Russia is no exception to Western sanctions. (file)
In early March, as the US and its allies lifted a wave of sanctions on Russia, President Joe Biden stood up in the White House and said he wanted to “deale a powerful blow to Putin’s war machine.”
But as the war in Ukraine approaches its 100th day, that machine is still very much in operation. Russia is being propelled by a flood of cash that could average $800 million a day this year – and that is what is rising from commodity superpower oil and gas.
For years, Russia has acted as a giant commodity supermarket selling an insatiable world: not only energy, but also wheat, nickel, aluminum and palladium. The invasion of Ukraine has prompted the US and the European Union to reconsider the relationship. It is taking time, though the EU took another step this week by striking a settlement agreement on Russian oil imports.
Russia is not untouchable by sanctions that have made it an untouchable across the developed world. Corporate giants have fled, running away from assets worth billions of dollars, and the economy is headed for a deep recession. But Putin can ignore this loss for now, as his treasury is flooded with revenues from commodities that have become more attractive than ever because of a jump in global prices caused by the war in Ukraine.
With some countries halting or phasing out energy purchases, Russia’s oil and gas revenues this year will be around $285 billion, according to Bloomberg Economics estimates based on estimates from the economy ministry. This would exceed the 2021 figure by more than one-fifth. Throw in other items, and it makes up for more than $300 billion in foreign reserves frozen as part of sanctions.
EU leaders know they must stop buying from Russia and indirectly funding a disastrous war at Europe’s doorstep. But for all that ambition, national governments also know there will be repercussions for their own economies.
They agreed this week to impose a partial ban on Russian oil, paving the way for a sixth package of sanctions, but only after weeks of bargaining and divestment.
“There are always political constraints on access to sanctions,” said Jeffrey Schott, a senior fellow at the Peterson Institute in Washington. “You want to maximize the pain on your target and minimize the pain in your constituency at home, but unfortunately, that’s easier said than done.”
Lesson #3: Only an energy embargo really hurts Russia. Two-thirds of the increase in c/a surplus this year is from energy exports (blue). Only a third of the imports are from compression. Maritime sanctions would stop tankers sending oil from Russia. All you need is political will… pic.twitter.com/AOnX28i8eB
— Robin Brooks (@RobinBrooksIIF) 29 May 2022
In the US, officials are debating ways to ease the financial pressure, possibly by helping put a cap on the price of Russian oil or by imposing sanctions on countries and companies with Russian businesses still under sanctions. doing business. But such secondary sanctions are deeply divisive and risk ties with other countries.
The US has already imposed sanctions on Russian oil, but Europe is slowly weaning itself off this dependence. This is giving Moscow time to find other markets — such as China and India’s commodity guzzling — to limit export revenues, and any damage to its financial war chest.
That means money is going into Russia’s accounts, and financial data is a constant reminder to the West that a dramatic change is needed. According to the International Energy Agency, oil-export revenues alone are up 50% from a year ago. Russia’s top oil producers posted their highest combined profit in nearly a decade in the first quarter, estimates Moscow-based SberCIB Investment Research. And wheat continues to be exported – at high prices – because sanctions on Russian agriculture are not even being discussed because the world needs its grain.
The current account surplus, the largest measure of trade in goods and services, more than tripled in the first four months of the year to nearly $96 billion. This figure, the highest since at least 1994, primarily reflects an increase in commodity prices, although a decline in imports under the weight of international sanctions was also a factor.
The ruble has become another symbol used by Putin to show power. Once mocked as a “wreck” by Biden when it initially collapsed in response to sanctions, it has since been propelled by Russia to become the world’s best-performing currency against the dollar this year. Is.
Putin has also tried to take advantage of Russia’s status as a commodity superpower. Amid concerns about food shortages, he said he would allow the export of food grains and fertilizers only when restrictions on his country are lifted.
“If the goal of the sanctions was to deter the Russian military, it was not realistic,” said Janice Kluge, senior associate for Eastern Europe and Eurasia at the German Institute for International and Security Affairs in Berlin. “It can still fund the war effort, it can still offset some of the damage that sanctions are doing to its population.”
A big hole in sanctions against Russia is the willingness of other countries to continue buying oil, albeit at a discount in some cases.
Indian refiners bought more than 40 million barrels of Russian oil between late February and the start of the Ukraine invasion in early May. This is 20% higher than Russia-India flows for the whole of 2021, according to Bloomberg calculations based on trade ministry data. To get Russian barrels cheaper than market prices, refiners are seeking private deals rather than public tenders.
China is also strengthening its energy ties with the country, getting cheaper prices by buying oil that is being dumped elsewhere. It has boosted imports and is also in talks with Russian oil to replenish its strategic crude reserves.
Same story for steel makers and coking coal. Imports from Russia rose for the third month in April to more than double last year’s level, according to official customs office data. And some sellers of Russian oil and coal have tried to make things easier for Chinese buyers by allowing transactions in yuan.
“Most of the world is not involved in imposing sanctions,” said Wouter Jacobs, founder and director of the Erasmus Commodity and Trade Center at Erasmus University in Rotterdam. “Business will continue, fuel will be needed” and buyers in Asia or the Middle East will step in, he said.
When it comes to gas, Russia has fewer options for diverting supplies, but countries at the end of pipelines from Russia – some of which run through Ukraine – are also locked in interdependence.
About 40% of the EU’s gas needs are met by Russia, and will be the hardest-hit link in the bloc. European deliveries also jumped in February and March as the invasion pushed up prices in European gas hubs, making purchases affordable for most customers with long-term contracts from Russia’s Gazprom PJSC.
Volumes have decreased since then, thanks to warm weather and record inflows of liquefied natural gas from the US and other countries. Military activity has also caused disruption, and Russia halted supplies to Poland, Bulgaria and Finland, which declined Putin’s demand for payment in rubles.
Even though the EU has reduced its dependence – Germany says it has dropped from 55% to 35% – there are complications at every step. Several big buyers of Russian gas have gone out of their way to buy the vital fuel, and utilities such as Italy’s Eni Spa and Germany’s Unipar SE are expected to continue to supply.
While progress is slow, the direction is only towards greater sanctions. Despite the uncertain timetable, the pressure on the Russian economy and Putin’s finances will eventually mount.
The country’s energy sector is also facing many other factors beyond demand, from shipping and insurance restrictions to weak domestic demand. Oil production could fall by more than 9% this year, while gas production could decline by 5.6%, according to the Russian Economy Ministry’s base-case outlook.
“There is some optimism in the Kremlin and even a surprise that the Russian economy did not collapse under the onslaught of sanctions,” said Tatiana Stanovaya, founder of political advisor R.Politik. “But looking forward two to three years, there are a lot of questions about how the energy and manufacturing sectors will survive.”
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)