22.09.22 Sanctions Review

As Russia’s seaborne oil exports fall and its budget revenues slide, the negative impact of sanctions on the economy and ordinary Russians increases

The first half of September saw Russian oil exports decline sharply, according to Bloomberg. Shipments to China and India could not compensate for the loss of the European market. With the price environment also worsening, budget revenues dropped to the lowest they’ve been in three months. As the EU embargo is gradually introduced, and new sanctions limiting maritime transportation of Russian oil come into effect on December 5, the situation in Russia may continue to worsen. Oil export revenues could fall even further if Russia fails to expand into the Asian market. Although this is unlikely to directly affect the Kremlin’s ability to wage a protracted war in Ukraine, it will undermine the Russian government’s plans to accelerate import substitution and expand social programs. These were meant to become a form of compensation for the losses that the economy and ordinary citizens are bearing as a result of sanctions.

According to Bloomberg’s calculations, maritime transportation of Russian oil fell by almost 900 thousand barrels per day (b/d) to 2.54 million b/d in the first two weeks of September. This compares with an average of 3.42 million bpd for the week ending September 2, meaning a 26% decrease of the daily average. To add to this, the volume of marine exports, calculated on the basis of a four-week moving average to exclude short-term fluctuations, was less than 3 million b/d for the first time in five months. 

Exports in September initially fell due to a storm in the Pacific Ocean, and then because of an “unexplainable” drop of oil moving through the Baltic Sea ports. In the four weeks ending September 9, exports stood at 1.77 million bpd. A week later the figure was 0.83 million bpd.

Exports to Europe in the four weeks ending September 16 fell by 172 b/d to 804,000 b/d compared to the four week average ending September 9. This is the yearly minimum. The significant drop can be explained by countries refusing to import Russian oil right in the wake of the EU embargo coming into force on December 5, Bloomberg notes.

At the same time, deliveries to Asia, and primarily to China and India, remained at about 1.73 million bpd in the four week period ending September 16. This is the same level as seen in the four week period ending September 9.

As a result of reduced volumes of supply, lower prices, and a steep discount on Russian Urals in proportion to global prices, the export duty on oil has already fallen to $126 million per week. This is the lowest it’s been in 12 weeks. In October, revenues from oil exports may drop even more, as the export duty will be reduced by another 15% to $6.06 per barrel. This means that the income from each barrel of exported oil may fall to levels not seen since February 2021, Bloomberg predicts. 

Russia's oil revenues could drop even further in the coming months, with a partial EU embargo coming into effect in December, coupled with a ban on European operators from insuring and financing the transportation of Russian oil by sea to third countries.

In addition, the United States is putting pressure on countries that import Russian oil to join the G7’s oil price cap. Although it’s unlikely that China, India and Turkey will back the initiative, the price cap will give them a stronger bargaining position with Russian exporters, which could lead to an even greater discount on Russian oil.

In August, Russia's oil export revenues fell by $1.2 billion compared to July. At $17.7 billion, this is the lowest they’ve been since March. This is despite an export increase of 220,000 bpd to 7.6 million bpd, the International Energy Agency noted in a report from September. Then, Russia was able to largely redistribute the 2 million b/d of oil that had been in limbo after the start of the war between new buyers. Normally, this oil would have been exported to Europe, the USA, Japan and Korea.

After the introduction of the partial EU ban, Russia will be able to redistribute another 2.4 million b/d. However, new buyers want Russian oil only if it comes with a discount, and this is already leading to falling Russian budget revenues, the IEA notes. According to the agency’s forecast, by February 2023, when the embargo comes into full force, oil production in Russia will be reduced by 1.9 million b/d to 9.5 million b/d. For comparison, in August this figure was almost 11 million b/d.

The decline in oil export revenues hurts Russia's ability to finance the war, the agency notes. However, this conclusion may be an over-exaggeration. Military spending is cushioned from even a moderate drop in oil export revenues. However, as real income shrinks, the Russian government’s ability to support import substitution programs and expand social programs will indeed be limited.