Russia continues to focus on oil despite the EU and US embargo. The number and degree of economic sanctions against Russia are increasing after the invasion of Ukraine, the effects are visible but perhaps less than expected. Putin counts on the resilience of the Russian economy to support the war in Ukraine, and the strategies currently being implemented are showing their effect. Even in the presence of sanctions and embargoes, there is a phantom fleet transporting Russian oil products around the world. The game seems to be working for now: things may change in the future, but revenues are not what they used to be.
Because Russia matters.
Russia is a major player in global energy markets and is among the world’s top three oil producers competing for first place with Saudi Arabia and the United States. Overall, Russia bases a large part of its economy on the sale of fossil fuels, which in 2021 accounts for 45 percent of the federal budget. In 2022, Russia’s gains were limited by the sanctions imposed after the invasion of Ukraine, but the Kremlin is reorganizing itself to give a new direction to its markets.
Its extensive pipeline network allows Russia to export large volumes of crude oil not only to Europe but also to Asia. In 2012, Russia launched the 1.6 million barrels per day Espo pipeline, which sends oil directly to Asian markets such as China and Japan. Pipelines are not the only way for Russia to export oil: In addition, there are railways and, above all, tankers departing from the ports of the northwestern part of the country.
Before the sanctions, Europe was the first reference market for Russian oil exports: in 2021, Russia supplied 10 percent of diesel demand and about 20 percent of European refineries. After the sanctions came into effect, the Kremlin is reorienting its course.
Who is Russia selling oil to?
After the sanctions came into effect, Russia also increased its production and exports of oil and its derivatives. In 2022, Russian companies drilled more oil fields than in more than a decade. According to the latest Crea data, Russia’s crude oil and oil products export volumes increased in the week from January 30 to February 5, 2023: It seems that Russia is responding to the risk of lower earnings caused by sanctions by increasing exports. Volume has increased, but revenues are not what they used to be: what has been done in Europe since the start of the war in Ukraine has halved.
According to data transmitted by ReutersRussia’s oil and gas revenues decreased by 46.4 percent compared to the same month of the previous year. The Ministry of Finance attributed the decline largely to falling oil prices and a decline in natural gas exports. Meanwhile, the European Union is no longer the target market for Russia’s fossil fuel exports.
Last week, China surpassed the EU in terms of imports. In general, Russia is turning to Asia to make up for losses in the European market. For example, last week, the value of Russia’s crude oil exports increased thanks to deliveries to Egypt and Turkey.
Now Russia plans to divert 80 percent of its oil exports to “friendly” countries. In addition, shipments of unknown destination are increasing: After the initial collapse due to sanctions, Russian oil production and exports increased, again thanks to “ghost cargoes”.
Putin’s ghost fleet
Russia is circumventing sanctions thanks to its fleet of “ghost ships”. The use of untraceable activities was common even before the sanctions. Even a cargo ship can get lost or lose track of its cargo. For example, a Russian tanker may transport its cargo to another non-Russian-flagged vessel without tracking its activity. In the past, Venezuela and Iran have used this game to evade Western sanctions.
The European Union is responding by blacklisting a Dubai, United Arab Emirates-based shipping company accused of helping to circumvent Russia’s sanctions on oil. The company is believed to have bought Russian tankers to change their country of origin. Meanwhile, data confirmed that Russian crude shipped by “ghost ships” rose from 3 million barrels in November to over 9 million barrels in January, according to the report. Finance Times.
What can happen with sanctions?
Russia’s oil production was unaffected by the sanctions, although its revenues fell. The scenario for the future remains uncertain and the Russian oil industry will have to face other challenges: the latter Bloomberg Russia does not have the capacity to store oil on a large scale, and the system could quickly collapse if companies cannot sell what they produce.
It is too early to assess the impact of the February 5 European embargo on the purchase of refined fuels from Russia, including diesel. Meanwhile, in the first 8 days of February, Russian refineries produced about 2 percent above January levels. Bloomberg. In the long run, the loss of revenue from fossil fuel exports could weigh heavily on the government coffers.
Russia had to sell its foreign exchange reserves to cover the deficit, which amounted to 1.76 trillion rubles, up from more than $22 billion in January, to cover the cost of what it calls a “special military operation” in Ukraine. If the Kremlin’s adjustments in the markets do not restore revenues from oil and gas exports, the war will be less and less sustainable for the Russian coffers.
Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
