The war in Ukraine is unique in its propensity to gain energy ground. And for good reason, in the absence of direct military intervention, Western countries quickly opted for the “purse” angle of attack to respond to Russian aggression. Among the world’s biggest sellers of hydrocarbons, Russia is particularly dependent on revenue from its fossil fuel exports. Therefore, it is logical that the latter acted as a privileged target with the consequent results in this first “anniversary” of the start of the conflict.
According to the latest report from the Center for Research in Energy and Clean Air (CREA) published for the occasion, Russia has earned 560 million euros per day from exports of fossil fuels during the past month. “This is a 50% drop from the peak of 1.13 billion euros per day reached in March 2022, notes CREA. However, Russia’s earnings in January-February [2023] until the anniversary of the invasion amount to about 30,000 million euros”.
“Europe’s reliance on gas imports from Russia, in particular, probably gave Putin a sense of security that Europe would not act decisively or unitedly in response to Russia’s invasion of Ukraine,” the minister said. CREA analyst Lauri Myllivirta.
Renewal of the order book
The entry into force of the different European embargoes, on Russian coal last August, on crude oil in December and on oil derivatives at the beginning of the month, are not insignificant. On the gas side, it was Vladimir Putin himself who interrupted supplies: a “costly decision” according to Lauri Myllivirta “because there is no other buyer for the gas supplied by the pipelines.” “In the last 30 days, exports to the EU have fallen by 86% compared to the peak of 700 million euros per day reached in March 2022, CREA points out. However, the EU still sends 100 million euros a day to Russia by Fossil Combustibles.
“Continued imports of pipeline gas and LNG, as well as various exceptions to import bans on crude oil and petroleum products, have meant that the EU has remained Russia’s second-biggest customer after China, ahead of China. ‘India, after the entry into force of the ban on petroleum products.
Despite major reductions, some Asian countries continue to import several million euros of Russian fossil fuels every day, such as Japan, South Korea and Taiwan, which are allies of Ukraine. While Chinese purchases have held steady, China has become the top importer after European sanctions, while India has climbed to the top of importers despite buying very little Russian oil before the invasion.
This new year 2023 also means the appearance of new countries among the main importers of Russian oil products such as Turkey, the United Arab Emirates and Morocco, to which small buyers such as Tunisia, Brazil, Egypt and Algeria are added. “Exports of petroleum products take place almost exclusively from the Baltic Sea and Black Sea ports and are highly controlled by the European shipping industry, which makes the revision of the maximum price of the product the key tool to reduce the Russia’s revenue from this trade,” the Finnish research center said.
Margins that remain high despite the ceilings
As it stands, Russia’s crude oil price cap of $60 a barrel has little impact as the Kremlin only grants about $15 a barrel to oil producers and collects the rest in taxes. On the one hand, there is the mineral extraction tax, whose target rate was approximately $37 per barrel in 2022 based on an average sales price of $62.2 per barrel, and on the other hand, the mineral extraction tax. export pegged at less than $6 per barrel. “These high tax rates show that the costs of oil production in Russia are very low and that, at current sales prices, the vast majority of sales revenue remains for the State in the form of taxes,” analyzes CREA. .
In addition, this cap does not apply to crude oil leaving Russian Far Eastern ports whose price per barrel exceeds $70 and which is mainly bought by China… and transported by tankers insured by ‘Europe’. “Insurance and ownership fees for Russian fossil fuel cargoes are much higher for cargoes leaving Russia’s western ports than for Far Eastern ports,” CREA notes.
As for gas, Russia benefited from record price levels achieved last year. Its exports to the EU generated as much revenue in the second half of 2022 as in previous years, when volumes were four to five times lower than before the invasion of Ukraine.
A turnaround in 2023?
In 2021, Russia’s federal budget amounted to $343 billion and taxes on the extraction and sale of gas and especially oil accounted for 37% ($127 billion) of it. Last year, federal budget revenues were estimated at $358 billion with a higher tax burden on the extraction and sale of oil and gas accounting for a record 46% share ($166 billion). This increase is explained in particular by the January-May period, during which the average price of a Brent barrel stood at 104 dollars, which allowed tax collection to almost double compared to the same period in 2021.
But CREA points out that the sanctions introduced in and after December have significantly reduced Russia’s fossil fuel export earnings. In January 2023, oil and gas tax revenue fell 54% compared to December 2022 and 46% compared to January 2022. In the last month, oil and derivatives production remained constant, slightly below 11 million barrels per day. According to the Finnish research center, “it is very likely that the decrease in income is explained by the deepening of the discounts that willing buyers agree to buy Russian crude and petroleum products.”
Lauri Myllivirta’s analysis recalls that the Russian budgetary situation should deteriorate in 2023, hence the review of the taxation of oil exports planned by the Ministry of Finance and “which could make oil exporters unable to sell at prices for under the roof.”
Sanctions will be heightened to reduce Russian revenue by 40%
The Clean Air and Energy Research Center makes several proposals to strengthen and broaden the range of sanctions adopted by Western countries and which could reduce “Russia’s daily revenue by an additional 40% compared to the current level.” In particular, CREA advances the reduction of the ceiling price to 30 dollars a barrel of crude oil, which would deprive the country of 150 million dollars a day. He mentions the ban on European imports of oil and gas through pipelines as well as the ban on liquefied natural gas that would increase daily losses by 90 million euros.
“Low prices and technology and investment sanctions will degrade the country’s ability to develop new deposits and infrastructure, meaning Russia’s fossil fuel production will enter a phase of long-term instability,” predicts Lauri Myllyvirta.
The CREA also advocates for a reinforcement of the vigilance and the application of the norms through the permanent prohibition of the entry of oil tankers that do not respect the price ceilings in the ports and territorial waters of the EU and the G7 as well as the transshipment of Russian oil in these waters and EEZs of the countries concerned. According to the Finnish research center, it would also be necessary to restrict sales of old tankers that Russia could use to circumvent the ceiling. It also wants the establishment of “an authority dedicated to the monitoring and enforcement of Russian oil sanctions that will carry out regular monthly and extraordinary audits of certificates and other required documents.” Finally, the oil blend would have to be “addressed to ensure that the oil on the market is not partly Russian” through laboratory analysis to verify its origin.
Source: BFM TV
