The Russian invasion of Ukraine in February 2022 rattled the global energy markets, as Russia dominated the global oil and gas industry for decades prior to the invasion. Russia was the second-largest global crude oil exporter in 2019, with $123bn in revenue, and these exports comprised 45% of the country’s federal budget in 2021.
In response to the war, many Western countries imposed sanctions on Russia, which resulted in the country curbing its supplies to the West. This significantly disrupted the European power sector, with a significant volume of oil suddenly withdrawn from Europe. According to the International Energy Agency (IEA), prior to the invasion, Europe imported 4.5 million barrels of oil per day from Russia in 2021, 34% of Europe’s total oil imports.
Yet Europe has continued to rely on Russian oil, despite price caps and declining imports, raising the question as to how effective these sanctions can be when Europe is so fundamentally reliant on importing oil from Russia.
Western sanctions target Russian exports
In December 2022, the EU agreed to impose a price cap of $60 per barrel for Russian seaborne oil, before shifting the “discount” cap down to $45 per barrel in February this year. The moves have aimed to keep the price of Russian oil low, to prevent Russia from making signifcant profits on their exports, while enabling Europe to satisfy its need for Russian oil.
However, the cap has allowed Russia to continue exports, with Reuters reporting in January of this year that the average price of a Russian barrel fell to $49.48, below the initial cap, rendering it largely ineffective This cap has also allowed Russia to export oil to ‘third-party’ countries, such as those outside of Europe, via G7 and EU tankers, insurance firms and financial institutions at or below $60 per barrel, .
However, these caps have helped cut into Russian profits. The Centre for Research on Energy and Clean Air (CREA) estimates that Russia still makes around $688.3m per day from exports, which shows a significant decrease from $1,075.5m from March to May 2022. Since then, Japan, China, South Korea, Turkey and India have become the largest energy importers from Russia. Yet the EU became Russia’s largest oil importer in December 2022, suggesting that, for all their sanctions and statements, European governments may simply be unable to function without significant imports of Russian oil.
Dmitry Peskov, the Russian president’s press secretary, said: “A decision [on Russia’s retaliatory steps] is being prepared. One thing is self-evident. We will not accept any price caps,” according to the Russian news agency Interfax.
GlobalData reported that the volume of oil being transferred through Russian pipelines fell 37% year-on-year in the first seven weeks of 2022. European energy costs increased by 54% in the second half of 2021, as gas prices tripled and crude oil prices reached $105 per barrel.
According to the news agency CNBC, the EU’s ban on Russian seaborne crude oil imports and G7 countries’ price cap imposition cost Russia an estimated $171.8m per day. Western measures significantly contributed to a 17% decrease in Russian revenue from oil and gas exports in December 2022.
Similarly, the CREA reported that Russian crude oil exports fell by 12%, with a 23% decrease in selling prices. By December 2022, the country’s oil revenues fell by 32%, with an additional 5% increase due to Germany’s ban on pipeline oil imports. So far, Russia has made $3.3bn by shipping crude oil on vessels included in the price cap, which has resulted in$2.2bn in tax income for the Russian Government, but it is unclear how much longer Russia will be able to draw profits from its exports, if those export volumes continue to fall.
Gas flows fell to 36 million cubic meters per day (mcm/d) in the first seven weeks of 2022, from 80 mcm/d via the Ukraine and Slovakia routes. The IEA report said: “Reduced Russian pipeline flows, with low storage levels and adverse weather conditions contributed to strong upward pressure on European hub prices, which averaged more than $30/MMBtu [dollars per metric million British thermal units] in the fourth quarter of 2021. Natural gas prices moderated down to an average of $27/MMBtu in the first seven weeks of 2022.”
According to news agencies in Russia, economy minister Maxim Reshetnikov stated that the Russian administration projected a 2.9% decrease in Russia’s GDP for 2022, an improvement from its August prediction of a 4.2% yearly decline.
Similarly, Reuters reported that the Russian economy would resume quarterly growth in late 2022 or 2023, and that national the GDP would still fall by 0.9% in 2023, even after a 3.5% growth in the first quarter of 2022.
Domestic and international infrastructure
Rosneft, a state-owned company, is the largest producer of oil in Russia, followed by LUKOIL, the largest privately owned oil company. According to the IEA, Gazprom Neft, Surgutneftegaz, Tatneft, and Russneft also have significant production and refining assets.
Russia’s extensive crude export pipeline capacity allowed it to supply large volumes to Europe and Asia directly. The Druzhba pipeline system, also known for being the longest pipeline network in the world, transported 750,000 bpd of crude oil to refineries in parts of Europe. Currently, Russia supplies around 20% of total European refinery crude.
“Russian companies have spent the last decade investing heavily in primary and secondary refining capacity to take advantage of favourable government taxation, as well as growing global diesel demand,” an IEA report reads, drawing attention to Russia’s massive oil and gas infrastructure, which now may not have the volume of oil required to operate effectively..
Russia has an estimated refining capacity of 6.9 million bpd and produces large amounts of gasoline and diesel. The country has prioritised self-sufficiency in gasoline, resulting in minimal volumes of exports; in 2021, Russian refineries produced 5.6 million bpd of crude and exported 2.8 million bpd of oil products.
Regarding gas exports, Russia has a wide range of pipeline networks via transit routes through Belarus and Ukraine, and pipelines like Nord Stream, Blue Stream and TurkStream pipeline routes directly into Europe. The country produced 762 billion cubic meters (bcm) of natural gas and exported around 210 bcm through pipelines.
Spencer Dale, BP’s chief economist, noted the potential clean energy impacts of the sanctions, saying: “The increased focus on energy security as a result of the Russia-Ukraine war has the potential to accelerate the energy transition as countries seek to increase access to domestically produced energy, much of which is likely to come from renewables and other non-fossil fuel.”