Vladimir Putin and Russia are set to feel more G7 oil pain

Finland’s Center for Research on Energy and Clean Air (CREA) estimated that revenue from Russia’s fossil fuel sales was down 17 percent in December, costing Russia about €160 million ($246 million) a day.

Russia has largely been able to maintain its oil export volumes by diverting its sales from Europe, which used to be its biggest market for oil and gas, to China, India and Turkey.

He built his own fleet of tankers to bypass the caps, and used sanctions-busting techniques developed by countries such as Iran and North Korea, but the relatively small pool of buyers willing to accept his oil used their leverage to get even big discounts. before the price caps were introduced.

The war will leave permanent damage to Russia’s economy. Credit: AP

The new restrictions on refined products may be even more effective, but have some adverse implications for the West in the process.

China and India, the two biggest buyers of Russian oil, have their own very large domestic refining sectors. They do not need Russia’s diesel or fuel oil or other intermediate products. There is no obvious market for the Russian product previously sold in Europe.

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China and India may of course be willing to buy Russian products at very deep discounts and then ship their own to those buyers who previously bought from Russia, but this is a cumbersome and, given the relative distances, expensive way to get Chinese or to substitute Indian products for the Russian oil that Europe used to buy.

The flip side of that Russian dilemma is that, if there is not a market of sufficient size, the Russian product will not flow into the global market and prices for refined products may rise sharply.

Even if China and/or India were willing to buy from Russia and sell their domestic product in the world market, there would be substantial increases in transportation costs and therefore final prices, unless the Russian product was sold to them at a deep discount.

The limits on Russian product proposed by the EU are $US100 per barrel for diesel and $US45 per barrel for other, less value added, products. CREA estimates that a cap at that level, along with the planned simultaneous EU ban on imports of refined products, could cost Russia a further €120 million ($A185 million) a day.

Caps at that level would be largely consistent with the approach taken for Russian crude. The prices of refined products vary much more widely than crude oil, but these caps appear to represent a discount of about 30 percent, perhaps slightly more, to the freely traded products.

Russia will still generate massive revenues from its sales of crude and refined oil, even with the limits and embargoes, but the €1 billion or so a day it generated before the invasion could be almost halved.

Aside from the lost revenue, the embargoes and price caps will do long-term damage to Russia’s energy industry which, before the invasion, generated about 45 percent of its federal government’s revenue.

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.

He’s budgeting for something similar this year, but that’s based on an average oil price of $US70 a barrel. At the prices it has received since the limits were set, that deficit would roughly double even before the limits on refined products.

Before the invasion, Russia’s energy industry generated about 45 percent of its federal government’s revenue.Credit:Bloomberg

It could face something worse.

The G-7 agreed earlier this month to review the level of the price cap on Russia’s crude exports.

The G-7 countries had originally planned for the review to take place in February, but postponed it until March to get a better idea of ​​how the cap affected Russia and the global market and to get some initial feedback on the caps. refined products that can enable the group. to better calibrate them.

The new limits will be introduced within a more complicated market, with more varied prices, than crude.

Aside from the lost revenue, the embargoes and price caps will do long-term damage to Russia’s energy industry which, before the invasion, generated about 45 percent of its federal government’s revenue.

It has lost its core European market for crude oil, refined products and gas, rendering hundreds of billions of dollars worth of processing and pipeline infrastructure redundant and potentially stranding some major gas fields.

Europe will never allow itself to become as dependent on Russian energy as it was before the war and it is unlikely that China or India will allow themselves to be as exposed as the Europeans.

The cost, whether the oil or gas is shipped or transported by pipeline to non-European buyers, will be significantly (for gas, perhaps prohibitively) higher.

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Vladimir Putin saw Europe’s dependence on Russia’s energy as its vulnerability and as leverage to prevent it from coming to Ukraine’s aid. Instead, Europe used its position as Russia’s largest energy customer against it and that mistake will do significant, and probably permanent, damage to Russia’s economy regardless of the outcome of the war.

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