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Russia. Sanctions on crude oil and petroleum products. The OSW expert comments

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The European retreat from Russian raw materials is only beginning to be felt by Moscow, as the most important sanctions entered into force with a delay. As Iwona Wiśniewska, an analyst at the Center for Eastern Studies, notes in an interview with the TVN24 Biznes portal, despite attempts to circumvent the embargo, in January the revenues of the Russian budget from the oil sector fell by almost 45 percent. Another, stronger blow is just coming and is related to the recent ban on fuel imports.

Last Sunday, the EU embargo on imports of Russian fuels, such as diesel oil, entered into force. This is yet another sanction imposed by the West on Russia for attacking Ukraine, which are intended to limit the Kremlin’s ability to finance aggression-related expenses. For more than two months, the European Union has already banned the import of crude oil. In December, the limit on the price of Russian oil at the level of USD 60 per barrel, agreed by the European Union, the G7 and Australia, also entered into force.

In addition, the EU adopted price caps on Russian petroleum products, effective from 5 February. These are restrictions on sea transport to third countries.

Read more: This is to be another blow to the Kremlin. The new regulations have entered into force

The effects of the sanctions are already visible

In an interview with the TVN24 Biznes portal, Iwona Wiśniewska from the Center for Eastern Studies pointed out that the first effects of the embargo on crude oil and the price limit are already visible. – Recently, the Russian government published information on the budget results for January. It turns out that revenues from the oil sector have fallen by almost 45 percent compared to January 2022, she said.

At the same time, she emphasized that Russian crude oil is sold at a considerable discount. – The average price of a barrel of Russian Urals crude oil, which is taken into account when calculating taxes imposed on Russian oil companies, was below $50 in January. By comparison, a barrel of Brent crude cost over $80, she said.

Oil revenues of the Russian budgetCenter for Eastern Studies

However, we cannot yet speak of a full embargo on Russian crude oil. It applies only to sea transport, i.e. importing raw materials by tankers. Oil still flows to the Old Continent, for example through the “Friendship” pipeline. – Russia can export its oil through pipelines to the European Union. Poland, Slovakia, the Czech Republic and Hungary receive such oil. Bulgaria can still receive Russian oil by sea, said Iwona Wiśniewska.

The effects of the sanctions are also mitigated by other contractors. Over the months, there has been an increase in trade in raw materials with countries outside Europe, most often located in Asia.

– At the moment, mainly China, India and Turkey import this raw material from Russia. Accordingly, there was no decrease in oil production in Russia. In 2022, it even increased by 2 percent year-on-year, the analyst said. At the same time, she noted that there has been an increase in interest in fuels among European countries recently. – Until February 5, i.e. until the entry into force of the embargo on petroleum products, Russia continued to export them to the European Union and countries were willing to buy them, mainly diesel, to make stocks before the introduction of new sanctions, she explained.

Sea transportation of Russian oilPAP/Maciej Zielinski

Putin’s decree

Iwona Wiśniewska also referred to the document signed by the president at the end of December Vladimir Putin a decree on the response to the price restrictions on Russian oil introduced by Western countries.

The regulations prohibit the supply of these products to foreign legal and natural persons if the deliveries were to be made on the basis of contracts providing for the use of a price cap. The crude oil regulations entered into force on February 1.

According to the expert, such records are only propaganda. – In virtually no contract, companies do not show that they buy Russian oil at a low price due to the price limit. President Putin said that countries that follow this will be punished. For example, India, which buys this oil and pays 40-50 dollars per barrel for it in Russian ports, de facto adheres to this price limit, but does not admit to it. I have the impression that the Kremlin’s response to the price cap was only propaganda and will not have a real impact on the recipients of this oil, she stressed.

An even stronger hit

According to Iwona Wiśniewska, these sanctions, introduced at the beginning of February, will be much more painful for the Kremlin. She emphasized that so far European Union was the largest importer of Russian petroleum products, in 2021 it received almost 60 percent of of Russian exports. The loss of such a market is already a serious problem, and supplies will not be as easily diverted as in the case of crude oil.

