Filenews 28 November 2022
By Julian Lee
North U.S. import bans and self-sanctions by refineries and traders in Europe have had little effect on the flow of crude from Russian ports, with cargoes successfully redirected to the east.
But the shift in flows to Asia, where India has emerged as Russia's second-largest customer, has reinforced Moscow's dependence on an ever-shrinking pool of buyers. China and India now buy two-thirds of all crude exported by sea from Russia while at least half of the crude exported via pipelines from Russia also goes to China.
This gives enormous bargaining power to buyers from both countries, and is a force they have exercised. Russian crude is trading at a great discount compared to international crude, and this is hurting the Kremlin's war fund.
The most recent estimate, since late last week, is that Russian crude, known as the Urals mix, was trading at around $52 a barrel. That's a discount of $33.28 or 39% over Brent crude. By comparison, the average discount in 2021 was at $2.85. This discount costs Russia's oil exporters about EUR 4 billion. dollars a month in lost revenue, while also reducing the Kremlin's tax revenue from sales abroad.
International crude prices have also fallen since the invasion. Brent was trading at around $100 a barrel when Russian troops entered Ukraine, now moving at around $86. This decline would not have happened if Russian exports had been severely curtailed, as the International Energy Agency (IEA) had expected.
It is easy to see attempts to cut the flow of funds to the Kremlin's war fund as a failure, especially while production and export volumes remain strong.
But oil revenues are a product of both volume and price. Limiting flows is attractive because it is something visible. But this would only be effective if the fall in flows weighed more heavily than any increase in prices. This is unlikely. OPEC+, of which Russia is a key member, has made it clear that it will not intervene to replace the lost Russian barrels, so any reduction in Russian flows would immediately be felt in the market.
With China, India and Turkey willing to buy discounted cargoes, any ban on Russian flows could only be partial. If these countries cannot be persuaded to ban imports from Russia, stopping its exports altogether, it is very likely that buyers everywhere will ultimately pay more for their oil, having the opposite effect to what was intended and increasing the Kremlin's revenues.
The "hit" on prices, although less easy to perceive, has a better chance of actually reducing inflows into the Kremlin's war fund.
Source:BloombergOpinion
