Vladimir Putin and Russia are likely to feel even more G7 oil pain
The Finnish Research Center for Energy and Clean Air (CREA) has estimated that fossil fuel sales revenues in Russia were down 17 percent in December, costing Russia about 160 million euros ($246 million) a day.
Russia has largely maintained its oil export volumes by redirecting sales from Europe, formerly the largest market for oil and gas, to China, India and Turkey.
It has built its own tanker fleet to circumvent the caps and used sanctions-lifting techniques developed by countries like Iran and North Korea, but the relatively small group of buyers willing to take its oil used its influence to get big discounts even before price caps were introduced.
The war will cause permanent damage to the Russian economy. Credit:AP
The new caps on refined products could be even more effective, but with some detrimental effects on the West.
China and India, the two biggest buyers of Russian oil, have their own very large domestic refining sectors. You don’t need Russia’s diesel, heating oil or other intermediate products. There is no obvious market for the Russian product previously sold to Europe.
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China and India could, of course, be willing to buy Russian products at very deep discounts and then ship their own to those buyers who previously bought in Russia, but that’s a cumbersome and, given the relative distances, expensive way to buy Chinese or Indian products to substitute for the Russian oil that Europe used to buy.
The downside of this Russian dilemma is that unless there is a large enough market, Russian product will not flow to the world market, and prices of refined products will rise, perhaps sharply.
Even if China and/or India were willing to buy from Russia and sell their domestic products on the world market, unless the Russian product was sold to them at massive discounts, the cost of transportation and hence the final prices would increase significantly.
The caps for Russian products that the EU is proposing are US$100 per barrel for diesel and US$45 per barrel for other lower value-added products. CREA estimates that a cap of this magnitude, combined with the planned simultaneous EU ban on refined products, could cost Russia an additional 120 million euros ($185 million) a day.
Caps at this level would be broadly in line with the approach taken for Russian crude. Refined product prices vary much more than crude oil, but these caps appear to represent a discount of about 30 percent, maybe a little more, than the freely traded product.
Russia, even with the caps and embargoes, will still generate massive revenues from the sale of crude and refined oil, but the roughly $1 billion a day it was generating before the invasion could be almost halved.
Aside from the loss of income, the embargoes and price caps will do long-term damage to Russia’s energy industry, which generated about 45 percent of federal government revenues before the invasion.
Last year Russia ran a record budget deficit of 3.3 trillion rubles (about $70 billion) after a deficit in December wiped out 11 months of surpluses.
It’s planning something similar for this year, but that’s based on an average oil price of $70 a barrel. At the prices it has received since the caps were introduced, this deficit would roughly double even before the caps on refined products.
Before the invasion, Russia’s energy industry generated about 45 percent of the federal government’s revenues.Credit:Bloomberg
Something worse could happen.
The G-7 agreed earlier this month to review the level of the price cap on Russia’s crude oil exports.
The G-7 originally scheduled the review for February, but postponed it to March to get a better sense of how the cap has affected Russia and the global market, and to get initial feedback on caps on refined products that could help the group to calibrate better.
The new caps are imposed within a more complicated market with more different prices than crude oil.
Aside from the loss of income, the embargoes and price caps will do long-term damage to Russia’s energy industry, which generated about 45 percent of federal government revenues before the invasion.
It has lost its core European market for crude oil, refined products and gas, making hundreds of billions of dollars in processing and pipeline infrastructure redundant and potentially stalling some large gas fields.
Europe will never again become as dependent on Russian energy as it was before the war, and China or India are unlikely to allow themselves to be as exposed as the Europeans.
The cost, whether the oil or gas is shipped or pipelined to non-European buyers, would be significantly (possibly prohibitively expensive for gas) higher.
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Vladimir Putin saw Europe’s dependence on Russian energy as its vulnerability and as a bargaining chip to prevent it from coming to the rescue of Ukraine. Europe has instead used its position as Russia’s largest energy customer to counter it, and this blunder will cause significant and likely lasting damage to the Russian economy, whatever the outcome of the war.
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https://www.smh.com.au/business/markets/the-west-is-tightening-the-screws-on-putin-s-cash-machine-20230131-p5cgpv.html?ref=rss&utm_medium=rss&utm_source=rss_business Vladimir Putin and Russia are likely to feel even more G7 oil pain
