Oil Alone: In the first half of 2024, oil offset the decline in Russian non-oil export revenues, but this success will not be repeated in the second half of the year

A Brief Rundown 

Russia's ability to simultaneously continue large-scale military operations in Ukraine while maintaining internal social and economic stability directly depends on the revenues it earns from exports. In 2022, due to rising prices driven by panic in global markets, Russian export revenues reached abnormally high levels: $592.5 billion, of which $392 billion came from oil and gas. In 2023, total revenues dropped by 28.3%, down to $425.1 billion, a level that averaged over the ten pre-war years. What is happening with Russia's export revenues in 2024, and what trends are influencing their dynamics?

According to data from the Federal Customs Service, cited by state media, exports overall remained at last year’s level after the first seven months of 2024 (a symbolic 0.75% year-on-year growth). However, as import volumes decreased in 2024 due to issues with international transactions (→ Re:Russia: Battle for Imports) – from $166 billion to $153 billion in value terms over a seven month period — the positive trade balance increased by 20% compared to the same period in 2023, amounting to $87.9 billion.

Russian exports, 2022-2024, million USD 

Of the three main commodity groups in Russian exports, the largest – mineral products – showed an increase of 3.6% compared to last year, while the other two – metals and agricultural products – saw declines of 3.8% and 4.6%, respectively. However, the weight of the first group, which accounts for 63% of total exports, offset this decline.

Structure of Russian exports, January-July 2024, billion USD

Analysts from the Central Bank note in their ‘Regional Economy’ report that the negative impact on the export dynamics of most goods is due to strengthened sanctions, issues with receiving payments from counterparties, logistical difficulties, and unfavourable conditions in certain markets.

Many small minuses and one medium plus

The total export volume of mineral products (which, aside from oil, gas, and petroleum products, also includes coal and ore) amounted to $150.5 billion from January to July. While the Federal Customs Service does not publish data on individual product shipments (nor much other data), Central Bank analysts note that the overall category’s performance is driven by the increase in oil export revenues. This growth can be attributed to high price levels, a minor sanctions discount on toxic Russian oil, and Russia's incomplete adherence to OPEC+ production quotas.

At the same time, coal exports are declining due to unfavourable global market prices and a lack of logistical infrastructure, according to Central Bank analysts. Bloomberg reports that coal exports to China have fallen by more than 20% year-on-year since the beginning of the year, as Beijing imposed tariffs to protect its domestic producers. Meanwhile, China has increased overall coal imports from Australia and Indonesia, highlighting Russia's one-sided dependence on its senior partner. India and South Korea have not increased their purchases from Russia due to expensive logistics and sanctions, making Russian coal uncompetitive, according to traders interviewed by S&P Global.

Exports of metals and metal products, which account for 13% of the total value of Russian exports, fell by 5.2% in the first half of the year. The main reason is sanctions. In December of last year, the EU banned imports of Russian pig iron, ferroalloys, iron, copper and aluminium wire, foil, and certain types of pipes. In April this year, the US and UK imposed restrictions on Russian aluminium, causing the London Metal Exchange (which, before the sanctions, held reserves that were about 90% Russian aluminium) and the Chicago Mercantile Exchange to stop accepting it. As a result, Ural enterprises have completely halted supplies to 'unfriendly' countries, according to the authors of the ‘Regional Economy’ report.

Exports of agricultural products (which account for 10% of total export volume) fell by 5.3% year-on-year in the first half of the year. The primary cause was the decline in global grain and oil prices due to abundant harvests in key regions. The Bloomberg Commodity subindex for grains and oilseeds is at a four-year low. Due to the global grain surplus, several key trading partners for Russia have introduced temporary bans on grain imports or raised tariffs. For example, in the summer, Turkey – the second-largest buyer after Egypt – suspended wheat imports. Before that, Kazakhstan banned wheat imports from Russia. At the same time, Central Bank analysts noted a rapid increase in pork exports (China lifted its ban on meat imports from Russia late last year, which had been in place since 2008), but this accounts for only a few million dollars per month.

The decline in three other relatively large categories of Russian exports is due to various factors. Exports of chemical products (down 3.8% in the first six months) fell due to a decrease in global fertiliser prices, driven by cheaper raw materials. In addition, demand for some products – particularly polymers – has increased in the domestic market. Exports of machinery, equipment, and transport vehicles – the main non-commodity technological exports – declined the most significantly, by 10.7% compared to the first half of 2023, primarily due to rising transaction and logistical costs. Some enterprises managed to offset the drop in exports by increasing sales in the Russian market.

Payments, locomotives, China

At the same time, chemical industry enterprises and manufacturers of machinery and equipment are more likely than other sectors to report difficulties with receiving payments, according to the authors of the ‘Regional Economy’ report. Overall, according to the Central Bank’s July monitoring cited in the report, 25% of exporters are facing such issues. Exports of wood and pulp and paper products (-5.9% year-on-year) have also encountered logistical challenges. Additionally, Central Bank analysts point to a decrease in demand for Russian timber in Asia, due to a real estate sector crisis in one large country, which is clearly a reference to China.

