Putin gives a speech

Putin’s Ukrainian adventure begins to hurt Russia’s most profitable industry

Energy exports are the engine of the Russian economy, accounting for around 45% of the Russian government’s budget. Last year, exports of crude oil and other petroleum products brought Moscow more than $178 billion, a nice change for a country that is suffering a 3% economic contraction in 2020 thanks to the coronavirus pandemic.

In a normal year, oil sales would be a reliable source of income for Russian President Vladimir Putin, income he could use to pay pensions to his supporters, build up Russia’s foreign exchange reserves, finance the next generation of Russian weapons and support part of it. of the multi-year decline in disposable income. And, of course, the more oil Moscow sells abroad, the more money it has to fund its 10-week war in Ukraine.

So it was inevitable that the European Union (EU) would eventually come up with a ban on one of Russia’s biggest moneymakers. The goal: to squeeze the Russian economy by closing Moscow’s biggest oil market (in 2020, the EU received 138 million tonnes, or 53% of Russia’s total crude exports). Addressing European lawmakers on May 4, European Commission President Ursula von der Leyen proposed a sixth set of sanctions against Russia for its invasion of Ukraine, including an oil import ban that would would enter into force after a transition period of six months.

Assuming all EU member states sign on to the package (unanimity is required to enforce the oil ban), the Kremlin will have to seek out alternative markets to recoup lost profits. Putin admitted as much during a cabinet meeting with his top economic advisers on April 14. Feeling it was only a matter of time before Europe followed Washington with its own embargo on Russian crude, Putin was blunt: “We need to diversify exports.” Since the West is not interested in buying Russian oil, Moscow must explore other opportunities in Asia. The only other alternative for Russia would be to lose market share.

In an ideal world, Russia would be able to use Western oil sanctions to its own advantage. The irony of oil sanctions is that they tend to drive up world prices, meaning producers like Russia could theoretically make the same profits even if export volumes were lower. Still, the EU’s proposed import ban could complicate the formula.

First, countries still willing to buy Russian oil will seek to exploit Moscow’s dodgy financial and geopolitical position to secure the best possible deal. While India has scooped up millions of barrels of Russian crude since Putin ordered his self-proclaimed ‘special military operation’ in Ukraine, New Delhi has agreed to buy more Russian crude from March to June than during all last year. . It is also true that Indian refiners demand deep discounts. Instead of paying nearly $110 for each barrel as stipulated in the world market, India is demanding a price below $70 per barrel, a 36% reduction from the initial benchmark price. Of course, Russia would still make money from the deal, but the deal itself would be much less profitable than under normal circumstances.

Russian President Vladimir Putin delivers a speech in Saint Petersburg on April 27, 2022.

Putin may believe he can use China as a fail-safe against the West. Russia and China have established a strategic relationship, driven in large part by their mutual animosity against the United States. Putin and Chinese President Xi Jinping have met dozens of times since 2013. Xi called Putin his ‘best friend’ at a 2019 summit in Moscow, and the two countries reaffirmed their ties at the Olympics. by China in February by declaring Friendship “without limits”.

But China is ultimately an interested player. While it does not want to see the Putin government fall, China has refused to condemn Moscow for having ravaged its neighbor and denounces American and European sanctions as illegitimate. It is also hard to believe that the Chinese Communist Party (CCP) will provide its Russian neighbor with an unconditional economic lifeline. In fact, Chinese imports of Russian crude fell 14% in March. Chinese state oil refiners are avoiding new Russian oil contracts for fear of being in the crosshairs of US banking sanctions. The CCP’s severe lockdowns in major cities like Beijing and Shanghai could begin to affect the amount of oil the Asian economic superpower buys. After all, when work stops and buildings close, the less demand there is for fossil fuels.

Even if Russia is able to redirect oil shipments bound for Europe to Asia, the process will not be easy. The world may need cheap energy sources, but the sanctions Washington and Brussels have imposed on the Russian economy over the past two months are pushing tanker fleets and insurance companies to raise tariffs or stop dealing with Russian oil altogether. The EU proposal unveiled this week, if passed, would ban any shipping or insurance company under EU jurisdiction from getting involved in Russia’s oil trade. Moscow will have to look for non-European tankers to transport their cargoes – and these tankers will now have to travel much longer distances (India, after all, is much further from Russia’s Baltic ports than the Netherlands), which will result in an increase in navigation. costs. Normally, these costs would be passed on to the customer, but with Russia’s growing desperation, the Kremlin may have to absorb these costs to stay competitive.

The West’s energy sanctions against Russia are designed to achieve a political goal: to compel Moscow to halt its military operations and, ideally, withdraw from Ukraine. With Putin’s 20-year legacy now tied to war, the Russian strongman may calculate that caving in to Western pressure is not an option.

Whatever Putin decides, Russia will be weaker and less wealthy as a result.

Daniel R. DePetris is a member of Defense Priorities and a foreign affairs columnist at Newsweek.

The opinions expressed in this article are the authoris clean.

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