Fake bans and mystery shoppers: what will happen to Russian oil after December 5

Yekaterina Maksimova

What will happen to the country's main breadwinners after the embargo enters on December 5, why "black gold" flows to Asia at a discount and whether Europeans will return to the gray market for Russian oil - in an interview with an expert from the InfoTEK analytical center, associate professor at the Financial University under the Government of the Russian Federation Valery Andrianov.

About leaving Europe

-From December 5, Europe will refuse Russian oil. What market share do exporters lose and how much is it in money terms?

-According to Eurostat, in January-September this year, the export of crude oil and oil products from Russia to the EU countries amounted to about 80 million tons. For the same period last year - a little more than 84 million tons, that is, for 9 months, exports decreased by about 5%. But at the same time, the income of the Russian side from exports to Europe has grown sharply.

If in 2021 they amounted to 33.44 billion euros, then in January-September it was already 46.75 billion euros. That is an increase of almost 40%.

In other words, for smaller volumes of supplies, our exporters receive much more revenue. Such is the reverse effect of the anti-Russian sanctions being introduced. And, of course, this rise in price is passed on to the shoulders of ordinary European taxpayers, who are forced to pay much more for energy resources.

Of course, in dynamics by months, the volume of exports changed. It was the maximum before the start of the NWO: 11 million tons in January, but the closer to the beginning of the embargo, the more significantly the supplies were reduced. And in September they, according to Eurostat, amounted to only 7.57 million tons.

That is, of course, because of the embargo, deliveries to the European direction will be very significantly reduced.

- Who will replace Russian oil for Europeans from December 5, to whom will these billions of euros flow?

- In particular, deliveries to the European market have already increased dramatically Saudi Arabia and Iraq. In principle, Europe is looking for any sources of additional supplies. But here we must understand that, unlike gas, the oil market is a communicating vessel. If "black gold" leaves any one market, it appears in another place and vice versa. And if Saudi Arabian oil is sent to Europe in large volumes, it means that it is supplied in smaller volumes, for example, to China. And Russian oil comes to the Chinese market.

The turn to the East took place long ago

- China, Turkey and especially India in 2022 broke records for the import of our oil. But, as Bloomberg reported, the two largest plants in India from December will refuse to export from Russia. Does this mean that they are actually joining the oil embargo?

- I think that in the future India will increase its purchases of Russian oil. The potential here is simply colossal. Previously, Russia supplied rather modest volumes to this country, but at the same time, India is the largest potential consumer of oil. If in the last 20 years China has been the main driver of global economic growth, now these functions are being transferred to India.

According to estimates, the volume of oil purchases there can reach 250-270 million tons per year. And at the same time, Russia's share can be 20% of this volume, that is, 50-60 million tons per year. For comparison: in 2021, deliveries from the Russian Federation to India amounted to 4.5 million tons. That is, growth of more than 10 times is possible.

-What to expect from partnership with China?

- Now it is customary to say that we are starting a turn to the East. But this reversal has been going on for a long time. If in 2011 70% of our oil was sent towards the Atlantic and only 18% eastward, then last year (even before the introduction of all sorts of embargoes) the share of Russian oil exports to the Asia-Pacific region increased to 43%, while in the Atlantic direction, it decreased to 50%.

Agree, the growth of deliveries to the East is huge. And we are already supplying about 80 million tons of oil per year to China, both directly via the Eastern Siberia-Pacific Ocean oil pipeline and through the Far Eastern port of Kozmino, from where oil is almost completely exported to China.

About discounts for Asia

-Why do we sell oil to Asia at such a tangible discount?

-This is a topic for a separate big conversation. Yes, we are considered to be selling our oil at a discount. But in fact, these are prices that correspond to the balance of supply and demand in the world market and suit both the buyer and the seller. And the prices for Western consumers are quotations, artificially inflated on the wave of sanctions, and containing a huge speculative component. In fact, they contain the so-called “fear premium”, for sanctions.

I am often asked: what will happen to world quotes next year, in the next 10 years? But I believe that the world market is heading towards the fact that the very concept of single quotes will simply disappear, since there is a very strong defragmentation of world energy markets.

If the Western countries pay the price that has been inflated by stock market speculators, then consumers in countries friendly to us will be able to buy hydrocarbons under direct contracts, at equilibrium prices.

So let me emphasize once again: the prices at which we now supply oil to Asia are quite equilibrium prices, reflecting the balance of supply and demand. And they are close to those that were established in the market before the start of the wave of sanctions. That is, it is not we who are now selling oil cheaper than before, but it is the Europeans who are overpaying because of the sanctions that they also introduced. If there were no sanctions, then there would be no these discounts and overstatements.

- In other words, our oil companies do not lose anything from these Asian discounts and do not reduce their margins?

- Neither the sanctions nor the so-called discounts affect the financial performance of the leaders of our oil industry. So, for example, Rosneft's revenue in the first half of this year increased by 32.5% compared to the same period last year, to 5.172 trillion rubles. This is a record value for six months. Net profit in the first half of the year also showed strong growth - it increased by 13.1%, reaching 432 billion rubles.

