Minus $50 Billion: The Yermak-McFaul group has proposed measures to undermine the Kremlin’s ability to finance the war and maintain stability in Russia

To undermine Russia's ability to wage war against Ukraine, the West must achieve a $50 billion reduction in its oil and gas export revenues. This would essentially wipe out Russia's current account surplus (which stood at $50.6 billion in 2023, according to the Central Bank), asserts the Yermak-McFaul International Expert Group on Sanctions in their latest report.

As Re:Russia has previously reported, Russia's average export revenues over the decade before the war was a little over $420 billion annually, with around $250 billion derived from oil and gas exports.This was a comfortable level that allowed Putin's authoritarian regime to generate sufficient budgetary income to maintain social stability and networks of corrupt loyalty, while the Russian economy grew at a rate of around 1% per year. In 2022, thanks to a surge in oil and gas prices, the value of Russian exports reached $592 billion, with $392 billion attributed to oil and gas. These record revenues not only financed the war but also mitigated the impact of sanctions on the Russian economy (→ Re:Russia: Worse than a Crisis).

In 2023, export revenues returned to normal at $425 billion, of which $260 billion, according to recently published Russian customs data, came from 'mineral products’. Meanwhile, the war in Ukraine incurred approximately an additional $150 billion in annual expenses for the Russian budget. If, as previously indicated by Re:Russia, export revenues were to drop to $330–350 billion, and oil and gas revenues to $150–200 billion (as was the case in the crisis years of 2016 and 2020), this would likely fundamentally alter the situation within Russia and undermine its capacity to wage war in Ukraine. These calculations suggest that the proposal by the Yermak-McFaul group indeed brings the Putin regime closest to the 'threshold of impossibility' of addressing the dual challenge of waging war in Ukraine and maintaining domestic stability.

In 2023, according to the preliminary assessment by the Ministry of Finance, oil and gas revenues of the Russian budget amounted to 8.8 trillion rubles, or approximately $100 billion (out of the total $260 billion income from the country's oil and gas exports). In 2024, they are planned at 9.7 trillion rubles (roughly the same $100 billion after ruble devaluation). The experts from the Yermak-McFaul group propose four measures in their report that would significantly reduce these revenues and undermine the existing balance of stability.

Lowering the price cap on Russian oil from $60 per barrel to $50, according to the experts, could reduce Russia's export revenues by $17.9 billion. This is the most powerful measure among those proposed. Lowering the price cap on premium oil products from $100 per barrel to $60 would result in an additional loss of $9.6 billion. A more effective crackdown on the shadow fleet, used to circumvent the price cap, would cost the Russian economy, according to the group's calculations, $8 billion. Additionally, they suggest that the EU should stop purchasing Russian gas. A ban on liquefied natural gas (LNG) supplies from Russia would deprive it of $5.6 billion, halting pipeline gas supplies through Ukraine would cost $5.5 billion, and through the 'Turkish Stream' pipeline another $5.5 billion.

The price cap introduced at the end of 2022, even in its current form, has caused serious damage to Russia, the experts note: the discount of Russian Urals oil to Brent has increased from $1–2 per barrel to approximately $20. With the average price of a barrel of Brent in 2023 at $83, according to the Russian Ministry of Finance, a barrel of Urals was priced at $63, almost at the capped level. The budget was based on $68.3 per barrel, with the shortfall compensated for by the weakening ruble. However, the Urals discount to Brent fluctuated throughout the year. As Re:Russia previously reported, it was at its highest in the first few months when Russia was adjusting to sanctions. Subsequently, after restructuring logistics, the price difference narrowed. The price of Russian oil fell below the price cap for the first time at the end of 2023 amid a global drop in prices. In January, according to Russian authorities, the price of a barrel of Urals once again exceeded the cap.

