Kremlin benefits from commodities price volatility
EU unlikely to sanction agriculture and nuclear imports
Analysts expect slow-burn impact on Russian economy
Russia’s ability to maintain export flows of its critical revenue commodities have helped sustain the Kremlin through its invasion of Ukraine in the face of western sanctions, but analysts say the health of its vital oil and gas industry may be slowly deteriorating.
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Sanctions have restricted Russia’s access to previously key export markets. Russia’s share in EU oil imports fell from 30% in the first quarter of 2022 to 3% in the first quarter of 2024, according to EU data.
Restrictions on Russia’s access to global financial markets and Western technology are also increasing producers’ costs and raising risks of unplanned shutdowns and accidents.
While Russia is currently managing these problems, they are likely to become more damaging with time. Russia’s fiscal breakeven oil price has increased significantly since it invaded Ukraine, as it incurs major costs related to the conflict. S&P Global Commodity Insights estimated Russia’s fiscal breakeven oil price at $62/b in 2021, rising to $120/b in 2022, $103/b in 2023 and $94/b for 2024.
The Russian economy has so-far proven to be relatively resilient to these factors though, for three main reasons. Firstly, supply risks linked to the conflict led to commodities prices skyrocketing in the immediate aftermath of the war, boosting Russian revenues. Secondly Russia was able to redirect large volumes that were previously shipped West to non-sanctioning markets, including India and China. Finally, Russia is able to capitalize on the ruble to dollar exchange rate to ensure that if its dollar revenues decline, it can meet its ruble-denominated domestic costs.
Hydrocarbons impact
Oil and gas sales are Russia’s most important revenue stream. In 2023, they stood at Rb8.822 trillion, down from Rb9.057 trillion in 2021, according to Russian government data. Revenues in 2022 were significantly higher at Rb11.586 trillion on the back of commodity price volatility.
Sanctions have resulted in major discounts on Russian crude. In April 2022 its key crude grade Urals was trading at a discount of over $40/b to Dated Brent, according to Platts assessments by Commodity Insights. This has since narrowed and was assessed at $11.9/b on Aug. 7 — the lowest level since the day before Russia invaded Ukraine.
Tatiana Mitrova, a research fellow at Columbia University Center on Global Energy, said that sanctions pressure is increasing.
“Russia still has a comfortable level of hydrocarbon revenues, but sanctions pressure step by step starts to squeeze the Russian budget and corporate revenues. Russia is working hard to find the ways to increase its revenues, a lot will depend on the consistency of sanctions implementation and control,” she added.
The key sanctions on Russian oil include a ban on most Russian seaborne crude exports in force from December 2022, as well as a ban on most Russian refined products introduced in February 2023. There is also a price cap on Russian oil, set at $60/b for Russian crude, $100/b on products that typically trade at a premium to crude and $45/b on those that generally trade at a discount to crude.
Enforcement of these sanctions has been tricky, though, allowing significant volumes of Russian oil to be sold above the price caps.
“Part of the reason we are not seeing much enforcement of the price cap right now likely relates to US government and G7 fears on further energy market turmoil – particularly before the US election in the fall,” sanctions expert Laura Deegan of Miller & Chevalier said.
She added that enforcement is likely to focus on third country actors and attempting to deter them from continuing business with Russia.
It has been harder for Russia to support gas revenues. Despite increasing deliveries to China, redirecting natural gas supplies is much harder than rerouting oil. Gazprom is planning to build another pipeline to China – Power of Siberia 2 — that would run through Mongolia. It has yet to secure a final agreement on terms for supplies via the route though. Russian gas revenues could further fall if a contract for gas transit via Ukraine is not renewed beyond the current expiry date of end 2024.
In contrast Russian LNG supplies to Europe have increased since the war began, totaling 17.8 Bcm in 2023, up from 13.5 Bcm in 2021. The latest EU sanctions include restrictions on re-exports of Russian LNG landed at EU ports to markets elsewhere and sanctions against Russian LNG projects under development, which could dent these flows.
The EU aims to fully phase out Russian oil and gas imports by 2027.
Other revenue streams
The Kremlin continues to receive large sums of money for exports to the EU of other commodities, some of which are much harder to sanction, and have grown since the conflict began.
The EU has not sanctioned Russian food and fertilizers exports to Europe, due to concerns over the impact on global food security. Its imports of Russian cereals and oilseeds as well as Urea increased in 2023 compared to 2021.
Meanwhile, parts of the EU nuclear power sector, particularly in eastern Europe and Finland, which operate Russian-made VVER reactors, remain dependent on Russian uranium imports, conversion and enrichment services, as well as on Russian spent fuel and depleted uranium disposal. EU imports of nuclear fuel increased from 260 metric tons in 2021 to 570 mt in 2023.
Russia also continues to export significant volumes of metals to the EU. In 2023, the EU imported 5.8 million mt of iron and steel products from Russia, down from 10.9 million mt in in 2021, according to data collected in S&P Global Market Intelligence’s Global Trade Analytics Suite. Current volumes mostly comprise unrolled steel, pig iron and sponge iron the imports, although they are limited by quotas.
As long as the conflict in Ukraine continues, sanctioning countries will face ongoing challenges in reducing Russian commodities revenues.