About the oil price ceiling

-Another scary date for oilmen: from December 1, Turkey will close the Bosporus and Dardanelles straits for tankers with Russian oil due to insurance coverage sanctions. And Russia simply will not be able to insure ships.

- Nobody is going to close anything. We are talking about the fact that the Turkish authorities will require a confirmation letter from insurance companies to provide the vessel with insurance in the required volumes. This is a requirement for everyone, not just Russia. The excitement around this decision of Turkey arose in connection with the introduction of a ceiling on prices for Russian oil.

Let me remind you that the essence of this measure is that if the cost of a consignment of oil exceeds the threshold value, then Western insurance companies will not have the right to insure this cargo.

That is, firstly, if this price is within the ceiling, then there are still opportunities for insurance. Secondly, no one bothers to apply for insurance coverage in Asian companies. Yes, Western companies, primarily British ones, have de facto monopolized the marine insurance market, but this does not mean that they cannot be squeezed out. And now, as far as I know, negotiations are already underway with Asian insurance companies, which will gladly replace the British in the field of insurance of marine supplies.

- That is, Turkey will not care who will insure?

- Absolutely do not care if there is a standard insurance coverage. And I think that Chinese or Indian insurance companies are no less reliable than companies from London. Therefore, the issue of insurance, in my opinion, is completely resolved.

In addition, deliveries through the Bosporus and the Dardanelles are not so large as to speak of the collapse of Russian exports due to a new demand from the Turkish authorities. Thus, last year, 9.77 million tons of oil were shipped from the Black Sea port of Novorossiysk. For comparison, from Kozmino - 35.1 million tons, from Primorsk - 36.25 million tons, from Ust-Luga - 17.28 million tons.

Why does Europe, which will no longer buy oil from Russia, need all this discussion about introducing a price ceiling?

- In my opinion, the hidden purpose of this "ceiling" is an attempt to circumvent the sanctions that the West itself imposed against Russia. Today, Asian countries are purchasing relatively cheap Russian oil at the aforementioned "discount" and thanks to this they are gaining competitive advantages over Europe (due to the cheapness of energy resources). It is clear that this does not suit Europe and it is trying to rectify the situation.

-How?

- The meaning of the "ceiling" is that Russia will allegedly be obliged to supply oil no more than a certain amount. At the same time, at the settlement point, the ownership of this oil passes to the buyer, and then he can already resell it to anyone.

This creates excellent opportunities for various gray schemes for the circulation of Russian oil. In fact, Europe says: if you supply cheap oil, then we will turn a blind eye to its origin.

If your oil is inexpensive, if you don't make super profits, then we won't dig too deep and see if it was originally produced in Russian fields or not. Thus, Europe is trying to reduce the severity of its own energy crisis.

- Will they buy through "second hands" on the gray market, despite the embargo?

-I think yes. At the official level, no one recognizes this, but, I believe, we are really talking about the fact that such deliveries go on.

Moreover, thanks to the American sanctions, the schemes of the "gray" oil trade are perfectly worked out in the world. According to gray schemes, oil is supplied mainly to Asia from Iran and Venezuela. Either raw materials are transshipped from one tanker to another on the high seas, or transponders are simply turned off, documentation is changed and no one understands where the raw materials come from. As a result, Malaysia suddenly became one of the major oil suppliers to China, although all experts understand that under the "Malaysian" oil, sanctioned Venezuelan raw materials are hidden.

I think that the gray sector will not just grow, it will almost become dominant in world trade. And thus there is deglobalization, a break in the single oil market, which will be split into the European sector with its exchange trading and insane prices, into the Asian sector and into the gray sector. Confusion will grow, the concentration of "muddy water" will increase, in which successful businessmen and companies will be able to "fish".

- But Deputy Prime Minister Alexander Novak said that Russia would not supply oil when the price ceiling was set.

- Russia will simply not pay attention to these prices and will do business the way it did.

By the way, the "ceiling" prices are very clearly within those price indicators at which Russia sells oil in Asia. In my impression, Western politicians deliberately tried to adjust the "ceiling" to the real prices at which Russia now supplies oil to another part of the world.

- Will this gray market be able to significantly affect world prices?

- As I said, the very concept of the world price will be blurred. If earlier the quotes fixed on the largest international exchanges - for example, $100 per barrel - were an axiom and a guideline for all sellers and buyers, now the destruction of this system will begin.

And in my opinion, this is correct. For decades, the financial infrastructure of the global oil market with its exchanges, marker grades, price indicators, etc. has been built. But in the end it turned out that this system meets the interests of only the West.

Firstly, prices are determined on the largest stock exchanges in New York, London, etc. Secondly, the so-called marker varieties were created: Brent, West Texas Intermediate (WTI) and Dubai Crude. Moreover, for example, the composition of the Brent variety is formed absolutely arbitrarily, on the basis of purely political decisions. The prices of “national” varieties (including Russian Urals) are already tied to the quotations of marker varieties. At the same time, the binding is carried out according to special indices, which, again, are calculated by Western companies. In other words, the entire pricing system is geared towards the West.

This begs the question: why should it be so? We are so used to this paradigm that we do not even ask ourselves the question: is this normal or not.

