The San Juan Daily Star
How Russia is surviving the tightening grip on its oil revenue
By Anatoly Kurmanaev and Stanley Reed
Shunned by the West, Russia was able last year to redirect its potent oil exports to Asia, marshal a fleet of tankers unencumbered by Western penalties and adapt evasion schemes perfected previously by its allies Iran and Venezuela.
The strategy worked: President Vladimir Putin not only retained but increased money from energy exports, according to official data, and may have brought in more cash, collected in the shadows of the oil trade, that could be helping the war effort.
But it’s not clear if Russia can keep outmaneuvering efforts to throttle oil revenue. There are signs that Western controls that took effect in December — an embargo on most sales to Europe, and the Group of 7 nations’ price cap on Russian crude sold to other nations — are beginning to have a deep impact on energy earnings.
And another round of sanctions to slash Russia’s war chest began Sunday, when the European Union’s embargo on Russian diesel, gasoline and other refined oil products took effect. Like the crude oil sanctions, it is accompanied by Group of 7 price caps on Russian diesel and other oil products sold elsewhere.
The gradual ratcheting up of oil sanctions, which are designed to cut Russia’s oil export revenues without snuffing out a fragile global pandemic recovery, is a policy that analysts say could take years to bear fruit.
“Sanctions, in general, are more like a marathon than a sprint,” said Edward Fishman, a former State Department sanctions official. “Now that these sanctions are in place on Russia’s oil sector, I think you have got to assume they are a permanent fixture of the market.”
A year since the start of the war, Russia has been able to keep its oil flowing.
For all of 2022, Russia managed to increase its oil output 2% and boost oil export earnings 20%, to $218 billion, according to estimates from the Russian government and the International Energy Agency, a group representing the world’s main energy consumers. Russia’s earnings were helped by an overall rise in oil prices after the start of the war and by growing demand after pandemic lockdowns; those trends also benefited Western oil giants such as Exxon Mobil and Shell, which reported record profits for 2022. Russia also raked in $138 billion from natural gas, a nearly 80% rise over 2021 as record prices offset cuts in flows to Europe.
Export volumes of Russia’s main type of crude have also recovered after a dip in December caused by the imposition of the Group of 7 price cap and a Western embargo on seaborne Russian crude, according to the IEA.
Last week, the International Monetary Fund said that the oil price cap, currently $60 per barrel, was unlikely to affect Russian oil export volumes, and that it expected the Russian economy would grow 0.3% this year after shrinking 2.2% in 2022. That projection beats the fund’s forecasts for the British and German economies.
Russia has blunted the impact of Western measures by redirecting crude exports to China, India and Turkey, exploiting its access to oil ports on three different seas, extensive pipelines, a large fleet of tankers and a sizable domestic capital market that is shielded from Western sanctions.
In the process, the Kremlin was able to reengineer, in months, decadelong global oil trade patterns. Russia’s oil exports to India, for example, have grown sixteenfold since the start of the war, averaging 1.6 million barrels per day in December, according to the IEA.
“Russia remains a formidable force on the global energy market,” said Sergey Vakulenko, an energy scholar at the Carnegie Endowment for International Peace, a research group in Washington. “Opposing such a major player is not easy at all, and won’t happen in a day.”
Even as Russia continues producing about 10 million barrels of oil per day — making it the world’s third-largest producer, after the United States and Saudi Arabia — the European oil ban and price cap adopted Dec. 5 have recently curtailed the money its treasury derives from exports. In December, Russian oil export revenues were $12.6 billion, nearly $4 billion less than a year earlier, according to the IEA estimates.
That’s largely because Russian oil companies have to offer increasingly large discounts to a shrinking pool of buyers.
The trend appears to be persisting. The Russian government’s revenue from oil and gas production and exports fell in January by 46% from the same month last year, the Finance Ministry said Monday.
The difference between the prices of Brent, a global oil benchmark, and Urals, the main type of exported Russian crude, widened to about $40 per barrel in January, according to energy-data company Argus Media. That gap was just a few dollars before the war.
The Russian Finance Ministry has acknowledged the drop in oil revenues, saying last week that the average price of Urals in January was $49.50 a barrel, nearly half its price a year earlier. The ministry uses the Urals price to calculate its tax take from oil exports.
“The windfall income will decline, and volumes of their receipts will become less predictable,” the Finance Ministry said in a budget forecast late last year.
To supporters of Russian oil sanctions, the Kremlin’s ability to keep selling oil for less money is the intended outcome of the price cap. The idea is to avoid a shortage that could force prices up.
“So far, so good,” said Fishman.
Some oil experts say, however, that the steep discounts for Russian oil could partly be an illusion.
Using customs data from India, Vakulenko showed that local importers of Russian crude paid almost the same price as Brent crude. A New York Times analysis of the same data produced similar results.
The explanation, Vakulenko suggested, is that at least part of the large discount on the quoted Urals price had been pocketed by Russian exporters and intermediaries, who then charged a higher price to the buyers in India.
This revenue will not accrue directly to the Russian government in taxes, said Tatiana Mitrova, a Russian oil expert at the Center on Global Energy Policy at Columbia University. But because the Russian exporters probably have close ties to the Kremlin, some of money might still support the war effort, she said.
“It’s a complete black box of funds,” she said.
Experts agree that in the longer term, the future of Russian oil revenues will be decided by global economic forces beyond the control of Western sanctions enforcers and Russian evaders.
They say global oil prices will remain the single biggest determinant of how much money the Kremlin will collect from a barrel of exported crude, despite the growing opacity of its trade.
And the fate of that price rests, to a large extent, on Russia’s ally China, whose economy is just beginning to emerge from years of strict COVID-19 restrictions. In December, China’s imports of crude oil hit a record of 16.3 million barrels a day, according to estimates by Kpler, a firm that tracks energy shipping. If the trend continues, it will strain global oil supplies and benefit the Kremlin.
Adding to the upward pressure on oil prices, OPEC+, an alliance of Russia and OPEC, said Wednesday that it would maintain last year’s restrictive output targets, which could strain oil supplies if demand grows.
After a year of preparations, Russia seems able to absorb the immediate impact of Western oil sanctions on production, said Felix Todd, an analyst at Argus Media. Experts say Russia can plug any oil funding gaps in the next few years by using its National Wealth Fund, which it has amassed from past windfall energy profits and is worth about $150 billion.
The Russian government has also shielded its defense and social spending from budget cuts, meaning that even a drastic decline in oil revenues will not hurt its war effort for the foreseeable future, said Alexandra Prokopenko, a Russian economic analyst and former adviser at the Russian central bank.
“Putin has plenty of money to keep fighting,” she said.