route but via conventional routes that make vessels slow, easy to track, and open for search on the high seas – indicates that the project is very far from dead. A concerted enforcement effort on the seas and a focus on identifying which Chinese banks are facilitating these transactions are among the most crucial steps needed to stop the project dead in its tracks.
Ukraine keeps hitting Russian oil infrastructure
Amid the failure of the US and the West writ large to provide Ukraine with sufficient ammunition to stay in the battlefield, one achievement stands out in an otherwise grim start to 2024. Since the beginning of the year, Ukraine has taken 15% of Russian refining capacity offline through drone strikes. In a recent report, JP Morgan estimated that drones have hit 18 Russian oil refineries with a combined capacity of 3.9 million barrels per day this year. And the bank believes that Ukraine’s capacity to hit oil infrastructure is increasing as the country’s drone industry keeps producing longer-range kit and utilizes AI to improve precision. On April 2, Kyiv shocked observers when it struck Russia’s Taneco refinery complex, 800 miles from the Ukrainian border.
Russia is feeling the pain. It banned gasoline exports for six months and reportedly asked Kazakhstan to be ready to supply the country with 100,000 tons of gasoline from its reserves if shortages emerge. The US is feeling some pain as well, according to reports. As the Washington Post has chronicled, the Biden administration has repeatedly asked Kyiv to stop targeting oil infrastructure, allegedly citing the risk of Russian strikes on Western energy infrastructure as well as the broader global impact of supply disruptions. While US electoral politics may come into play with the oil price hitting a six-month high, there is a more nuanced argument that hitting refineries mainly achieves disruption rather than lasting damage. Predictably, Russia has also used the attacks to justify large-scale destruction of Ukrainian energy infrastructure.
Ukraine’s continued focus on Russian oil infrastructure directly targets the money funding the Russian war machine. Kyiv’s intelligence and targeting suggest they have a clear plan and rationale for the strikes, with the Taneco attack suggesting more facilities are in range than previously thought. For the US, the price of months of inaction is that Ukraine must adapt its tactics for the weapons that it has and that can deliver maximum effect, including roiling markets, which is a feature, not a bug. Ukraine will have few alternatives until the US and NATO can give Kyiv the arms it needs to stabilize the current situation and pursue strategic targets.
Hard lessons for US drone makers in Ukraine
Much as the machine gun was emblematic of the trenches of the Western Front a century ago, small, armed commercial quadcopter drones have become the iconic weapon of the trenches of Ukraine. Unlike well-known US military drones like the Predator or the 36-foot, $32 million Reaper, which are essentially highly sophisticated unmanned airplanes, the cheap, expendable drones ubiquitous on Ukrainian battlefields function more like flying small arms or piloted artillery ammunition. They are also consumed in staggering quantities, with the Ukrainian armed forces burning through 10,000 drones a month. Against that background, the Wall Street Journal’s recent investigation of the performance of US drones during the two years since the full-scale Russian invasion of Ukraine is tough reading. The piece suggests that the American tech has largely not delivered on the battlefield, proving vulnerable to Russian electronic warfare and often failing to withstand tough operating conditions. Notably, US drone developers report that 2019 US military standards for communications were not sufficient for the electronic warfare environment, while other standards for components and testing make it difficult to adapt rapidly to changing conditions. Most importantly, US-made drones are vastly more expensive than their plentiful Chinese competition.
The WSJ piece is the latest in a series of recent articles, following Foreign Policy’s coverage of the US Army’s Project Convergence exercise earlier this month and a scathing War on the Rocks analysis published in March, which highlight the challenges facing the US military and defense industry in adapting to the drone revolution in warfare. While not every future battlefield will look like Ukraine, and drones won’t soon eliminate the need for tanks, artillery, and small arms, it’s still a safe bet that cheap, expendable, low-altitude unmanned platforms will play an increasingly central role in land warfare and will be needed in vast amounts in any conflict scenario. However, as these articles point out, the US military and defense industry are oriented around expensive, high-end systems procured as part of multi-year contracts, leaving questions about American ability to cheaply mass-produce the basic components needed to supply wartime quantities of low-end drones. Significant government investment in the industry might address this, but Replicator, a Department of Defense drone program, reportedly intends to procure only "thousands" of units. In contrast, as FP notes, China is “poised at virtually every part of the drone and robotics supply chain,” and the Ukrainian armed forces rely almost entirely on both off-the-shelf Chinese drones and Chinese components for their domestic drone manufacturers (Ukraine’s “go-to drone” is made by DJI, a company that the US Congress is currently looking to ban). Having an ally dependent in wartime on a supply chain controlled by its enemy’s “no-limits” partner is worrisome, as is the prospect that failure to establish robust, cost-effective domestic supply chains for drones and drone components may result in US troops “bringing guns to a drone fight” on future battlefields.
