Page 35 - bne IntelliNews monthly magazine December 2023

bne December 2023 Cover story I 35
In the most recent example, Germany’s biggest solar panel maker, Meyer Burger Technology, is contemplating relocating its operations abroad due to the energy crisis. The CEO, Gunter Erfurt, said a decision would be made soon, citing the difficult power situation in Germany as a potential reason for the move, Brussels Signal reported. The United States is a possible new location, encouraged by substantial government investment in the solar sector and offers of significant state support for the company's already planned manufacturing plant in the US.
Sanctions are distortions
Oil sanctions won’t work unless Russia is totally encircled and all Russia’s exports have to leave through a gate that is controlled by the West, which then can enforce the $60 per barrel rule.
When the oil price sanctions were first suggested, as the West controlled 95% of maritime insurance it was assumed this could serve as the enclosing fence. The flaw in the scheme is that the entire eastward facing export route is wide open, allowing Russian ships to sail
to Asia totally avoiding the Western controlled gate entirely.
Chinese and Indian shippers have their own insurance and have refused to participate in the scheme in exchange for cheap Russian oil. At the same time Russia has built up a “ghost fleet” of ships that can carry almost all its own crude that operates entirely outside of the sanctions regime. After two years, the West is estimated to now control some 65% of the global maritime insurance business.
Oil export earnings, in U.S. dollar billion
Source: Federal Customs Service, International Energy Agency, KSE Institute *2021 data from Russian customs service, 2022-23 data from IEA
The US has imposed secondary sanctions on a total of five shipping companies in November and is investigating 100 more for ignoring sanctions. Western companies have been widely ignoring the regime with impunity, as detailed in an investigation by The Peterson Institute for International Economics (PIIE) and Kyiv School of Economics (KSE). In another note KSE warned that oil sanctions are in danger of losing their credability as they are working so badly.
The West is increasingly being sucked into a game of whack-a-mole to make leaky sanctions work. It is targeting individual ships and companies after the much more elegant market mechanism of using insurance to enforce the rules continues to fail. Without nailing all
the holes shut – sanctioning both China and India for example – you can’t win whack-a-mole and that would mean sanctioning the whole of the non-aligned world.
The hole in the eastern side of the ringfence means that sanctions are not sanctions but a distortion of the once highly efficient global energy market. Whereas once Russian oil from Siberia had to be shipped from Primorsk in
the Gulf of Finland a few days to the oil terminals in Rotterdam where it was refined before being distributed across Europe, now it has to sail for two months to Indian refineries in Gujarat or Chinese privately owned “teapot” refineries, before being shipped back to Europe and sold as “Chinese” or “Indian” oil products. It is of course the same Russian oil, except it has been whitewashed by the journey.
Federal budget oil revenues, in ruble billion*
Source: Ministry of Finance, KSE Institute * includes extraction tax and export duty
Ultimately, it is the European customer that pays the added transport costs.
As the roundtripping Asian trade route becomes well established, the discount Russia had to offer has been falling steadily according to the latest KSE Russian oil tracker. Pre-war the Urals blend was sold at a $2 discount to Brent. At its peak in the spring of 2022 that discount blew out to some $35,
but since then it has fallen to $10 now and analysts expect it to fall further next year to $5, reflecting the longer journeys involved.
The upshot of the hole in the ringfence, combined with the agreement between Russia and OPEC+, led by the Kingdom of Saudi Arabia (KSA), now a firm Russian ally, to restrict oil production, has been to push up the price of crude to over $80 per barrel, which more than compensates for any increase in transport costs.
The distortions that have been introduced into the oil markets is
one of the main mechanisms for the boomerang effect. In February 2022 on the eve of the war Russia earned $20.5bn from oil exports and the budget received RUB892bn ($10.7bn), according to KSE. In September this year Russia earned $18.5bn from oil exports in dollar terms and RUB987bn ($11.1bn) using the exchange rates current at the respective times. Instead of dramatically reducing the amount of money the Kremlin gets to fund its war machine, it is now earning more than it did in January 2022.
Cost to Russia
That is not to say the sanctions are useless. They have done a lot of damage but more importantly they condemn Russia to long-term stagnation.
Thanks to Putin’s efforts to build a Financial Fortress, Russia’s growth potential pre-war was only 1-2% a
year – far below the average global growth rate, condemning Russia to long-term stagnation in the long term. Prokopenko argues that the “permanent war” mentality of Russia’s financial
elite leads to hoarding of resources, super-conservatism and discourages institutional building, long-term
www.bne.eu