Will Russia be forced to come to its senses and make heavy concessions in order to end the war in Ukraine in 2023 sooner rather than later? The West, led by the United States, seems to think so as Russia’s oil/gas wealth, the central pillar of the power system controlled by President Vladimir Putin, appears to be on the wane.
It should be noted that in March 2022 the US banned the import of all Russian oil and gas products. Similarly, European Union (EU) countries have pledged to cut gas imports from Russia by two-thirds.
For example, Russian gas imports have fallen from 40% to 4%, with some forecasts suggesting that Russia has lost Europe’s gas market, traditionally its most important market.
Europe A lost gas market for Russia
In December, EU countries halted sea imports of Russian oil. Refined oil products from Russia will be banned in Europe from February 5, 2023. And now the US and EU have approved a price cap to stop countries paying more than $60 a barrel for Russian crude.
This upper price limit is also to be implemented from February.
In addition, it is feared that as a result of these sanctions, more than a thousand foreign companies could end their activities in Russia under “self-sanctions”. So far, about 40 percent of international companies in Russia’s energy sector have reportedly suspended or suspended operations. These companies include BP, Shell and ExxonMobil.
Incidentally, fossil fuels and other fuels are Russia’s top trade commodities, accounting for around 50 percent of the country’s total export earnings. In addition, the Russian state generates around a third of its income through taxes from the oil and natural gas export business.
One could argue, then, that oil wealth helps fund Russia’s war against Ukraine, and that as that wealth dwindles, its war effort weakens significantly.
In this regard, it should be noted that according to an analysis by the Center for Research on Energy and Clean Air (EU oil ban and price cap costs Russia €160m/day, but further measures can multiply the impact – Center for Research on Energy and Clean Air ) sanctions have already taken their toll on Russia. Key findings include:
- Russia’s fossil fuel export receipts fell 17% in December to the lowest level since the country’s full-scale invasion of Ukraine.
- The EU oil ban and price cap is estimated to cost Russia €160m/day. The drop in Russian oil supplies and prices has cut the country’s export earnings by 180 million euros a day. Russia managed to reclaim 20 million euros a day by increasing exports of refined oil products to the EU and the rest of the world, resulting in a daily net loss of 160 million euros.
- The measures resulted in a 12% drop in Russian crude oil exports and a 23% drop in sales prices, leading to a 32% drop in crude oil revenues in December. Germany’s freeze on pipeline oil imports lost another 5% at the end of December.
- Russia still earns an estimated €640 million per day from fossil fuel exports, down from a peak of €1000 million in March-May 2022. The EU ban on refined oil imports, the extension of the refined oil price cap and Reductions in pipeline oil imports to Poland will cut them by an estimated EUR 120 million per day by February 5th.
- In December, the EU remained Russia’s top oil importer when pipeline crude and all oil products are included. This will have changed as Germany stopped importing Russian pipeline oil at the end of December and the EU ban on oil products comes into effect in February.
- As European buyers scaled back their purchases, Japan became the largest LNG importer from Russia. China, South Korea, Turkey, India and Japan were the largest importers of coal.
- Russia has so far earned €3.1 billion from transporting crude oil on vessels that fall below the price cap, resulting in approximately €2.0 billion in tax revenues for the Russian government. This tax revenue can be almost entirely eliminated by adjusting the price cap to a level much closer to Russia’s cost of production.
- Lowering the crude oil price cap to $25-35, which is still well above Russia’s production and transportation costs, would cut Russian oil export earnings by at least €100 million per day.
- The price-cap coalition has significant influence in pushing price caps down – Russia has failed to find a viable alternative to ships owned and insured by the G7 to ship Russian crude and oil products from Baltic and Black Sea ports to transport sea.
- In the Pacific, Russia continues to use UK-insured tankers to sell oil to China, even though the market price for the oil is above the price cap. New measures are needed against insurers and tankers involved in this trade.