Recently, I happened to witness an interesting discussion. Honored by all respected veteran of the oil and gas industry, President of the Union of Oil and Gas Producers of Russia Genadiy Iosifovich Shmal put forward the idea of the need to increase the supply of Russian oil to Africa. This is a promising continent with a rapidly growing population, with a growing economy (although, of course, not in all countries). And the demand for energy resources there will expand. But he was immediately objected to - they say, the Africans do not have the money to buy oil in Russia.

Of course, if we supply our raw materials at prices artificially inflated in the West, not forgetting to feed the New York and London speculators, then the Africans will not be able to afford our oil. And if we take a course towards trading at equilibrium prices that suit both sides and do not depend on any Western exchanges, then we will have huge prospects in a number of countries.

If the vicious paradigm is broken, then the possibilities of Russia and its partners in the world energy market will be simply enormous.

About oil revenues

- It turns out that after December 5, Russia does not lose anything?

- The entire volume of oil and gas revenues of the Russian Federation in 2021 amounted to 9.1 trillion rubles.

In the first half of this year, oil and gas revenues reached 6.37 trillion rubles, which exceeds the amount of funds received by the budget from the industry for the whole of 2020 and more than 70% of the volume in 2021.

As I have already said, after the introduction of the European embargo, the main flows of Russian oil will be redirected to the East, in addition, the rapid development of gray schemes with the final delivery to the same Europe is not ruled out. Therefore, we are definitely not talking about the loss of a third of our oil and gas revenues.

Of course, the restructuring of supply chains will take time. Therefore, as Deputy Prime Minister Alexander Novak has already stated, next year oil production in the Russian Federation may be reduced by 7.5%, to 490 million tons (despite the fact that this year, despite the sanctions, it will grow by 1.1%, to 530 million tons). In this regard, possible budget losses will amount to 500 billion rubles.

This is an unpleasant, but not a critical fall. And, I emphasize once again, this is a temporary measure due to the readjustment of logistics schemes. It takes time and investment to create new supply chains. Behind all this is a huge hard work of a large number of people.

-How long will it take to make this changeover?

- I won’t risk giving accurate forecasts, but I think that in a year or two it is possible to reconfigure logistics, find a fleet of tankers, organize insurance, agree on sales markets, etc. And I think that by 2024 we can expect an increase in supplies.

- It is clear that it is incorrect to calculate, but still: how much, approximately, will our oilmen lose export earnings due to a reduction in production by 40 million tons?

- Here you need to understand that the main "beneficiary" of exports is not Russian companies, but the state. The domestic tax system is organized in such a way that the state withdraws the proceeds of oil companies, which is formed when oil prices exceed a certain level. That is, with an increase in oil prices, additional profit goes to the state, but even with their decrease, the volume of government revenues suffers in the first place.

- Why, by the way, has there been a decrease in exports to Europe? For several months we have been watching how the countries of Europe tried to buy Russian oil as much as possible until the “X” hour ?

- As I said above, there was still a slight but decrease in purchases. The fact that the decrease in exports turned out to be small is already an achievement. And it shows that European countries, with loud anti-Russian rhetoric, cooperated with Russia until the moment when the restrictions come into force. By and large, this anti-Russian rhetoric is “on the drum” for business, it thinks about its own benefit, and not about how to put more pressure on Russia.

Unfortunately, unlike gas, oil cannot be stored in large quantities “for use”. The final buyers of our oil are European oil refineries, and they have limited storage capacity for raw materials, they cannot make large reserves of Russian oil. As the hour of X approaches, refineries are forced to think about switching to other grades of oil, which requires readjustment of equipment. Hence the gradual decline in purchases of Russian oil, even before the moment of the embargo.

- Do you agree with the forecast that Russia, for which the European market is closed, will lose minimal oil revenues?

- I have already given the forecast estimate of the Russian authorities: about 500 billion rubles. I think we can agree with her. But here much will depend not only on the intensity of the sanctions, but also on… the tax policy of the Russian authorities. And here the situation, unfortunately, does not inspire optimism.

Recently, a bill prepared by the Ministry of Finance was adopted to increase the burden on the oil and gas sector.

According to the calculations of the analytical center InfoTEK, as a result of the adoption of this law, additional tax exemptions from the oil industry in 2023 will amount to 420 billion rubles. Thus, the tax burden on oil companies will increase from 73% to 75% of revenue, which is significantly higher than in other industries (for example, for the mining and metallurgical industries, as a result of the adoption of this law, it was reduced from 26% to 25%).

In the most difficult conditions, domestic companies are now reorienting themselves to new markets, establishing new supply chains. Of course, all this requires huge costs. As I have already said, the state takes the lion's share of the oil industry's revenue, but it is they who bear the additional costs, and not the budget. So isn't it time for the state to lend a hand to the industry that keeps the defense under such a frenzied onslaught of sanctions? If today the oil and gas industry is stabbed in the back, tightening the fiscal screws even more, will it be able to operate just as successfully in the coming years, resist sanctions? Or will domestic regulators represented by the Ministry of Finance do what Western politicians failed to do?