Page 34 - bneMagazine March 2023 oil discount

34 I Cover story bne March 2023
Ocean ports, have not dropped in a meaningful way and shipments do not appear to comply with the price cap. What the EU embargo and G7 price cap have, thus, triggered is a fundamental fragmentation of the market for Russian crude oil,” a paper from a team of top economists from the Social Sciences
Russian budget did tumble in January to a RUB1.8 trillion deficit and Ministry of Finance (MinFin) reported that oil and gas revenues were down 46% year on year in January, but what appears to be happening is Russia’s oil companies are reporting lower Urals prices, which reduce their tax burden, but are making
continues to receive market rates. Asia has been able to absorb all the crude Russia used to send to Europe. Whether it can absorb all the oil products covered by the February embargo remains an open question.
If the goal of the sanctions was to cut the Kremlin off from its biggest revenue earner, so far they have completely failed. Russia's goods exports reached
a record $532bn in 2022, resulting in an all-time high trade surplus of $316bn. The export of oil and gas reached $333bn in 2022, representing 63% of total goods exports, with crude oil accounting for $142bn, oil products
for $83bn and natural gas for $108bn.
In 2021, Russia produced 540mn tonnes of crude oil, accounting for
13% of global production. Of this, 260mn tonnes were exported directly as crude oil, comprising 13% of global exports. Domestically, Russia refined the remaining 290mn tonnes, of which 140mn tonnes were exported as refined products (11% of global refined exports) and 150mn tonnes were consumed domestically, according to BP.
The two major routes for exporting crude oil are by pipeline and by oil tanker at sea. The Druzhba pipeline system carries oil to the EU, while the ESPO pipeline carries oil to China. The remaining Russian crude oil has historically been exported by sea to the EU, China and other countries to a lesser extent.
The ESPO oil is not included in the sanctions regime and the SSRN paper found that the average price of oil since December on this route out of Russia is $82 per barrel, with half of it exported via the ESPO pipeline to China and another half of it on ships owned by Russian shipping company Sovcomflot, which also operates outside the sanctions regime.
Historically, seaborne EU crude oil imports from Russia originated from Urals fields and travelled via western ports in the Baltic and Black Sea. This
is where the largest impacts of the embargoes and price caps are being felt.
“SSRN the found actual average price of Urals since December oil was not the reported $52 but $74 per barrel”
Research Network (SSRN) – Tania Babina, Benjamin Hilgenstock, Oleg Itskhoki, Maxim Mironov and Elina Ribakova – assessing the impact of the oil sanctions found.
The SSRN paper is based on its calculations using high frequency and customs data, and they discovered there is a gap between the price inferred from customs data and the reported “discounted” price. SSRN the found actual average price of Urals since December oil was not the reported $52 but $74 per barrel. Brent was trading between a high of $81 and a low of $71 in December, suggesting that for most of the month there was no discount on Russian oil exports at all, or at least only a few dollar’s worth.
Discounted embargo dogleg
The price of Russia’s oil depends on where it is sent. China, India and many of the countries of the Global South are not participating in the West’s sanctions regime on Russia. And they are willing to pay market rates for its oil as a result.
Russia has exported 6.1mn barrels per day (bpd) since the embargos were introduced and has obtained an average of $73.3 per barrel taking all markets into account, with the EU piped oil paying the least ($62.98) and China the most ($88.12), according to SSRN survey.
That doesn't mean the missing money is ending up in the Kremlin's coffers. The
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back the discount through various scams. Money is being siphoned off into dark company-controlled offshore accounts in, what is in effect, a new transfer pricing scheme. MinFin is well aware of what is happening and is already working to tap into this dark flow of profit.
“In the past [Russian oil companies] may have wanted to boast that they were successful in selling their crude at the top of the market in order to impress their international sharehold- ers and keep their debt holders happy and content. Now they have nobody
to impress. It is far more profitable
to maintain the illusion that they are selling their oil cheaply, which greatly reduces their tax burden,” Sergey Vaku- lenko, an independent energy analyst, consultant to a number of Russian and international global oil and gas compa- nies, said in a separate paper, adding that this money would make an ideal “slush fund” for Putin to use in his war against the West.
Cashing in on a distorted market
A key point to note with the sanctions is they are specifically designed to allow Russia to sell its oil. The Western architects were worried about causing an oil shortage that could spike prices. The goal of the oil price cap was to allow the oil to flow but limit the price Russia could charge. The upshot the scheme has been for Russia to simply switch
all its deliveries away from Europe and turn to the Global South, where it