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Finance

Russian Energy Revenues Resistant to Sanctions

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Despite waves of sanctions, Russia's oil and gas revenues have done more than weather the storm. They have gone stratospheric. But Moscow's luck could be about to run out.

Over the past three months since the invasion of Ukraine on Feb. 24, the EU has hammered Moscow with new restrictions, including a formal ban on imports of Russian oil and plans to phase out purchases of Russian gas, raising huge questions over the future of the industry that accounts for roughly 40% of the country's budget revenues.

Prospects for the rest of the year and further on remain vague and will depend on the implementation of the sanctions, the outcome of the war and the demand for Russian energy outside the Western world.

The Russia government take from crude and products export duties and taxes was $71.8 billion during the first five months of 2022 — or an average of $14.4 billion per month — compared to $41.8 billion over the same period last year. This includes a peak of $23.1 billion in April, when average Brent prices reached nearly $110 per barrel. In comparison, the average Russian government take from duties and tax in 2021 was about $10.3 billion per month.

Oil Earnings Soar

Russia's revenues from oil export duties totaled $3.8 billion in the first five months of 2022, which was up from $3.1 billion in the same period of 2021. Mineral extraction tax (Met) for crude oil — the country’s key source of revenues — brought the state another $55.2 billion in January–May, twice as much compared to $28 billion a year ago.

Higher revenues year on year reflect Russia’s rising crude production under the Opec-plus agreement as well as higher crude prices, even taking into account the huge discounts that Russian barrels are facing. The average price for Russia’s Urals blend in January-May totaled $83.48 per barrel, up almost 35% from $61.62/bbl during the same period last year. Russia's rising oil exports also contributed to higher revenues. Russian crude oil exports to both FSU and non-FSU states, excluding transit, jumped in January-May to an average of 4.976 million barrels per day versus 4.421 million b/d a year ago.

But concerns are rising in Russia that this is where the good news ends. Moscow-based BCS Global Markets recently estimated that Russia could lose up to $50 billion in budget revenues next year when the EU's ban on Russian seaborne deliveries takes effect. The oil import ban does allow for various exemptions, but the European Commission has said that it should halt around 90% of the 27-nation bloc's oil imports from Russia by early next year.

The EU imported crude oil worth €48 billion ($51 billion) and refined products worth €23 billion from Russia last year, according to EU data. Russian customs data show that the country's total crude exports were worth $110.12 billion in 2021. Crude exports to the EU were worth around $50 billion in 2021, while petroleum product exports were worth approximately $30 billion.

Russian government officials have played down the impact of the ban, saying Russia will simply export more oil to other markets, while European consumers will end up paying higher fuel prices. Nevertheless, if Russia's efforts to boost sales in other markets fall short of its expectations, it could be forced to take some of its production off line, which would result in a corresponding loss of revenue from the Met.

Gas Revenues Also Up

On the gas side, the EU seeks to phase out Russian gas imports by 2027 but is not ready for an immediate halt in supplies due to a lack of adequate replacement supplies in the short run.

Europe’s dependence on Russian gas, coupled with unprecedentedly high prices, now means a huge windfall revenue for Russia’s sole pipeline gas exporter Gazprom and, through the 30% export duty and Gazprom’s dividends, to the country’s budget. From the gas export duty, the Russian budget received almost as much in the first five months of 2022 as in full year 2021 — $12.4 billion versus $15.3 billion. Export duty applies to almost all Gazprom exports, with some exceptions agreed in bilateral intergovernmental agreements.

Energy Intelligence calculates, based on gas transmission data and its own European border price estimates, which are usually higher than Gazprom’s own price estimates, that Gazprom might have generated some $46 billion from exports to Europe, excluding Turkey, in the first five months of 2022. That is almost as much as it generated in Europe, including Turkey, in full-year 2021, or $52.2 billion, according to Gazprom’s data.

Revenues have been growing despite a sharp drop in Gazprom’s export volumes, which is largely due to lower demand for the pricey hub-linked long-term contract gas. Europe’s policy to minimize imports from Russia when possible and Gazprom’s recent deliberate cutoffs of some buyers that rejected Moscow’s new payment scheme have so far had little impact on gas flows, but the effect may be more evident later. In the first five months of 2022, Gazprom may have exported some 54.5 billion cubic meters to Europe, including Turkey, down 32% on the year, Energy Intelligence calculates.

The export duty doesn’t apply to LNG exports, meaning the budget doesn’t win from a sharp growth in LNG prices. In China alone, which accounts for some 12% of Russia’s total LNG supplies, Russian exporters generated around $740 million in revenues in the first quarter of 2022, up 69% on the year, Energy Intelligence calculates based on the Chinese customs data.

Topics:
Sanctions, Crude Oil, Non-Opec Supply, Gas Supply, Fiscal Terms
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