Russia’s ability to fund its war largely depends on the size of its oil and gas revenues. According to data from the Federal Customs Service of the Russian Federation, these revenues reached a record-breaking $384 billion in 2022, the highest figure recorded in Russian history. The average price of a barrel of Russian Urals oil in 2022 rose to $76, up from $69 in 2021, while the price of gas increased to $1,500 per 1,000 cubic metres. These price hikes allowed Gazprom to increase its revenues despite the significant decline in exports to Europe. Russia's unprecedented export earnings compensated for the effects of numerous sanctions, including record capital outflows (you can read more about this in Re: Russia's Worse Than a Crisis report). As a result, the Russian economy has been able to avoid a severe economic downturn.
Before the oil embargo, the European Union was the largest purchaser of Russian energy resources. In 2022, the EU paid Russia almost 140 billion euros, out of which 83 billion was for oil, 53 billion for gas, and an additional 3 billion for coal. For comparison, Russia received 123 billion euros from exports to Europe in 2021, 68 billion in 2020 during the pandemic, and 112 billion in 2019. According to estimates made by the Belgian think tank Bruegel, Russia may be able to earn between 14 and 69 billion euros in revenue from the European market in 2023, even despite the oil embargo and the limits placed on gas supplies. The baseline scenario predicts revenues of at least 29 billion euros.
The baseline scenario developed by Bruegel’s experts assumes that Russia will continue to export its gas via Ukraine and the Turkish Stream pipeline at current volumes, or at a rate of 630,000 megawatt-hours per day. Liquefied natural gas supplies will remain at the average level of 2022, which stands at 510,000 megawatt-hours per day. The price is currently 50 euros per 1 megawatt-hour. Further, crude oil will be imported through pipelines at a rate of 285,000 barrels per day and via sea transportation at a rate of 100,000 barrels per day. Its average price will be 55 euros per barrel.
For Russian revenues to reach the maximum of 69 billion euros, which is roughly the same amount allocated to Ukraine by its allies in 2022 (as estimated by the Institute for World Economics at the University of Kiel), certain factors must be in place. Gas transit through Ukraine must either meet or exceed the average level witnessed in 2022, which might happen if Europe experiences bad weather. If this were to occur, as we have previously discussed here, Europe may require more gas than usual. Moreover, LNG supplies would need to remain at their highest level, which was 630 megawatt-hours per day in 2022. In addition, oil supplies would need to exceed the baseline scenario, which may be possible if Bulgaria and Poland increase their demand. Although the experts at Bruegel deem this scenario unlikely to occur, the Bulgarian authorities have already permitted the export of petroleum products manufactured from Russian oil to Ukraine. In order to achieve this more extreme scenario, gas prices would have to double, reaching 100 euros per 1 megawatt-hour, and the price of Russian oil would need to hit $70 per barrel, which is the price Russia has built into its budget.
According to Bruegel’s experts, EU energy sanctions will not be fully effective as long as they do not include restrictions on the sale of Russian gas. If this extreme scenario of increased gas pumping through the remaining pipelines alongside higher prices occurs, Russia's revenues from gas export revenues will remain at the same level in 2023 as they were in 2022. If Russian oil supplies to Europe continue to decline, they may be redirected to Asia, and thus the Russian budget will experience insignificant losses. However, if sanctions are imposed on Russian gas, it will be impossible for Russia to redirect these exports. Nonetheless, the energy balance in Europe is already precarious (we wrote about the situation here), and any further reduction in supplies will likely have a negative impact on the region on par with the effect experienced by Russia.Thus, further action in terms of the effectiveness of the current sanctions policy against Russian energy exports is limited. Therefore, the state of the Russian economy and budget will now be heavily dependent on the price of oil. Despite reaching new highs in the first half of 2022, oil prices stabilised in the autumn before beginning to decline again in early 2023. This has caused Russian budget revenues to drop significantly, as the price of Russian Urals fell below $50 per barrel. However, the recent surprise decision by OPEC+ countries to cut their production by a total of 1.6 million barrels per day has once again led to an increase in prices. This will provide a significant boost to Vladimir Putin not only in his ongoing war in Ukraine, but also in his successful evasion of sanctions. Finally, this decision is expected to counterbalance the effects of any additional sanctions imposed by the EU against Russia’s energy exports.