Western price caps cut into Russian oil revenue

Russia’s revenue from oil exports fell by almost a third in the first quarter of this year, indicating that western price caps were starting to squeeze the lucrative trade for Moscow, according to oil sales records compiled by the Kyiv School of Economics.

The data analysis by the Ukrainian academic institute shows that three quarters of the drop in sales of Russian oil and oil products between January and March can be linked to western restrictions.

Russia’s revenue from crude and refined products totalled $38.8 billion in the first full quarter after the G7 and EU introduced price caps in December. In the last three months of 2022, that revenue amounted to $54.5 billion.

The researchers attributed about 75 per cent of the fall to lower sales volume and larger price discounts for Russian crude — both factors that were directly related to western restrictions. The remaining 25 per cent of the fall was linked to lower global prices.

The findings offer evidence that sanctions targeting Russia’s energy sales are having some effect in limiting Moscow’s ability to refill its war chest while continuing to allow its oil to flow in order not to disrupt global markets.

The price cap on crude, introduced in December, stands at $60 per barrel, while the cap on refined products, imposed in February, limits the sale of Russian diesel and gasoline to $100 per barrel and that of lower-value products such as fuel oil to $45 per barrel.

The curbs only allow the use of western shipping services for oil sold for less than the caps. Russia has redirected most of its exports to India and China.

Declining crude export volumes accounted for $6.1bn of the revenue losses. The detailed records suggest Russia’s move to cut oil production may be driven by challenges in the market rather than a policy choice. Sales of crude fell 12 per cent year on year, the equivalent of about 400,000 barrels per day.

Russia announced in February what it said was a voluntary production cut in response to what Russian deputy prime minister Alexander Novak called the “destructive energy policy of the countries of the collective West”.

“With the EU embargo fully in force, it has become very difficult for Russia to redirect all of the seaborne crude from the no-longer existent European market,” said Benjamin Hilgenstock, senior economist at the KSE Institute.

Hilgenstock said Russia was increasingly sending out tankers without a destination and accepting steep discounts on sales, which “show that recently announced production cuts are not voluntary but a consequence of sanctions”.

The study found that while revenue from crude dropped significantly, there was little change to Russia’s sale of oil products, which contribute to a much lower share of the country’s budget.

A further $5.2bn of the hit to export revenue was due to the increase in price discounts for Russian oil relative to Brent. This widened from $17.4 per barrel last December to $23.2 in March as a direct result of the price cap.

Discounts varied widely between buyers. India absorbed most of the exports from the north-western port of Primorsk that used to ship oil to Europe and paid only $43.9 per barrel in the first quarter of 2023 for imports from that port.

But in China, which mainly bought the “premium” ESPO blend from the Far Eastern port of Kozmino initially focused on Asia, prices were on average $71.8 per barrel.

While essentially all of the shipments from other Russian ports were made in compliance with the price cap, 95 per cent of volumes exported from Kozmino were priced above $60 per barrel. Around half of these deals involved G7- or EU-owned vessels and services, raising serious questions about sanctions circumvention.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

The caps have placed visible pressure on Russia’s public finances. A combination of a 45 per cent year-on-year decline in energy revenues and a 34 per cent year-on-year increase in spending meant that the country had breached its full-year deficit targets for 2023 within the first quarter.

Vladimir Putin’s economic adviser Maxim Oreshkin said on Tuesday that Russia would get back on track and plug the hole with budget profits in the following months, but his optimism is not shared by many.

Lower exports changed Russia’s trade balance, which supported the rouble throughout 2022, leaving the Russian currency 20 per cent below its level a year earlier.

While the sanctions coalition has succeeded in depriving the Kremlin of some of its revenue, the study highlights the need to lower the caps in case of a possible recovery in oil prices following the Opec+ decision.

“For each $1 per barrel increase in the price, the country could receive $2.7bn in additional export earnings,” the study added.