Where did Russian oil go

Russia exported an average of 8.3 million barrels of oil and oil products daily in April — a record figure since the start of the Russian invasion, the International Energy Agency (IEA) reported. April exports were almost 8% higher than the 2022 average and 10.6% higher than the 2021 average. At the same time, it was mainly the supply of crude oil that showed an increase, while the export of oil products decreased by 6%.

These figures show that Russia does not seem to have any problems finding new consumers to replace European ones, IEA analysts say. At the same time, Russia classified production and export data, so the real figures may differ slightly from the agency’s estimates. Many transactions have been deliberately dropped off the radar, and the oil market has become very untransparent, Alexey Belogoriev, an expert on the global energy market at the Institute of Energy and Finance, has told Novaya-Europe.

The growth in supplies under the sanctions is not much of a surprise, considering what the restrictions were aiming for. The Western coalition was actually trying to avoid a sharp decline in oil exports from Russia, Belogoriev notes. “The situation on the oil market is generally quite tense, so the path of influencing prices rather than supply volumes was chosen,” he says.

Nearly six months after the Western embargo and the price cap were introduced, 80% of Russian oil exports are going to India and China, although before the war, about 60% of supplies went to Western countries. Those are mainly transported to Asia by sea, hence the 18% increase in seaborne traffic in Q1,2023.

Most of the oil in Russia’s western ports was sold below the price cap. However, in the east, Russian companies and their partners seem to be circumventing sanctions, economists believe. 95% of oil was exported from the Kozmino port in Russia’s Vladivostok region at a price above the cap. At the same time, more than 50% of the ships carrying those supplies were owned or insured by companies from the countries that imposed sanctions.

Discounts allowed Russia to become a serious competitor in Asia, Bloomberg notes. In over a year, Russia’s share in India’s crude oil imports has grown from 2% to 20%. In China, Russia increased its share from 25% to 36%. Supplies of Russian oil to Europe are also growing, but this oil comes in a processed form from Indian refineries. By doubling supplies to the EU, India has even overtaken Saudi Arabia.

In general, it would be more beneficial for Europe to acquire Russian oil products directly, but this pattern allows to hold the prices down in the current conditions. “Russia sells oil to India at a discount, and this allows Indian suppliers of oil products not to raise prices as well,” Belogoriev says.

Different kind of discount

The price of Russian oil also rose last month. According to the IEA, the average cost of all domestic oils exceeded $60 per barrel in April (under Free On Board contracts, which do not include shipping and insurance costs). It was the first time this happened since Western countries imposed sanctions on Russian oil in December. Russia’s main Urals crude cost $55 in April, while the more expensive ESPO crude oil rose to $73 per barrel.

No more super profits for the budget

In April, the situation on the oil market became much better for Russia, but it is not yet known how this will affect Russia’s state revenues. Most of the April taxes are received by the budget with a delay as the severance tax for the oil sold in April is being paid in May. Moreover, the market conditions may change in the future.

Data from previous months shows that oil and gas revenues continue to fall, and this has a serious impact on the growth of the budget deficit. That said, the oil supplies decreased by 12% in Q1, and budget revenues from exports plummeted by 38% (compared to the 2022 average value).

According to the Kyiv School of Economics, Russian companies earned $39 billion exporting oil and petroleum products in Q1,2023, which is 29% less than in Q4,2022. The economists believe that the drop in revenue was due to lower prices on the world market, increased discounts on Russian oil, and reduced exports, with all three having more or less the same amount of impact.

Russian Finance Minister Anton Siluanov confirmed that there was an issue with oil and gas revenues at a meeting with Vladimir Putin. “So far, we see that, taking into account the market situation, taking into account all the discounts, they are still lagging behind the plan,” the minister said.

In the first four months of this year, the drop in oil and gas revenues amounted to 52% compared to the same period in 2022 (2.5 trillion rubles, or €29 billion). As a result, the budget deficit reached 3.4 trillion rubles (€39.5 billion), which is already 400 million more than the planned deficit for the whole year. In total, the Russian Finance Ministry was planning to receive 8.9 trillion rubles (€103.8 billion) of oil and gas revenues in 2023: which means it is currently about 600 billion rubles (€7 billion) behind.

Sanctions on oil and oil products are cutting Russia off from the super profits that it received in 2022 due to the rising prices, Oleg Buklemishev, director of the Centre for Economic Policy Research at the Faculty of Economics of Moscow State University, told Novaya-Europe. At the same time, although revenues from oil and oil products this year are significantly lower than last year, they were still higher in Q1 than in 2021.

There is no clear vision of what is going to happen to oil and gas revenues by the end of the year, Buklemishev notes. The situation will depend on market prices, new potential sanctions, and the actions of the Russian government.

In addition, some economists believe that Russia has accumulated about $100 billion in shadow reserves. This is 1/3 of the income Russian companies received from exports last year: this money was invested in various assets and is kept in foreign banks, including European ones. The money in question was accumulated due to the real cost of Russian oil being higher than the one companies used to pay taxes.

“For example, with a $20 discount, only $5 normally goes to the seller, the rest is spent on two more things. The first one is the increased cost of transporting oil to Asia, and the second one is traders’ fees, since most of the oil is being resold through intermediaries. A common assumption is that Russian companies control a significant portion of freight and trading abroad. This way the price of shipment, which the treasure uses for taxation, is not the entire revenue of companies,” Belogoriev says.

As of now, this money is being used on parallel imports fees, weapons, and can also be transferred to Russia if the state introduces additional tax fees, economist Oleg Itskhoki previously told Novaya-Europe.