Russia remains focused on oil, even in the face of the EU and US embargo. Economic sanctions against Russia after invading Ukraine are increasing in number and scope, the impact is visible but perhaps less than expected. Putin is banking on the resilience of Russia’s economy to support the war effort in Ukraine, and the policies currently being implemented are having an impact. Despite sanctions and embargoes, there is a ghost fleet shipping Russian oil products around the world. The trick seems to be working for now: things might change in the future, but revenue isn’t what it used to be.
Because Russia matters
Russia is a major player in global energy markets and one of the top three oil producers in the world, vying for the top spot with Saudi Arabia and the United States. In general, Russia relies a large part of its economy on the sale of fossil fuels, which accounted for 45 percent of the federal budget in 2021. In 2022, Russian gains have been limited by sanctions enacted after invading Ukraine, but the Kremlin is reorganizing to give its markets a new direction.
Russia cuts oil production. And the prices go up
The huge pipeline network allows Russia to export large quantities of crude oil not only to Europe but also to Asia. In 2012, Russia launched the 1.6 million bpd Espo pipeline, which sends oil directly to Asian markets like China and Japan. Pipelines are not the only means by which Russia must export oil: there are also the railways and, most importantly, the tankers that depart from the country’s north-western ports.
Before the sanctions, Europe was the first reference market for Russian oil exports: in 2021, Russia covered 10 percent of diesel demand and about 20 percent of European refineries. After the sanctions come into effect, the Kremlin will realign its routes.
Who does Russia sell oil to?
After the sanctions came into effect, Russia also increased production and exports of oil and derivatives. In 2022, Russian companies achieved a string of wells in their oil fields, the likes of which had not been seen in more than a decade. According to the latest Crea data, Russian export volumes of crude oil and petroleum products increased in the week of January 30 to February 5, 2023: Russia seems to be responding to the risk of lower revenues from sanctions with increasing exports. Volumes have increased, but revenues aren’t what they used to be: since the start of the war in Ukraine, products manufactured in Europe have halved.
Russia’s oil and gas revenues were 46.4 percent lower than a year earlier, according to Portal. The Treasury Department attributed the decline primarily to lower oil prices and the slump in natural gas exports. Meanwhile, the European Union is no longer the target market for Russian fossil fuel exports.
Why China could derail the Russian oil embargo
Last week, China surpassed the EU in terms of import volumes. In general, Russia is turning to Asia to offset losses in the European market. In the past week, the value of Russian crude oil exports has increased thanks to deliveries to Egypt and Turkey.
Now Russia plans to direct 80 percent of its oil exports to “friendly” countries. In addition, shipments with unknown destinations are increasing: After an initial slump due to the sanctions, Russian oil production and exports have increased, also thanks to “ghost shipments”.
Putin’s ghost fleet
Russia circumvents sanctions thanks to fleet of ‘ghost ships’ The use of untraceable activities was common even before the sanctions. A cargo ship can also disappear or lose sight of its cargo. For example, a Russian tanker may transfer its cargo to another non-Russian flag vessel without the activity being tracked. In the past, Venezuela and Iran have used this ruse to escape Western sanctions.
The European Union is responding by blacklisting a shipping company based in Dubai, United Arab Emirates, accused of helping to circumvent Russian oil sanctions. The company is said to have bought Russian tankers to change their country of origin. Meanwhile, data confirms that Russian crude shipped on “ghost ships” rose to more than 9 million barrels in January, up from 3 million barrels in November, the Financial Times reported.
What can happen with sanctions
Russia’s oil production is unaffected by the sanctions, although revenues have suffered. Going forward, the scenario remains uncertain and the Russian oil industry has to face other challenges: according to Bloomberg, Russia does not have the capacity to store oil on a large scale, and if companies do not sell what they produce, the system could quickly collapse in a crisis .
Diesel and petrol, turn the pump – everything changes again
It is too early to assess the impact of the February 5 European embargo on the purchase of refined fuels, including diesel, from Russia. Meanwhile, Russian refineries produced about 2 more than January in the first 8 days of February, according to data cited by Bloomberg. In the long run, lost revenue from fossil fuel exports could weigh on government coffers.
Italy is still paying for Putin’s war, but Gazprom’s revenues have plummeted
Russia has been forced to sell foreign exchange reserves to cover a deficit that totaled 1.76 trillion rubles, more than $22 billion, in January to cover the costs of a so-called “special military operation” in Ukraine. Unless the Kremlin’s adjustments to markets bring oil and gas export revenues back to previous levels, the war will be less and less sustainable for Russia’s coffers.