Russian state hackers target critical infrastructure
Hackers linked to an infamous Russian military intelligence hacking unit, Sandworm, responsible for major offensive attacks on power infrastructure in Ukraine, have taken credit for probing attacks on water infrastructure facilities in Texas, Poland, and a water mill in France. As reported by Wired, the hacks involved changing software settings and tripping switches, and it is unclear if these intrusions caused any damage. The Cyber Army of Russia Reborn has taken public responsibility for the attacks in videos posted on Telegram. A report published this week by cybersecurity firm Mandiant chronicles how Sandworm fostered the group and may even use it for cover. Of particular concern, according to Mandiant, is that while Sandworm has been much more circumspect in its past actions in the US, Cyber Army of Russia Reborn appears to have no qualms about infiltrating critical infrastructure, raising the issue of how to respond proportionally to a quasi-state actor. The one clear takeaway is that Russia is vastly increasing the risk of cyberwarfare through the continued cultivation of hacking groups that act as arms of the country’s intelligence services.
Leaked document reveals Russian information offensive
This week, the Washington Post’s Catherine Belton published details of a classified 2023 Russian policy document that outlines an “offensive information campaign” aimed at subverting the US and other “unfriendly states”. As the story notes, the document is striking for providing confirmation of many of the suspected elements of Russia’s hybrid war against the West going back a decade or more. The document is a classified addendum to the official Concept of the Foreign Policy of the Russian Federation, which softens its anti-Western rhetoric by claiming that Russia is not the enemy of the West. The leaked document is much blunter about taking offensive action against the US and its allies. It notes: “It’s important to create a mechanism for finding the vulnerable points of their external and internal policies with the aim of developing practical steps to weaken Russia’s opponents.” The paper makes clear the stakes for Russia in Ukraine, the outcome of which will “to a great degree determine the outlines of the future world order.” The article notes that the policy document is one of several leaks that make clear that Russia can and will support propaganda campaigns supporting isolationist and extremist policies in Western countries. With the US election approaching, law enforcement and civil society, as well as media and social media platforms, will need once more to be vigilant in identifying false and misleading stories that are coming out of Russian influence networks that feed mistrust and division without trampling on the rights of people to hold unpopular and divisive opinions.
Bulgarian PM calls out Russian meddling
Nikolai Denkov, who stepped down as Bulgaria’s prime minister last week after the collapse of his coalition, recounted in an interview with the Financial Times how his government had struggled to root out graft and deeply entrenched connections to Moscow. He said the issue of Russian influence and corruption were deeply linked and exacerbated by energy deals made by previous governments with Russia’s Gazprom, including the TurkStream pipeline project. Leaked emails showed that Russian officials and gas executives had full control over the construction of the pipeline through Bulgaria despite claims by then Prime Minister Boyko Borisov’s claims that it was under Bulgarian control. In his FT interview, Denkov also criticized the continued political influence of Bulgarian businessman Delyan Peevski, who is under US and UK sanctions, with the US citing his “extensive role in corruption in Bulgaria.” Denkov noted that Bulgaria’s production of arms for Ukraine continues at full capacity and underlined that Sofia remains wary of Russian attempts to sabotage the plants or shipments following a July 2022 explosion at an arms depot attributed to Russia.
Raiffeisen is hiring in Russia
Last month, we reported on Raiffeisen Bank International (RBI), the largest foreign banking brand operating in the Russian market, amid growing pressure from the US on the bank to take a decisive step to spinoff the Russian business, sell it to a third party, or take a write-down. Yet an investigation by the Financial Times found that the bank had posted more than 2,400 job advertisements, including 1,500 for sales management and customer service roles since December, suggesting the bank is actively growing its Russian presence despite the bank’s public pledges that it plans to exit the Russia business. When contacted by the FT, the bank’s CEO launched an investigation and made a statement that the language in job ads about expansion was “boilerplate” from before the war and that “the reduction of the Russia business will continue.” As the article notes, Raiffeisen has increased total employee numbers between February 2022 and December 2023. A charitable explanation is that RBI needs to maintain the business until it disposes of it and claims churn rather than expansion prompted the hiring ads. A less charitable explanation is that RBI does not fear US action. The episode is also another reminder that RBI’s continued dithering over the fate of its Russia business means continued scrutiny and ever greater odds of being on the wrong side of enforcement by the US and possibly even the EU.