The weakness in Russian exports is reflected in the dynamics of rail freight transport. From January to August, loading volumes fell by 3.7%, and freight turnover (taking into account empty wagon runs) decreased by 5.6%, according to Russian Railways (RZD). By the end of the year, freight volumes will likely be the lowest since the 2008-2009 crisis, predicts the Telegram channel MMI. Given that Russia continues to shift its supply routes from west to east, the drop in freight turnover should not have been as significant as the drop in loading. While Europe's share of Russian exports was 23% in the first half of 2023, it dropped to just 15% in the first half of 2024. Meanwhile, Asia’s share rose from 69% to 85%. The main factor behind the decrease in freight turnover is the reduction in the average transportation distance. This could be due to logistical companies using shorter routes because of issues with the railway infrastructure.

MMI’s authors also attribute the weak dynamics in rail freight to a shortage of locomotives. Although there are nominally enough locomotives for freight transport (around 20,000), frequent breakdowns and difficulties with repairs, caused by sanctions, led to a shortage of rolling stock as early as last year, according to a report by Vedomosti citing an unnamed Russian Railways employee. By the end of 2023, the technical readiness coefficient of the locomotive fleet had dropped to 93% (the normal level is 95%), and in 2024 it will be even lower, Mikhail Burmistrov, head of the Infoline consulting company, told Vedomosti. Due to the shortage of rolling stock, port and terminal storage capacities are almost fully loaded, the authors of the 'Regional Economy' report note. The situation is likely to worsen. The state-owned company estimates that it will need nearly 10,000 new locomotives by 2035. Since this volume exceeds the production capabilities, the company predicts a shortfall of 1500 locomotives by the end of the period.

Russia's exports to its largest partner, China (which accounts for over 30% of Russian exports), are also not growing. According to the General Customs Administration of China, imports from Russia amounted to $64.7 billion in the first half of 2024, compared to $65.7 billion in the second half of 2023 and $61.8 billion in the first half of 2023. In August, Russian exports surged by 17.7% compared to July, reaching $11.42 billion. However, a similar seasonal spike was observed in August 2023. As before the war, the lion’s share of Russian exports consists of hydrocarbons. The volume of metals and metal products (the second most important category) fell to $3.8 billion in the first half of the year, compared to $5 billion in the second half of 2023, but was slightly higher than the $3.2 billion recorded in the first half of last year. It seems that the potential for further growth in exports to China is exhausted in the foreseeable future.

The oil key to war

Thus, Russia’s non-oil exports are seeing declines in nearly all categories, meaning the burden on oil revenues is increasing. This factor will largely determine the situation by the end of this year and into next year. Meanwhile, oil prices are falling. This week, after the release of an OPEC+ report that lowered the forecast for demand growth next year, the price of Brent crude dropped below $70 per barrel for the first time since December 2021. Adjusted for inflation, this price level corresponds to values from 20 years ago. We may be witnessing a shift in the trend. Analysts at Morgan Stanley note that the market is behaving similarly to 2007–2008 and 2020, periods that preceded major crises: fuel inventories are growing, refining margins are shrinking, and the spreads between short-term and long-term contracts are narrowing. Based on these observations, the bank lowered its Brent crude price forecast for the fourth quarter from $78 to $75 per barrel. However, there are less pessimistic views, such as from the US Energy Information Administration (EIA), which expects the price of Brent to be slightly over $80 in the final months of the year.

For Russia’s total export revenues in 2024 to remain at last year’s level, oil prices for the remainder of the year would need to match those of September-December 2023, meaning above $85 per barrel of Brent. Given that other export revenues are down this year, the price would need to be closer to $90, which seems unlikely. Additionally, Russia’s oil export revenues in the coming months will start to reflect the country’s required production cuts in October and November to meet its OPEC+ commitments. Therefore, it is highly probable that Russia’s oil revenues for this year will fall short of last year’s levels.

Next year, no significant price increases for most of Russia's export goods are expected, as prices are already relatively high compared to pre-pandemic levels. For instance, World Bank analysts predict that by 2025, prices for various metals may deviate by no more than 5% from late 2024 levels, with some rising and others falling. Agricultural product prices are expected to decline slightly. Coal prices, however, may drop significantly, potentially more than 10%, due to increased supply amid weak economic activity in China. As a result, oil revenues will become even more crucial.

At the same time, the latest macroeconomic forecast from the Ministry of Economic Development, which will shape the 2025 budget, does not factor in a potential trend reversal in the oil market. The forecast for Brent crude in 2025 has been raised from $75 to $81.7 per barrel. Along with upward revisions to the economy's growth forecast for this year and next (→ Re:Russia: Heated Stagflation), this will allow the Ministry of Finance to plan for higher expenditures based on these anticipated higher revenues. However, this will likely lead to a higher inflation rate than the Central Bank hopes. As a result, economic policy in 2025 will probably follow the same ‘push-pull’ principle as in 2024, with the regulator attempting to cool artificially driven economic growth and the government striving to support it. The real challenge for Russia’s economic authorities, however, would be if OPEC+ countries abandon production cuts to regain lost market share in oil sales.