The collapse of the oil industry
The "backbone" of the domestic economy – the oil industry – has entered a period of trouble, and these troubles have already begun to affect federal budget revenues. Although some of the statistics in Russia are now closed for review, data from independent sources show that the situation is deteriorating.
According to the International Energy Agency (IEA), oil revenues decreased by $1.2 billion in August against $19.9 billion in July due to lower prices, despite a slight increase in sales volumes. There is a rush to buy Russian oil until the ban announced by the European Union (and supported by the US) came into force in December, especially since it is traded at a discount of about $ 20 per barrel against the price of Brent. What will happen when the planned embargo begins?
Forecasts of volumes of Russian oil, which will disappear from the market from December, sound different. So, one of Gazprom's analysts, who recently left his native company and moved to America, casually calls the figure 6 million barrels per day – almost complete export of oil and oil products from Russia, minus Chinese routes. The point of such forecasts is to scare the West with catastrophic disasters that will fall on it because of the sanctions imposed on Russia, such as wildly rising energy prices and energy supply shortages.
On the other hand, according to the IEA predictions, the panic has no reason and is more of a propaganda nature. The loss of the European oil market as a result of the embargo on Russian crude oil, the agency says, will amount to about 1.4 million barrels per day, which is not difficult to compensate for the increase in production in other countries. To this we must add a reduction in the supply of Russian oil products, but still no 6 million barrels are obtained.
But for Russia, the expected losses will be a severe blow. If the European embargo, along with the earlier embargo from the US and the UK, comes into full force, our country, as we calculated with colleagues at the RusEnergy agency, will lose 51% of crude oil exports and up to 57% of oil products exports. And since a significant part of domestic oil refineries is engaged in the production of export products – such as fuel oil in huge quantities and straight-run gasoline (naphtha), – the loss of this market will lead to refiners' refusal from raw materials, and then down the chain to a reduction or halt in production at the fields. It already looks like the collapse of an entire industry. Production under this scenario will be reduced by at least half. Both budget revenues and companies serving oil workers will suffer.
Russia will lose more than 51% of exports of crude oil and petroleum products, it looks like the collapse of an entire industry
Buy – but cheap
The December embargo, apparently, can no longer be avoided. However, as they said in the old jokes, nuances are possible. One of them is the sensational proposal to set a price cap for oil from Russia.
G7 finance ministers agreed in early September to take additional measures to limit Russia's oil revenues. Adhering to the wording in the document adopted by the ministers, we note that the new sanctions come down to a ban on "services that provide global sea transportation of oil and oil products of Russian origin" at a price above a certain level.
This formulation needs some explanation. Firstly, the focus on sea transportation around the world is due to the fact that a ban has already been imposed on Russian oil exports to a number of countries. In early June, the European Union adopted the so-called “sixth package” of sanctions, which orders EU members to stop importing crude oil from Russia from December, and from March next year, imports of petroleum products. Temporary exceptions are made for several countries that are not able to immediately end their dependence on Russian supplies, and these small consumers do not make a difference. The United States and Great Britain imposed an embargo on the purchase of oil and petroleum products from Russia even earlier. Now, according to the "Seven", it is time to deal with tankers that go from Russia to other markets.
Secondly, the initiators of these measures showed an understanding that a complete ban on trade in this commodity would be a punishment not only for Russia, but also for a number of countries that purchase Russian energy resources. Nobody is forbidden to buy such oil, they decided, but the purchase price should be limited so that the Kremlin authorities could not use these proceeds to finance military operations. In other words, Moscow will receive so little that the proceeds will barely cover the cost of production and transportation.
Moscow will receive so little that the proceeds will barely cover the cost of production and transportation
The meaning of the new sanction is defined in the Preliminary Guidance on Implementation of a Maritime Services Policy and Related Price Exception for Seaborne Russian Oil issued on September 9 by the US Department of the Treasury.