This is primarily related to logistics. Each petroleum product must be transported separately, so a large fleet of small tankers is necessary for this. In addition, gasoline, diesel fuel, so as not to be contaminated, should not be loaded onto units that previously transported, for example, mazut. As a result, transporting petroleum products over long distances is not very profitable. Therefore, there are many barriers that make redirecting all of these supplies rather impossible, the OSW expert assessed.

The question is whether there will be people willing to buy such large amounts of fuel. – Of course, the Kremlin is thinking about Asia, but there is a lot of competition there. The most important players are China and India. It is hard to imagine that these countries would give this market to Russian diesel. In turn, Turkey or African countries, which have increased imports of petroleum products, will not be able to take over all Russian exports. So there is a problem with both finding recipients and logistics – she explained.

The remedy for the problem of raw materials is to increase the export of crude oil. “We’ll probably be dealing with that in the coming weeks.” Russia will try to export more and more oil to non-Western countries. Then, the crude oil processed there will be returned to the European market, she said. However, such a change will not be without costs. According to Wiśniewska, Russian refineries will face serious problems.

“Already at this point, the International Energy Agency is forecasting that their diesel production could fall by 12 percent in the coming weeks. Diesel is a more processed product, and Russian refineries are very poorly modernized. As a result, the share of mazout is high, and Russia will have nothing to do with it. There will be many obstacles here. Forecasts say that in the near future Russia will be forced to reduce oil production by approximately 5-7 percent, explained Iwona Wiśniewska.

From the European perspective, the reaction of the market to the introduction of the new embargo may be reassuring. – He reacted calmly, which means that he calculated the price of the embargo and was prepared for it. European companies also have so much fuel in their warehouses that they will be able to balance the situation for several months, said the OSW expert.

Ghost ships

Recently, there have been more and more reports about the circumvention of sanctions by ships flying the flags of other countries, which actually transport Russian oil. Recently, such activities were described, among others, by the British “The Economist”. Oil is transported in dilapidated tankers, which are sometimes half a century old and sail with their transponders turned off. They are renamed and repainted, sometimes several times in one trip. Iwona Wiśniewska, however, is skeptical about the scale of this practice and its importance for circumventing sanctions and thus patching up the loss in Russian business. – We have Iran’s long-term experience, Venezuela’s experience. Such circumvention of sanctions is possible. The gray fleet of tankers, transshipment of raw material on the high seas, the use of a chain of intermediaries – Russian companies will certainly use all these mechanisms. However, looking at the results of the Russian budget, it can be said that this circumvention of sanctions is not of a mass nature, she pointed out.

She added that “each circumvention of the sanctions also increases the risk and costs, which means that the recipient demands an even greater discount from the manufacturer.” – In fact, prices for Moscow are not increasing, but the money that various intermediaries receive is increasing. Probably some of them are connected to the Kremlin. However, I have doubts whether the money earned in this way goes to the Russian budget. Rather, they will be located outside of Russia, she said.

Read more: The Russians found a way to deal with the sanctions. “It’s a ghost sale”

Money for the war

The radical shift in European energy policy and the associated costs had one main goal – to deprive Russia of the possibility of financing war in Ukraine. However, it has yet to be achieved. – Taking into account the reserves that Russia currently has, and the income it received last year from the export of raw materials, the Kremlin will probably have enough money for this year – predicted Iwona Wiśniewska. According to the expert, the situation may become more complicated in the coming years if the Kremlin’s spending remains at the current level.

In her opinion, Europe is unlikely to return to its former dependence on Russian raw materials. – Of course, we are talking about a hypothetical situation in which there is a change of power in the Kremlin. Freeze conflict in Ukraine it would not be enough for European companies to return to cooperation with Russia. It is known that freezing the conflict would only mean an attempt to gather forces again and rebuild military potential, and thus pose a further threat to Europe, she said.

However, even after the regime change, a return to such a high dependence on raw materials will no longer be possible. “Besides, every week, month takes such a scenario away. Russian oil is redirected to other markets, if it is necessary to reduce production, the question is whether it will be possible to easily resume production from inactive deposits. While earlier Western companies stopped cooperation with Russia, but remained there, in recent months we have had a whole series of real withdrawals from this market. If Russia decides to admit Chinese partners to the assets they left behind, such a return may not be possible, the analyst concluded.

Main photo source: PAP/EPA/MIKHAIL METZEL/SPUTNIK/KREMLIN POOL



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