The combination of low oil prices and international economic sanctions have thrown Russia’s oil industry into chaos.

Oil production in the country was expected to exceed 11 million barrels a day by 2019 but is now expected to fall to below 10.5 million barrels over the next five years, according to a new report from the International Energy Agency (IEA). By 2020 oil production is not expected to have fallen by 560,000 barrels per day.

Here’s the key chart:

The combination of price falls and sanctions have had a “crushing impact”, the IEA warn, as the lack of access to international markets has meant firms have been unable to plug the financing gap caused by cheaper oil.

Russia’s major commodity producers, including Gazprom, Lukoil and Rosneft, were directly targeted by Western sanctions over the country’s involvement in the ongoing crisis in Ukraine.

Many of these companies have been forced to cancel or postpone exploration projects projects aimed at expanding supply, while international partners have also been playing it safe and holding off doing business in Russia while sanctions remain. 

On Monday, Rosneft announced that its 2015 investment programme would remain at the same level as last year, unwinding a previous commitment to raise investment by 30%.

The IEA says the risks to Russia’s oil industry are growing:

Lack of access to funds will result in lower capex, which will not only affect future production from greenfields, but will also affect maintenance at older fields, resulting in even higher decline rates in the future. According to Rystad Energy data, capex in Russia is expected to fall to $ 62 billion in 2015.

Most concerning for investors is that even without sanctions the sector faces some serious challenges that a prolonged period of underinvestment is only likely to exacerbate.

The government’s recent move to take possession the privately-owned oil company Bashneft, majority-owned by Russia’s then-richest man (now much less so) Vladimir Yevtushenkov, is a stark reminder of the risks that investors take doing business in strategically important sectors in the country.

The expropriation happened after a court reversed a number of earlier rulings. It decided that it found that the company had been “unlawfully sold” in 2000.

As Yevtushenkov was reportedly told by Russian President Vladimir Putin:

“A chicken can exercise ownership of eggs, and it can get fed while it’s sitting on the egg but it’s not really their egg.”

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