The Kremlin has adopted innovative strategies to ensure its revenue streams remain steady.
In the past, Russia achieved unprecedented shipment volumes. However, its crude oil exports saw a decline in August, falling to 3 million barrels a day. This was a notable drop from its April-May average and even went below pre-war levels. Experts anticipate this decline to continue. On September 5th, Russia decided to extend a “voluntary” reduction of 300,000 barrels a day, which they had initially planned for August, until the end of 2023. However, the basis for this reduction is still unclear.
Financial Implications and Economic Strategies
The drop in exports has financially impacted the Kremlin, particularly as they aim to strengthen their military resources. In August, federal tax revenue from crude sales fell sharply to $8 billion. This was a decrease from $10 billion in July and $13 billion in August of the previous year, as Viktor Kurilov from Rystad Energy consultancy estimated. The rouble, previously a representation of Russia’s economic might, has significantly weakened against the dollar. Due to these economic challenges, Russia is working harder to maximize its profit from every crude barrel. They have developed three primary strategies to address this.
The first strategy focuses on achieving higher prices for the fewer barrels they offer. This strategy faced obstacles. Between January and August, the average price of Urals, Russia’s main crude grade, was $59 per barrel. This was a decrease from $83 during the same months of the previous year. The global oil price drop and Western sanctions majorly influenced this decline. These sanctions allowed countries like China and India to have a stronger negotiating position. The G7’s “price cap” also had an impact, limiting Western companies from supporting Russian crude exports if the oil price was above $60 per barrel.
Recent Developments and Future Prospects
However, the strategy to increase prices has recently seen positive results. The expected rise in U.S. interest rates and production cuts by both Russia and Saudi Arabia have pushed the global oil price upwards, reaching over $90 a barrel on September 5th. This price increase benefits Russia. They have started using a “grey” fleet of tankers and a government-supported insurance system to counteract the price cap’s effects. They are now focusing more on shipping from the Baltic and far-eastern ports instead of the Black Sea, making sanction breaches harder to spot. Since mid-August, the price of Urals has remained above $70 a barrel. The West remains cautious about implementing stricter price caps, wanting to maintain a consistent flow of Russian oil. This is to avoid potential supply issues if the global economy sees a resurgence. Therefore, the increase in the Urals’ price appears to be stable, even if it’s challenging to persuade buyers to agree to smaller discounts relative to the global oil price.
With a decrease in Russia’s crude sales, they are emphasizing the sale of their premium refined oil to maintain their revenue. Russia can process more crude by using the unused capacity in its refineries, estimated to be about 10% of the total. They will likely postpone much of the planned maintenance and will focus more on producing diesel instead of jet fuel. In August, Russia’s exports of these “clean” products exceeded the exports of the last five years.
Exploring New Distribution Channels
Russia’s third strategy to counteract the drop in crude shipments involves finding new ways to distribute its oil. They have discreetly increased piped flows to European countries like the Czech Republic and Hungary, which still buy Russian oil. Experts believe this trend will continue until 2025. Russia is also sending more shipments through the Arctic, providing a shorter and more cost-effective route to China. Kpler’s data shows a significant rise in Russian crude tankers using this route in 2023. Even though the Arctic is mainly navigable during summer and early autumn, Russia hopes for year-round navigation by 2025, relying on the effects of climate change. However, this might not support the war effort in time. Many factors, starting with the global economy’s condition, that will determine Russia’s export revenue are out of its control.