Sanctions go to Urals – Kommersant newspaper № 48 (7249) from March 22, 2022

The European Union has intensified discussions on a ban on the purchase of Russian oil, which threatens to shock the Russian economy. Europe, along with China, is the largest consumer of Russian oil, and supplies to the EU account for about half of Russia’s oil exports and about 20% of production. The Russian authorities were skeptical about the possibility of a full embargo, believing that it would raise prices to unprecedented levels. The largest European oil consumers have not yet supported such a radical measure. Market participants believe that in the event of a full embargo, Russia will not be able to redirect a significant part of supplies to Asia and will face a drop in production by 18%.

EU countries are actively discussing an embargo on Russian oil as new sanctions for hostilities in Ukraine. This is the most painful measure for Russia, which receives major foreign exchange earnings from oil exports, with Europe being a key market for Russian oil and oil products. According to the Federal Tax Service, in 2021 Russia exported 230 million tons of oil and 144 million tons of oil products, total revenues amounted to $ 180 billion. Oil and condensate supplies to Europe in 2021, according to Kommersant, amounted to 105 million tons, which is about comparable to 20% of Russian production. In addition, Russia is the main supplier of diesel fuel to Europe, its share of about 70% of imports, or about 40 million tons. According to Platts, at the end of last year, Europe imported about 3 million barrels per day of Russian oil and 1.5 million barrels per day of petroleum products.

Problems with the sale of Russian oil and oil products on the spot market have already arisen against the background of financial sanctions against Russian banks, which has led to difficulties in calculations. Gradually, more and more foreign buyers of Russian oil, including European majors, began to boycott Russian supplies in response to Russia’s continued actions in Ukraine. As a result of declining demand, the Russian Urals variety has fallen in price relative to the Brent benchmark: the discount on the spot reaches $ 30 per barrel. In the last week, due to huge discounts, Indian companies have shown interest in Russian oil, but the volume of purchases is not so great, and it is likely that the reduction in exports will be noticeable in April and will be clear in May. According to IEA estimates, even an informal boycott by Western consumers could lead to a drop in Russian oil production by 3 million barrels per day, or 25%.

According to market participants, in the event of a European embargo, Russia will not be able to quickly redirect supplies to other areas. In the event of a full embargo, Russia will be able to quickly redirect to the east no more than 5-10% of current exports to Europe, according to Kommersant’s interlocutor in the oil industry. According to him, to compensate for the European market, it is necessary to redirect flows, including the construction of new pipelines. The reduction in production in Russia could be in the short term (three to five years) about 18%, he believes.

In early March, an embargo on the sale of Russian oil was announced by the United States and Britain, which account for about 13% of Russian oil and oil products exports. In the EU, the Baltic states and Poland take the most radical position on the embargo. The latter is gradually reducing its dependence on Russian oil through purchases, primarily in the Middle East (see Kommersant, January 13).

However, the largest European consumers of oil from Russia – Germany and the Netherlands – are not ready to abruptly abandon Russian raw materials. “As before, the government is convinced that it cannot give up oil exports and imports,” said German government spokesman Steffen Hebeshtrait. “This is the position of the federal government, and as far as I know, nothing has changed in it,” TASS quoted him as saying. A previous package of EU sanctions against Russian state-owned companies, published last week, stressed that the restrictions did not apply to oil deals.

The Russian authorities also commented on the possible imposition of the embargo on March 21. Russian Deputy Prime Minister Alexander Novak is pessimistic about the EU’s chances of abandoning Russian oil altogether, and in the event of such a scenario, he hopes to redirect supplies to the Asian market. “If there was a refusal, the price of oil would be $ 300 a barrel, that’s what I’m saying. And some are talking about $ 500 per barrel, “TASS quoted Mr. Novak as saying. Dmitry Peskov, a spokesman for the Russian president, said that “Europeans will have a hard time” if they give up Russian oil, and “Americans will stay with their own and feel much better than Europeans.”

Against the background of discussions on the embargo on Russian oil, the price of May futures on Brent reached about $ 115 per barrel. According to the latest Fitch forecast, the average price of oil in 2022 will be $ 100 per barrel.

Dmitry Kozlov

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