The Western noose around the Russian oil sector has gradually tightened. Some sectoral sanctions have been in place since 2014, including restrictions on lending, goods, services, technology and investment for offshore oil projects in the Arctic. Many owners and top executives in the sector have also been subject to sanctions.
Then, in March 2022, a ban on imports of Russian energy products to the United States and then to Canada entered into force, and in June, the European Union decided on a sixth set of sanctions, banning imports of Russian crude oil and petroleum products. Although Europe currently imports 1 million barrels of Russian petroleum per day, oil imports must end by 5 December and that of petroleum products by 5 February. The UK will also stop buying oil from Russia by the end of the year. Only Central European countries with exceptional exposure were temporarily exempted from the ban.In 2021, the EU imported 2.2 million barrels of petroleum per day from Russia, with almost a third of pan-European oil imports coming from Russian oil fields in an average year. Exports of crude oil and natural gas are extremely important for Russia, accounting for 42% of its exports, half of which are destined for the European Union.
Yet the bans did not shake Moscow, which quickly redirected some of its shipments to Asian markets. While Europe suffers from an extreme rise in energy prices, Russian companies are offering their products at a great discount in China or India. The price of Russian crude oil, known as Urals, is now USD 20-30 below the Brent benchmark price, whereas before the war the difference was only USD 1-2.
Russian oil is also finding its way to European users through various tricks. More and more tankers are leaving Russian ports without specifying their destination. According to the TankerTrackers.com portal, oil exports from Russian ports to European Union Member States rose to an average of 1.6 million barrels per day in April.
Despite sanctions, Russia has made record revenues from fossil fuel exports, worth almost EUR 100 billion in the first 100 days of the war in Ukraine. Russian energy giant Rosneft increased its profits to USD 7.2 billion despite the sanctions.
Although Russian Urals has become cheaper than Brent due to sanctions, the significant increase in world prices has still pushed up the average price by 33% to USD 84.1 per barrel compared to the first half of 2021. In fact, production also increased in the first half of 2022, up by 3.4% in January–May, according to Rosstat. However, a decline is expected for the year as a whole, after Finance Minister Anton Siluanov ordered a 17% cut in production at the end of April, but this will not be accompanied by a sharp fall in budget revenues either.The figures show that Russia's oil exports have so far been shock resistant, and despite international sanctions have dropped by just 400,000 barrels a day below pre-war levels. However, Russia can only find buyers for about half of its supply in the medium term, so it seems inevitable that its exports will fall significantly. Moscow is also working at full steam to look for markets and, in addition to the aforementioned China and India, 1 million barrels a day of Russian oil could be exported to some Middle Eastern countries, as well as Indonesia, Pakistan and Sri Lanka, and even Brazil and South Africa. According to energy research firm RystadEnergy, roughly 75 per cent of exports will be directed to Asia and other markets.
But Moscow is still grappling with what to do with the oil it has extracted. The Russian oil industry has always been export-oriented, and revenues from the sale of liquid hydrocarbons have formed the basis of the state budget. The oil industry is also facing logistical difficulties in addition to the embargoes, most notably a shortage of ships. While Russia has just over 1,700 tankers (this is only 1.1 per cent of the global total), tanker-type shipments have often been carried out by Western companies. The sixth set of EU sanctions not only bans oil purchases, but also extends to tankers carrying oil from Russia.
In this situation, Lukoil's Vice President Leonid Fedun suggested that Russian companies should reduce production by 20–30 per cent, to 7–8 million barrels per day. This reduces supply, which contributes not only to the rise in global oil prices, but also to the fall in Russian oil discounts. However, Russia is losing market positions that are likely to be taken by other exporting countries.To solve the problem, the Governor of the Central Bank of Russia, Elvira Nabiullina, suggests that exports should not be seen as an absolute priority, and the domestic market should be considered. The idea itself is not new, as China has followed a similar path.
The situation in Russia, however, is very different from China. First of all, there is a huge difference in population and, consequently, in economic power. Compared to China, which rivals the United States in terms of GDP, Russia accounts for only 3.12% of world GDP.
The Russian market will, therefore, not be able to absorb the large volumes of oil that would result from a possible serious cutback in exports for some time to come, not to mention the fact that refineries and petrochemical plants are also heavily dependent on foreign technology and equipment. Thus, it is clear that without export revenues, the Russian oil industry and the budget will be in trouble, and the best way forward is to look for new markets. For this to be successful, it is necessary to accept that ‘black gold’ will continue to be sold at a discount for a while.