Four months into the Ukraine war, Russia is raking in record revenues from its oil and gas sales – but experts say Moscow should take other heavily sanctioned countries in recent history, including Iran and Venezuela, as a cautionary tale in the longer term.
“Oil-producing nations like Iran and Venezuela, which have been hit by economic sanctions in the past, have suffered severe setbacks in their oil production from which they still have not recovered,” said Takahide Kiuchi, economist at the Nomura Research Institute.
That’s because the sanctions are designed to slash demand, which in turn is forcing the country’s oil producers to curb production, experts told Insider. The Russian oil industry is also likely to suffer from a slowdown in technological advances as foreign investment churns out of the country.
And Russia could be hit even worse than Iran and Venezuela because most of their sanctions are imposed by the US, Kiuchi told Insider. Restrictions on Russian trade are far broader, he said, and the US isn’t the only one sanctioning Russia: the UK has also banned Russian oil imports, and EU countries have agreed to ban 90% of Russian crude purchases by the end of the year.
All of these factors combined point to a decline in Moscow’s cash cow as trade restrictions eat through the economy, experts say.
For example, the Iranian and Venezuelan oil industries have been hit by sanctions in recent years – a harbinger of what may be to come for Russia.
Iranian and Venezuelan oil production went into free fall after US sanctions were hit
In July 2015, Iran reached a historic deal with six world powers – the US, Britain, China, France, Germany and Russia – to limit its nuclear program in exchange for the lifting of sanctions, including oil.
After sanctions were lifted, Iran’s oil exports surged to 2 million barrels a day in 2016 and peaked at 2.8 million barrels a day in 2018, according to R data. That number began falling after the US – under former President Donald Trump – unilaterally withdrew from the deal and re-imposed sanctions in May. According to R, Iran’s oil exports fell by over 90% later that year to 200,000 barrels a day.
Like Iran, “the supply side of the Russian economy will almost certainly be affected by the sanctions,” Schroders, an asset management firm, wrote in a statement in March.
Venezuela was sanctioned by the US in 2019 to overthrow socialist President Nicolas Maduro. As a result, Venezuela’s exports fell to a 77-year low of 623,600 barrels a day in 2020 — a third down from 1.89 million barrels a day in 2016 before sanctions were imposed, according to R data.
Sanctions on Iranian and Venezuelan oil hit the countries during a period of low energy prices in 2014-2020, so any sales they managed to generate would have been modest compared to Russia’s windfall in the current boom market. That’s because an energy supply crisis has pushed oil prices to 13-year highs not only because of the war, but also because global demand is recovering from the pandemic.
Despite robust sales earnings, Russia’s economy ministry still forecasts a 17% fall in oil production this year from 2021, R reported in April, citing an official document. According to the International Energy Agency, the country exported about 5 million barrels of crude oil a day in 2021, half of which went to Europe.
Although countries like India and China have stepped in to buy Russian oil, which is shunned by the rest of the international community, Moscow is unlikely to be able to find buyers for all the oil it sells to the EU , said energy director Henning Gloystein, climate and resources at Eurasia Group, a risk consultancy.
“The rest of the world can’t fully absorb what Europe used to import in crude oil,” Gloystein told Insider.
Sanctions against Russia will lead to technological and hardware decline
More importantly for Russia, the energy market boom won’t last forever and a slowdown in major investment in the country’s oil industry will hit hardware in the long run, experts told Insider.
In Venezuela, deteriorating oil infrastructure has already affected the quality of exported crude grades, leading to price discounts and delays in deliveries, R reported in January, citing documents from state oil company Petroleos de Venezuela.
In Iran, oil embargoes and technological restrictions have left the industry in a state of chronic underinvestment, according to Schroders. The country’s oil minister, Javad Owji, said in November the country needed $160 billion in investments to modernize and upgrade production to avoid becoming a net oil and gas importer, the reported Iran International TV Channel.
If Russia’s energy production falls to a level where – as Iran now fears – it will have to start importing, it could send inflation skyrocketing and spill over into the rest of the economy, Schroders said.
The situation is already beginning to play out in Russia, as key software used in the oil and gas industry becomes obsolete as companies exiting the market no longer update or maintain software and codes, Bloomberg reported June 28.
“The withdrawal of Western energy companies from Russia will also result in a lack of investment and highly skilled personnel needed to maintain or increase production,” Eurasia’s Gloystein said.
While investors from China could eventually step in to fill the gap in Russia’s oil industry, Kiuchi said it could take time for this scenario to materialize as the Chinese are wary of over-backing Russia for fear of getting into the Second-rate penalties to be obtained.
Although Russia now seems to have the upper hand due to favorable market conditions, history shows that sanctions “leave deep and long-lasting scars in the target country,” Schroders added.
Finally, “Russia may lose its status as a resource-rich country,” Nomura’s Kiuchi said.