On December 5, 2022, the sanctions of the Western coalition against the export of Russian oil came into force: an embargo on sea deliveries and the introduction of a ceiling price. On February 5, 2023, similar sanctions on the export of Russian oil products came into force.
According to the results of 2022, many expected a particular effect from the introduced restrictions against the Russian oil industry. Still, the Russian Federation demonstrated an increase in oil production and exports while its revenues broke records. Naturally, this raised doubts and questions about whether the sanctions were effective. One can say that the sanctions will have an inevitable effect, but it will be delayed and stretched over time.
The countries that imposed sanctions accounted for more than half of the export basket of Russian oil and oil products. The introduction of an embargo on crude oil forced the Russian Federation to look for new buyers, and “friendly” countries became such, primarily China, India, and Turkey. China and India alone account for a fifth of the world’s oil consumption, and these countries may well absorb all of Russia’s exports, even after European buyers abstain from them.
However, new markets mean significantly longer transportation distances and significantly higher logistics costs. Ultimately, even if the Russian Federation completely reorients its oil on the “friendly” countries’ market, it will be forced to dump to partially cover transportation costs to ensure the competitiveness of its own oil on Asian markets. In addition, these countries also understand Russia’s despair due to the lack of alternative sales markets. Therefore, these countries will try to get discounts. In 2022, China received an unprecedented trade deficit due to high prices for Russian energy carriers. However, before that, it always tried to balance the volumes of exports and imports in bilateral trade. That is, even preserving the physical volume of Russian exports will be accompanied by a reduction in revenue and income.
To a certain extent, revenue will also decrease due to the introduced iron caps – a ban on insurance and transportation of Russian oil if its price is higher than the established limit. However, this tool’s capabilities are limited for several reasons. First, they do not apply to pipeline deliveries, particularly in China. In addition, the Russian Federation has deployed a shadow fleet of unprecedented size, and therefore it will be challenging to control compliance with price caps. It will be especially relevant for high-quality types of oil, the places of shipment close to Chinese buyers – ESPO and Sokol. Nevertheless, part of the deliveries, first of all, the Urals, will fall under this restriction. Some buyers are already facing problems buying oil due to price restrictions. In addition, we should expect the introduction of secondary sanctions against companies that transfer their fleet to the Russian shadow one.
The mechanism of sanctions’ influence on the export of Russian petroleum products is similar to that of crude oil. Most likely, the Russian Federation will not be able to completely reorient the export of all diesel and fuel oil, which were key export items, to its “friendly” countries: China and India have excess oil refining capacity and will export petroleum products from Russian oil. Therefore, there will probably be a drop in the production of petroleum products and the export of released oil. Ultimately, the decline in oil production and export volumes may be insignificant, but there will be a reduction in the production and export of oil products. Subsequently, this will be accompanied by a drop in the income of the Russian Federation.
The beginning of March is too early to assess the effect of the sanctions but already enough to understand that they will work in the long term. Already today, there is strong evidence that Russia’s oil revenues show the potential to decrease. In particular, the Kremlin is looking for ways to reduce the deficit of oil revenues in the future. However, several factors will affect the speed and effectiveness of sanctions. These are, in particular, global oil prices, the strategy of the behaviour of the OPEC+ countries, and the ability of other countries to replace Russia’s supplies in response to its speculative actions. In addition, one should not forget about sufficient foreign exchange reserves that, for a certain time, will allow one to cover the deficit from export oil revenue. As before, we still adhere to our previous forecast that the drop in revenues from the Russian oil industry sector, compared to 2021, could amount to 25-46%, depending on the market conditions of oil and oil products.
A more detailed and extended text can be found in Ukrainian and Russian-language versions of our analysis.