The Discount has Shifted: Russian budget oil and gas revenues soared at the beginning of the year due to the narrowing discount of Urals to Brent, but there is still potential for sanctions to be toughened

According to the Ministry of Finance, the Russian budget’s oil and gas revenues for the first quarter of this year amounted to almost 2.93 trillion rubles, which is an increase of 79% compared to the same period of 2023, despite the intensification of sanctions pressure. However, a significant contribution to this growth was made by the 25% devaluation of the ruble. If in the first quarter of 2023 the dollar averaged around 73 rubles, then in the first quarter of 2024, it was almost 91. In addition to this, a significant inflow in February was the one-time receipt of additional payments for oil under the tax on the extraction of minerals for the fourth quarter of 2023. Finally, another factor was the increase in physical export volumes. According to Kommersant, in March, offshore exports increased by 5% year-on-year. Oil not claimed by the refining industry as a result of Ukrainian drone attacks was redirected for export.

However, the main source of revenue growth was Russian oil prices. Compared to the first quarter of last year, the price of Brent crude oil rose only slightly, from $81 to about $85. The rise to $90 per barrel already occurred in April. A barrel of Urals in January-March 2023, according to the Ministry of Finance, cost on average about $48 (i.e. the discount to Brent was about $30), in January 2024 it was $65, and in February — $69. At the beginning of 2023, shortly after the price cap was introduced, the discount was at its highest, by the end of the year it had shrunk to $12, and in early 2024 it was $18. There is no data for March yet, but the discount has clearly decreased. In early April, according to Argus Media data cited by Bloomberg, Urals crude was selling on average for $75 per barrel, meaning the discount does not exceed $10.

Thus, the growth of Russian budget oil and gas revenues primarily reflects the reduction in the discount and indicates that the sanctions are not effective enough. However, the sanctions against Russian oil exports only intensified from the end of 2023 (→ Re:Russia: Rusty Business), when the US Treasury Department's Office of Foreign Assets Control (OFAC) began to block those operating as part of Russia's shadow fleet. At the beginning of this year, sanctions pressure continued to intensify: as we previously wrote, in February, OFAC extended sanctions to Russia's largest shipping company Sovcomflot (→ Re:Russia: Pressure Cap). According to Bloomberg, in March, Sovcomflot vessels transported about 1.5 million barrels of Urals crude oil — compared to 4.4 million barrels in January and 4.7 million barrels in February. By the end of March, the OFAC's established 45-day transitional period was in effect, during which vessels could complete voyages for previously made transactions.

The blocked Sovcomflot vessels are being replaced by tankers from the shadow fleet. According to the estimates of the Kyiv School of Economics, in February, its share in Russian oil supplies increased from 65% to 75%. Some shipments from vessels rejected by India were redirected to China, but some still reached the country: oil from Sovcomflot tankers was transferred to shadow fleet tankers off the coast of Oman, as reported by Bloomberg. As a result, however, China increased its imports of Russian oil by 5% (to 1.3 million barrels per day) and overtook India in the list of Russia’s largest buyers. India reduced its imports by 23% (to 1.2 million barrels per day). Turkey remains the leader in terms of imports of Russian oil products. In addition, India and Turkey serve as ‘launderers’ for Russian oil: their exports of premium petroleum products to the EU and G7 countries increased 2.8 and 2.3 times, respectively, compared to April 2022. 

Further reduction in Russian budget revenues from oil will depend on the severity of the sanctions regime, write analysts from the Kyiv School of Economics, engaged in tracking Russian oil and gas revenues. According to their calculations, at the current level of price cap and sanctions, but with stricter enforcement, revenues from oil and oil products may amount to $163 billion in 2024 compared to $178 billion in 2023 and $143 billion in 2025. The revenue level in 2023 can be considered comfortable for the Russian budget even with the increased spending on the war in Ukraine. A $30 billion annual reduction will be significant but not critical for the budget. However, if the cap on Russian oil prices is lowered to $50 per barrel and enforced, export revenues could fall to $103 billion at current prices. At this level of revenues, the regime will find it very difficult to simultaneously wage a full-scale war, deal with the economic problems associated with sanctions and 'structural manoeuvre', and maintain political stability. 

The fight against the shadow fleet is not hopeless, writes Craig Kennedy, an expert at Harvard University's Davis Research Centre, in his blog. The existing number of ships (according to recent estimates, there may be more than a thousand) is not enough to transport all of Russia's oil to circumvent sanctions — twice as many are needed. At the same time, according to his estimates, the service life of the tankers that Russia buys is only two or three years. According to Kennedy's calculations, $8.5 billion has been spent on the shadow fleet thus far. Given that old tankers are gradually being phased out of the fleet, it will take several more years and about $25 billion to create a fleet of sufficient size. Additionally, in the second quarter of 2023, Russia sharply reduced its tanker fleet purchases, which Kennedy attributes to the exorbitant costs.