Page 38 - bne monthly magazine June 2024 Russian Despair Index

38 I Cover story bne June 2024
The US feared that Ukraine’s drone strikes on Russian oil refineries would cause oil prices to spike. In fact they are having the opposite effect, and the strategy is proving to be more effective than the Western oil sanctions regime. / bne IntelliNews
Gasoline hit a six-month high in April, rising over 20% from January, forcing the Kremlin to ask for help from its friends in Belarus and Kazakhstan.
Russian consumers have so far been shielded from the wholesale price hikes, but retail diesel prices surged
by 10% in the last week of April. This indicates that oil companies might be absorbing the price increases, reducing their margins, or that the Kremlin has expanded fuel subsidies.
Despite its success, the strikes on oil refineries is not going stop the war anytime soon; crude oil exports may be increasing their share in exports, but the current high oil prices, supported by the OPEC+ voluntary production cuts, have led to a surge in income for Russia’s budget.
Russian oil export revenues surged to $17.2bn in March 2024, driven by higher global oil prices and increased crude export volumes, according to the April ‘Russian Oil Tracker’ by KSE Institute. Despite robust US Treasury sanctions targeting the shadow fleet, Russia continues to expand it by incorporating new tankers, allowing for stable exports and further evasion of oil price cap. Russian seaborne oil exports rose by 4% in March, driven by a 12% increase in crude oil shipments (+400,000 bpd), while exports of oil products declined by 6%.
However, the one place where the strain on the system is already showing up
is that the discount that Russia has
to offer customers is rising again and reached $18 at the end of last year, according to KSE, from a low of $13.7 dollars in October. Previously, analysts were predicting that the discount could fall to as low as $10 this year, due to the success of redirecting all of Russia’s oil exports from Europe to Asia.
In the end, Ukraine's strikes have weakened Russia's refining capacity without significantly affecting global oil prices, reducing the Kremlin's income and increasing domestic fuel costs, all while forcing Russia to rely more on crude oil exports to sustain its economy.
lows,” Tymofiy Mylovanov, rector of the Kyiv School of Economics (KSE) and former economics minister, said in a tweet.
“Moscow exported just over 712,000 tonnes of diesel and other petroleum products in the last week of April, a drop from more than 844,000 tonnes in the same week in 2023,” Mylovanov added. Monthly exports of crude oil, however, rose by 9% from February to March, reaching their highest level in nine months and their third highest since Western sanctions on Russian crude oil took effect in December 2022.
To drive the point home, a Ukrainian drone hit a Gazprom oil refinery in Salavat (Salavatnefteorgsintez) in Russia’s republic of Bashkortostan 1,500 km from the Ukrainian border, the first time the region has been struck since the war started.
“This Gazprom refinery is one of Russia's largest oil refining and petrochemical production complexes. It specialises in the production of gasoline, diesel fuel and other types of petroleum products. In 2022, the Salavat refinery processed 6.7mn tonnes of oil,” Mylovanov said.
In 2023, Russia produced approximately 10.1mn barrels per day (bpd) of oil – about the same level as pre-war – half
of which was refined domestically
to produce fuel products, including gasoline and diesel, consumed by the military and the domestic market. The remaining 50% was exported
www.bne.eu
as crude oil to refineries abroad. Although Russia continues to export fuel products to Turkey, China and Brazil, most Western nations have ceased importing Russian refined fuels. The Ukrainian strikes have knocked out up to 900,000 bpd of Russian refining capacity, leading to repair delays due to complex equipment and Western sanctions preventing access to specialised components.
With limited oil storage capacity, Russia faces a tough choice: either increase crude oil exports at lower prices or shut wells. Should Russia halt production, global oil prices would rise, driving up Russia’s own costs for fuel, but reducing the oil export revenues it needs to cushion the blow.
And Russia is already ramping up crude oil exports as the production of refined products fall, with monthly shipments rising by 9% between February and March, reaching a nine-month high. Conversely, the country's refined fuel exports have plummeted. The Ukrainian strategy is working and is inflicting palpable pain on Russia’s oil business. Diesel production has fallen by 16%, and gasoline production by 9% since Ukraine began targeting Russian refineries.
Wholesale fuel prices in Russia have surged due to the reduced refining capacity. Gasoline prices rose by 23%, and diesel prices jumped by 47% in western Russia between the end of 2023 and mid-March, according to KSE.