Russia’s revenue from oil and gas sales plunged in January, by 46%, according to official data from the Russian Finance Ministry. They had already fallen in December. This decline is consistent with the application since December of a European embargo and the imposition by the G7 countries and their allies of restrictive conditions on exports of Russian crude. Since February 5, the same mechanisms have applied to refined products, including diesel.
For its part, Gazprom indicated last month that its exports had fallen by 46% over one year. Since the drop in gas pipeline deliveries to European countries, the gas giant aims to develop its liquefied natural gas (LNG) capacities, which is delivered by sea. Russian LNG is not, for the moment, subject to Western sanctions, and could, like crude oil, find outlets in Asia, in particular in China, the world’s largest importer of LNG whose economy has been opening up again since the lifting of the “zero Covid” policy.
The public deficit is widening
This shortfall resulted in January in a public deficit of around $25 billion, a level not seen since 2011. At the same time, public spending jumped 59% over one year, mainly to finance the effort. of war in Ukraine more and more expensive.
“We have no funding limitations”, warned Vladimir Putin in mid-December. Transformed into a war economy, industry, particularly manufacturing, was redirected towards production necessary for the continuation of the war. ” The country and the government will give whatever the army asks for,” had decided the Russian president.
The country has its sovereign wealth fund to cover this deficit. On January 1, its reserves were valued at some 148.4 billion dollars, equivalent to 7.8% of GDP, according to the Ministry of Finance. Since February 1, 2022, this amount has decreased by 15%. For the month of December alone, the government had drawn $35.1 billion to make up its deficit. This sovereign wealth fund has been mainly funded in recent years by oil and gas revenues. Before the war, all the revenue generated by the sale of hydrocarbons contributed to 45% of the public budget.
An exceptional tax on the profit of companies under study
To meet its needs, the government is also studying the principle of a contribution from the country’s businesses, according to the local press. Prime Minister Mikhail Michoustin has offered to appeal to members of theRussian Union of Industrialists and Entrepreneurs to pour an exceptional tax of 2.8 billion dollars into the coffers of the Russian state. But the industrial lobby leans more in favor of a 0.5% increase in the tax on profits, which today stands at 20%.
For the Kremlin, the loss of oil revenues will turn into a headache in the coming months. Indeed, 2023 should not be like 2022. Last year, despite the war in Ukraine and the sanctions, which largely focused on imports from Russia and its isolation from international trade, the revenues generated by hydrocarbons had reached 36.7 billion dollars, according to official data from the Russian government, an increase of 28% compared to 2021. For oil alone, production had increased by 2% and exports by 7%, despite a discount on the prices of the urals, its benchmark crude oil. For gas, the decline in deliveries in Europe was partially offset by the 8% increase in exports of liquefied natural gas (LNG).
The unknown of the diesel embargo
Especially since for this year, the impact of the European embargo mechanism and the price cap on the export of refined petroleum products, particularly diesel, remain difficult to assess. Until last month their main destination was the European Union (see graph).
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If Europe should be able to find alternative suppliers, because it refines 80% of its diesel needs itself, the situation looks more tense for Russia, which must take into account a price per barrel of diesel capped by the $100 G7. “The fundamental question is going to be whether Russia can divert the million barrels per day of diesel previously sold to European Union countries. This depends 1/ on whether transport and insurance costs are covered with the capped price, and 2/ on finding new customers”indicate in a research note Ben McWilliams, Simone Tagliapietra and George Zachman, analysts at the Bruegel Think Tank. According to them, since Russian diesel is currently selling below 100 dollars, the cap and its conditions should not be a problem.
On the other hand, finding new outlets could prove more difficult. As much as China and India, which had replaced European countries, were interested in buying Russian crude oil at an attractive price to use their significant refining capacities and export the products, as much buying refined products directly is economically less profitable. .
Several scenarios
According to the Bruegel researchers, countries that already export diesel to the European Union could be interested provided Russian diesel is sold at an attractive price. Among these countries are Egypt, Turkey, Algeria and Morocco, and on longer sea routes the United Arab Emirates and Saudi Arabia. For these countries, this would allow them to optimize their share of European markets by adding the diesel export capacities that Europe will need. Another alternative, is a substitution on the other side of the Atlantic. “If European Union countries increase their imports of diesel from the United States, Russian diesel could flow to Latin American countries buying diesel from the United States”, they say. Finally, Russia can also adjust its refining capacities, and export more crude or other refined products depending on changing market conditions and product prices.
Either way, the global diesel routing map is well on its way to being redrawn.