The idea of a lower price cap was discussed even before its implementation — for instance, Kyiv insisted on $30 per barrel. This level is also considered optimal by the Yermak-McFaul group. The US and the EU debated a higher level, up to $70 per barrel, fearing that Russia would refuse to supply oil on unfavourable terms, leading to a new surge in global prices. The Yermak-McFaul group's report presents three counterarguments. First, the experts write, even with a $30 ceiling, Russia would still profit — the production cost of Russian extraction, according to their estimates, is mostly in the range of $10-15 per barrel. Second, the effect of prolonged supply reductions on the Russian economy would be more severe and would manifest quicker than the damage from reductions due to a lowered price cap.

Finally, halting supplies would harm China, India, and Turkey, which have become the largest buyers of Russian oil. Russia is likely to prefer avoiding causing problems for them, the experts suggest. As Re:Russia has previously reported, the global oil market is currently approaching surplus (supply meeting or exceeding demand) due to increased supplies from non-OPEC+ countries. In this situation, Saudi Arabia is interested in reclaiming its market share, which had diminished due to the voluntary reduction in Saudi sales in the previous period. If Russian supplies were to decline, Saudi Arabia would start replacing Russian oil in Asian markets.

However, to achieve the desired effect, it is not enough to simply lower the price cap on oil and oil products — compliance with these limitations must be ensured. The measures required for this are listed in the Yermak-McFaul group's 'Russian Oil Tracker' January report. The authors point out that an effective exchange of information between authorities and companies capable of providing services to Russian counterparts has not yet been established within the G7. For example, companies are not obligated to provide authorities with original contracts. It is suggested that countries with access to the Baltic and Mediterranean Seas should monitor whether all vessels passing through their territorial waters are properly insured. Finally, experts insist on harsher sanctions for organisations helping Russia to circumvent the price cap. For companies from non-coalition countries, direct violation of the sanctions regime should be punished with US blocking sanctions.

Among other ideas from the Yermak-McFaul group, the most easily implementable appears to be a European embargo on Russian LNG shipments, which they also propose to introduce gradually to avoid a price spike. In 2023, Russia supplied the EU with 19.8 billion cubic metres of LNG, compared to 20.5 billion in 2022, according to data from the London Stock Exchange cited by the Financial Times. This is a small portion of Europe's consumption, estimated at around 350 billion cubic metres. EU authorities are already discussing a gradual phasing-out of Russian supplies. If the embargo were imposed during the current heating season, according to calculations by the Bruegel think tank, by its end, the average storage level would be at about 20%. Only Spain and Portugal might face depletion of their reserves. If Russian LNG were redirected to Asia in this scenario, experts at Bruegel believe there would be no significant price increase.

Halting pipeline gas supplies, as proposed by the Yermak-McFaul group, would be more challenging. The expiration of the contract for the transit of Russian gas through Ukraine is at the end of 2024. Ukrainian authorities have repeatedly stated that they do not intend to renew it. However, transit could continue even after that, explains Carnegie Policy analyst Sergei Vakulenko: the parties to such contracts would have to be European companies, not Ukrainian ones. Moreover, the main buyers of Russian gas in Europe (Slovakia, Hungary, Austria, and Italy) 'are pragmatic and not inclined to engage in foreign policy activism'. Maintaining transit is somewhat beneficial for Ukraine as well, he believes. Due to the war, it consumes significantly less gas than before, mostly relying on domestic production. However, the deposits are unevenly distributed across the country, making it more convenient to deliver Russian gas to some consumers while compensating for this by supplying Ukrainian gas to Europe. In this situation, Vakulenko believes it would be more rational to wait until 2026–2027 when significant volumes of LNG from the US and Qatar are expected to enter the market. Then, it would be possible to smoothly phase out Russian pipeline gas. However, from a strategic standpoint, it is important to undermine Russia's ability to wage war in 2024 — before the US presidential elections. The cost to Europe of either Ukraine's defeat or the need to support it in its confrontation with Russia until 2026–2027 would be significantly higher than compensating for the lost revenues of Slovakia and Austria.