Page 13 - FSUOGM Week 09 2023

FSUOGM PERFORMANCE FSUOGM

Sea, as well as a refinery in Constanta, Romania. shipborne oil cargos leaving Russia has con-
Italy doubled its purchases of Russian crude tinued to unchanged suggesting that demand
from 0.65 to 1.3mn tonnes per month, while has not been affected. The strong profits of the
Bulgarian volumes went up from 0.3mn tonnes companies does not tally with the collapse in
in an average pre-war month to 0.7mn in Octo- revenues reported by MinFin unless the price of
ber 2022. Urals is no longer a good indication of the profits
And here is the rub: while the price for that oil companies are making.
Urals quoted on the Baltic Exchange, the main This might change in 2023, as Lukoil in par-
exchange for Russian oil export deals, tumbled ticular is in talks to sell more its refineries in
by 50%, the price for the refined product like die- Bulgaria, Romania and Moldova, while the gov-
sel and naphtha did not change. That introduces ernments of these countries are switching away
a huge spread between the cost of crude and the from Russia crude supplies, but in the mean-
ultimate refined products. Normally a refinery time the leading Russian companies remains
earns a $10 margin on turning a barrel of crude extremely profitable.
into a more valuable refined product, but in sec- One of the side-effects of this was not just it
ond half of last year this margin swelled to $40- provides a way for Russia to dodge sanctions,
$50, making refineries insanely profitable. as sanctions key to the FOB price of Urals leav-
In an indication that the numbers don’t ing Russia, but it also means the profits accu-
add up, while MinFin reported that oil and gas mulate to the oil companies’ offshore trading
receipts were down by almost half in December, arms inside the EU, not the government, which
the leading Russian oil companies are reporting charges tax on the FOB Urals price at Primorsk.
record profits.
Since the war started the leading Russian Kremlin second tax manoeuvre
companies are no longer obliged to report their Russia earned a massive $227bn current ac-
results but in November privately owned Rus- count surplus in 2022 on paper – more than
sian oil major Lukoil stated that profits had dou- double the surplus of $120bn in 2021, itself an
bled y/y in January to September to RUB648bn all-time record. However, it turns out that the
($8.6bn) after sales were up by 52% to RUB2.3 Kremlin probably has little access to a lot of
trillion ($39.6bn). The same month the board that money, as the cash is accumulated not in
announced that it would pay a full 100% of cash the Kremlin’s coffers as oil tax revenues, but in
flow as the 2021 dividend and launched a second the oil companies' offshore accounts.
$3bn share buyback programme. Unlike most The government has already reacted by per-
big Russian companies, Lukoil’s importance forming a second “tax manoeuvre”, more adjust-
to the EU economy means it has so far largely ments to the tax code to better tax Russia’s oil
escaped the Western sanctions. companies, says Macro Advisory’s Weafer and
State-owned oil major Rosneft was also this work is likely to be ongoing.
reporting high profits, although its bottom line In order to have a more realistic price of oil
was hurt after Germany appropriated some the Russian government is also currently talking
of its assets. Rosneft said its nine-month net about adopting the Dubai crude price as a better
income was RUB591bn ($9.4bn), down 15% benchmark, or simply using Brent minus a dis-
from a record-high RUB696bn reported for count as the benchmark.
the same period in 2021. That follows on from The Kremlin maybe unable to tap the excess
a spike of record profit in the first half of 2022 profits that oil companies are making – MinFin is
of RUB432bn ($7.2bn) despite the sanctions. currently in negotiations with the Russian Union
Rosneft said it had successfully reorientated its of Industrialists and Entrepreneurs (RSPP), the
exports to Asia. The fall in profits in the third big business lobbying association, asking them
quarter was largely due to the loss of its German to make a “voluntary” payment of RUB200bn
assets and is nowhere as large as the 46% fall in ($2.6bn) – but the companies can largely off-
oil and gas revenues seen by MinFin. set the loses they have from selling cheap Urals
The story is the same at Gazprom Neft, the crude on the open market with the outsized prof-
oil production arm of the state-owned gas behe- its they make from selling oil products in the EU
moth Gazprom, which reported a four-fold market to European customers.
increase in profits in 2022 last week to an all-time The de facto transfer pricing refined oil busi-
record RUB503.4bn ($6.7bn). Like Lukoil, sales ness also creates large slush funds of privately
were up by half y/y to RUB3.1 trillion, making it owned cash outside Russia that can also be used
Russia’s fastest growing oil producer in terms of to buy technology and other sanctioned goods to
production. keep these companies in business. IIF’s Ribakova
Business is booming at all these leading speculates that the Kremlin has a good idea of
oil producers. The price of Urals oil may have where and how much money is in these funds
plunged in December, but the number of and has some, limited, control over them. ™

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