The backdrop for the whole scheme is a complete embargo on the sea transportation of Russian crude oil from December 5 this year and Russian oil products from March 5, 2023. And then the main exception to this embargo is formulated – for goods supplied at a price corresponding to or reduced in comparison with a certain "ceiling", the size of which has yet to be clarified. If you buy oil or fuel oil below this marginal price, no embargo is a law for you and no penalties threaten you.
The documents of the G7 and the US Treasury say that the price "ceiling" will be determined by consensus following technical consultations within a coalition of countries that agree with the proposed scheme. The post of "coordinator" of the scheme will be rotating. At the same time, the United States will maintain a complete ban on the import of oil and oil products from Russia, no matter what price they are offered.
There is no way around sanctions
Participants in transactions, including intermediaries or insurers, will be required to provide documented evidence of the price at which these Russian goods are purchased. In the United States, compliance with the terms of the deals will be monitored by OFAC, the Office of Foreign Assets Control of the Treasury Department, which is entrusted with sanctions powers.
At this moment, the dates are known, which include a ban on tanker transportation of oil and oil products from Russia around the world. It remains unclear which buying countries have agreed or will agree to participate in the proposed coalition, and whether the partners in specific transactions and numerous insurance companies will participate in price control. After all, the financial terms of many contracts are simply not disclosed: this is normal business practice.
Administering proposed embargo exemptions is extremely difficult. It is no coincidence that the US Treasury in its “preliminary guidance” places great hopes on “informers”, that is, on individuals or legal entities that are not involved in transactions, but are able to obtain at least indirect information about their price parameters. Insurance companies should help in fulfilling the tasks of the embargo, since up to 90% of oil shipping by sea is insured by firms from the USA and Europe.
In China, which buys large volumes of oil, they do not want to join the coalition. The main volume of deliveries from Russia goes along well-established routes – mainly through the ESPO oil pipeline ("Eastern Siberia – the Pacific Ocean"). The capacity of these routes, including transit through Kazakhstan and some supplies from Sakhalin, is being used to the maximum. It will not be possible to quickly increase the capacity of the infrastructure. And we must take into account that part of the oil supplied to China until 2029 will go to repay loans issued by the Chinese to Rosneft. The current logistics takes China out of both participation in possible embargoes and manipulations with oil prices.
India, according to media reports, is under considerable pressure, but even there the authorities are already in a hurry to emphasize that they do not intend to stop the exchange of goods with Russia. Nevertheless, Indian companies have already begun to reduce their purchases of Russian oil, especially since its main supplier, Iraq, has already promised to give them a $10 discount off any price offered from Moscow.
Indian companies have already begun to reduce purchases of Russian oil, especially since its main supplier, Iraq, has promised a $10 discount off any price offered from Moscow.
It is not worth counting on the fact that outside the G7 and China and India there will be daredevils ready to challenge Western sanctions. Suffice it to recall that even Kazakhstan decided to fully adhere to the sanctions regime imposed by the United States.
Speculation that Russia will be helped to circumvent sanctions in Iran is groundless. Iran is Russia's rival in the oil trade and will not let it enter its elaborate smuggling export schemes. Transshipment of oil at sea from tanker to tanker, mixing Russian oil with someone else's cargo in tankers and other tricks, as practice shows, are of a single nature and practically do not affect the volume of supplies.
Moscow has threatened to stop deliveries altogether to places where prices will be capped, but the effectiveness of this threat to “freeze your mother’s ears out of spite” has yet to be tested. Recall that the cessation of gas exports to "disobedient" European customers of "Gazprom" did not lead to capitulation of buyers to the demands of the seller.
Until December 5, the initiators of the scheme have time, although it may not be enough to form a workable coalition and reach consensus on the price limit. But even without the introduction of the promised “ceiling,” one can conclude with a high degree of certainty that the sanctions will work, and it is the Russian oil industry and the entire domestic economy that will suffer from them. The rest of the world will bear the loss relatively easily despite the panic fanned by pro-Kremlin propagandists.