- Other measures available to the EU and its allies could reduce Russia’s fossil fuel export earnings by an estimated €200 million per day from levels projected after the oil products import ban and price cap.
At the same time, despite sanctions and supply cuts, Moscow still made 155 billion euros from oil and gas exports in 2022 – 30 percent more than the previous year. Because the EU, which imported around a quarter of its oil from Russia and was thus Russia’s most important crude oil customer by far, did not impose the embargo immediately after Russian troops invaded Ukraine.
And Russia compensated for eventual losses in Europe by selling more oil at a cheaper rate to countries like China, India and Turkey, which did not participate in the sanctions.
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In contrast to the oil market, the natural gas market is highly regionalised. Russian gas was mainly exported to Europe via pipelines (nearly 50 percent of European gas imports).
When these pipelines were disrupted, Russia was still making money from lower exports as the price of natural gas on the spot market in Europe had increased six-fold.
Hard times for Russia?
However, with oil and gas prices falling in 2023, the Kremlin estimates that those revenues will fall by 23 percent – a figure some experts say is overly optimistic. The number could be much lower. And that’s because of three additional factors.
First, the modern trend in exporting gas is to liquefy it. Along with the USA, Qatar and Australia, Russia is one of the most important LNG exporters.
Importantly, to liquefy its gas, Russia was dependent on many western companies that used to be the leading providers of liquefaction and drilling technology and software. With their withdrawal due to sanctions, Russia cannot replace them themselves.
That explains why the private Russian energy company Novatek – Russia’s second largest natural gas producer and the most important liquefied natural gas producer after Gazprom – decided to postpone the start of production of Arctic LNG 2, a large liquefied natural gas project on the Yamal Peninsula, emphasizes Professor Jeronim Perović, author of the book ” Raw material power Russia. A global energy story.” Western companies involved in this project, including Total (France), Linde and Siemens (Germany), and Mitsui (Japan), who provided both the technical know-how, services and financial resources, have stopped working together. In addition, the South Korean company Daewoo Heavy withdrew its order to build 15 LNG tankers.
Ships with Russian Oil / Twitter
Second, there is a problem with transporting Russian oil/gas to non-sanctioned Indo-Pacific countries (like India and China). With no pipelines operational (they are under construction and will take many years to complete) to this region, Russia relies on the ships at sea for export. But here, argues Professor Jeronim Perović, Russian companies rely heavily on Western tankers to transport their goods.
But the West, particularly EU countries and the UK, have decided that these companies are no longer insured when transporting Russian oil.
What’s more, the G7 and EU nations have agreed on price regulation that bans tanker owners, insurance companies and other maritime service providers under their jurisdiction from providing services to Russia’s oil industry unless it has already been over the barrels are sold at defined prices, currently capped at $60 per barrel.
Third, Professor Perović adds that most Russian oil comes from fields discovered in the Soviet era. “As these fields are already at peak production, Russian energy companies are being forced to develop more technically challenging reserves in remote arctic areas and offshore.
Although Russia had already started producing certain technologies for the energy sector when the first Western sanctions were imposed in 2014, the share of foreign equipment in technically demanding, unconventional projects was still present before the start of the Russo-Ukrainian war in February 2022 at 50 to 60 percent.
It is unclear to what extent Russian companies will be able to import western technology via third countries. In addition, the extent and price at which non-Western companies can replace certain Western technologies is also uncertain,” he says.
Overall, things are not looking good for the Russians. Their most powerful weapon in the war against the West through Ukraine was the weapon of energy. But this weapon seems to be gradually losing its sharpness.
- Author and veteran journalist Prakash Nanda has commented on politics, foreign policy and strategic matters for nearly three decades. A former National Fellow of the Indian Council for Historical Research and recipient of the Seoul Peace Prize, he is also a Distinguished Fellow at the Institute of Peace and Conflict Studies.
- CONTACT: prakash.nanda(at)hotmail.com
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