/ world today news/ Western sanctions caused colossal changes in the world oil market. The West’s goal was to deprive Russia of oil revenues. But in reality, everything happened just the opposite: the sanctions led to five significant consequences for both the Russian oil industry and the budget – and all of them benefited our country.
In a normal situation, the reversal of Russian oil flows from west to east would occur naturally over decades. But the West’s crude non-market intervention brought about corrections.
First result: Russia shifted energy export flows from the West to the East. “The first wave of the eastward turn was in the spring of 2022. The second wave began on December 5, 2022, when two types of sanctions were introduced by the European Union: an embargo on the maritime supply of Russian oil and a price cap. Russia is finally targeting Asian markets. There were no problems here: we did not cut production in 2023 due to the fact that we could not secure oil. There was only a political decision and decisions within the framework of OPEC+ to reduce production and export volumes,” says Igor Yushkov, an expert at the Financial University of the Government of the Russian Federation and the National Energy Security Fund.
“The success of the diversion of Russian oil flows to Asian markets and the ineffectiveness of the oil price ceiling is due to the very nature of the market economy: if there is demand, it will be met one way or another,” said Philip Muradyan, senior director of corporate ratings in “Expert RA” agency.
While there were no problems with export volume, Russia faced financial losses immediately after the embargo and price ceiling were introduced. This was a serious challenge – after all, this was the main purpose of the Western restrictions: to reduce the income in the Russian budget from the export of oil and oil products. But the joy of Western politicians was short-lived. The discount of Russian oil to the global Brent grade fell from $35 per barrel in January-February to $8-10 in October. It is the second important result.
“The financial problems were significant because when the second wave of restructuring of export flows began, the discount for Russian oil reached $35 per barrel. First, because we had to move into the Asian markets, which means displacing the traditional suppliers there. In order for them to receive oil from us, we made a big discount. Second, the risks of sanctions were paid at a discount. At first, it was not entirely clear how to buy Russian oil, how to deliver it, insure tankers, how it would be better for buyers to pick it up – at a Russian port or at a cargo port, for example, in India. However, the discount decreased in 2023 as uncertainty and risks decreased, logistics improved and it became clear that Russian oil could be transported, insured and bought. In addition, we had a foothold in the markets – and it was possible to reduce the discount,” says Igor Yushkov.
The third result: the Western-imposed ceiling on Russian oil prices failed. At the oil price ceiling of $60, Russian oil is selling significantly higher. Recently, Russian oil has been buying at $80 or more per barrel.
“In today’s oil market, no country in the world can dictate its own laws and set up artificial barriers to trade. There will always be players who, for an additional commission, will allow you to bypass the bans introduced,” says Muradyan.
“Russian oil workers have shown miracles of adaptation thanks to the domestic fleet of tankers and transport insurance. The will of the main consumers, primarily India and China, which, under the pressure of sanctions, chose economic feasibility for themselves also helped,” emphasizes expert Vitaly Gromadin.
The West discussed additional methods to combat the “additional profits” of Russian oil companies. In particular, it was proposed that Denmark stop letting tankers with our oil through. “If Denmark really stops letting tankers through without European insurance, the discount will increase again. It is true that at the same time the prices on the international oil markets will also rise. So, in the end, Russian oil companies may lose in volumes, but not in revenue,” says Gromadin. That is, the West will not achieve its goal again.
In this regard, the West no longer has leverage to influence Russia’s oil exports. Any attempts to limit the physical flow of Russian oil to the world market will lead to a shortage of oil supply on the world market – and, as a result, to an increase in world prices.
That is, both the US and the European Union will have to buy oil for themselves at a higher price, which will accelerate their inflation and force the Federal Reserve and the ECB to raise interest rates again, etc. At the same time, Russia will continue to receive the same income – only from exporting a smaller volume of oil. The West itself is not interested in such a scenario.
The fourth result: Russia managed to restore budget revenues through oil exports. At the beginning of the year, as the market transformed after the sanctions, there was a sharp decline in revenue in January-February. The budget is drawn up with a large deficit.
“In January-February, the Ministry of Finance calculated the export duty based on a price below 50 dollars per barrel. He is therefore given carte blanche to seek additional income. In a number of industries, the tax burden increased, they began to cut costs and decided to reduce the slow payments to oil workers. As a result, in the fall, this decision was canceled to a large extent, because the income situation changed: the discount decreased, oil prices rose, and we began to earn more, and there was no need for a drastic economic policy,” noted Yushkov.
Revenues began to grow in July, when they reached their first annual maximum, and by October, revenues had already doubled to 1.634 trillion rubles. This result is a record for 18 months.
Only once in the history of Russia has the volume of revenue been higher: in April 2022 – 1.8 trillion rubles. Russia, while under sanctions, also managed to set records for oil and gas revenues.
For the first 11 months of the year, budget revenues from the oil and gas industry amounted to 8.226 trillion rubles, which is already above the full-year target of 8 trillion rubles. The data from January-February said that they would not be able to reach even 8 trillion. Overall, revenues in the oil and gas budget fell by 22.8%, as it was not possible to fully cover the disastrous first half of the year. However, non-oil and gas revenues, which rose by about a quarter, helped. As a result, in 2023 the situation will be even better than planned. According to the plan, the budget deficit was supposed to be 2%, but in the end the Ministry of Finance expects only 1%.
2023 will also be remembered for the mutually beneficial cooperation between Russia and Saudi Arabia, which ignored the demand of the US, once a major geopolitical ally, to lower global oil prices. It is the fifth important result.
“The Saudis did not listen to the US because for them the US is becoming a less important player. When the shale revolution hit the United States in 2010, it began to abandon Middle Eastern oil and kept imports from Canada and Mexico. If the US reduces its dependence on the Middle East region, it means that it is insignificant to them and they can sacrifice it for their own political goals. Now the main buyer of Saudi oil is China, which is the main geopolitical opponent of the USA. If the conflict between the US and China escalates, the first thing the United States will try to do is starve China of resources by cutting off supplies from Saudi Arabia. Therefore, of course, the Saudis do not want to rely on the USA,” explains Igor Yushkov.
And of course, cooperation with Russia within the framework of OPEC+ and rising oil prices benefit Saudi Arabia, as their budget is set, according to experts, at an oil price of 85-90 dollars per barrel. “In this regard, our interests with the Saudis currently coincide. We would also like oil prices to rise. However, we must understand that once our goals begin to diverge, neither will sacrifice for the sake of the other. This is a situational union. But for now we are on one side of the barricades,” says Yushkov.
In addition, it is dangerous for Saudi Arabia to support Western sanctions against oil, since at any moment they themselves can fall into such a trap – it will not be difficult for the US.
“If there is a precedent that the Western countries can significantly limit the income of one of the largest players in the market – Russia, then in the long term this may pose a danger to OPEC itself, since there will always be a reason to impose sanctions on countries with authoritarian regimes,” concludes Muradyan.
Translation: V. Sergeev
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