The Russian government has been grappling with a significant contraction in its oil exports revenue, largely attributed to the European Union (EU) and G7 sanctions imposed on Russia. The 25 per cent year-on-year decline in budget revenues for January and February is primarily due to the discounts resulting from these sanctions.
Impact of the Ukraine Invasion
Moscow’s full-scale invasion of Ukraine has also contributed to a 52 per cent increase in spending, exacerbating the mushrooming deficit that threatens to erode Moscow’s economic resilience. The Kremlin has been developing countermeasures to thwart sanctions, including assembling a ‘shadow fleet’ of tankers capable of transporting Russian oil with impunity.
Risks from the Shadow Fleet
The shadow fleet, which has been steadily expanding, poses an increased risk of oil spills in coastal regions from the Baltic to the Sea of Japan. To mitigate these threats, coalition policymakers and coastal states will need to take robust action.
Sanctions Overview
Russian oil sanctions consist of two separate embargos: the EU/G7 ban on Russian oil imports and a ‘price cap’ that bans EU and G7 entities from providing shipping services for any Russian seaborne oil priced above a certain value. The capped price is currently US$60 a barrel, seeking to limit Russia’s ability to reap windfall revenues from high oil prices while avoiding the supply shock an unconditional ban on shipping services would cause.
Challenges in Oil Shipping
Russia’s tanker needs are immense and meeting them without relying on European marine services is a challenge. From vessel finance to fleet ownership, Europe plays an outsized role in all aspects of global oil shipping, particularly in the complex area of mandatory oil spill liability insurance. Some 95 per cent of the global fleet is insured by the International Group of P&I Clubs (IG), which requires insured vessels to maintain specific safety and environmental standards.
Countermeasures and Future Outlook
Despite the challenges, the Kremlin continues to develop countermeasures to thwart sanctions. One measure is to ease the glut of Russian crude by announcing a cut in exports. The other is to sell more to China to regain pricing leverage. However, additional deliveries to China must come from Russia’s distant Baltic and Black Sea ports because China-bound exports from its Pacific ports are close to capacity.
This means higher freight costs and an undesirable increase in Russia’s tanker needs, making it even more vulnerable to the second EU/G7 embargo.
Original Article: With oil exports the largest contributor to Russian state revenues, these discounts are a cause for concern. They are largely to blame for a 25 per cent year-on-year contraction in Russia’s budget rev — Eastasiaforum