archigraf/Shutterstock Save for later Print Download Share LinkedIn Twitter Russia will make a "voluntary" cut of 500,000 barrels per day in its crude oil production in March, Deputy Prime Minister Alexander Novak announced Friday — a move that follows the recent expansion of Western sanctions.Novak said Russia is still "selling the entire volume of oil produced" but will not sell to "those who directly or indirectly adhere to the principles of the price cap." He was referring to the G7 price caps for exports of crude oil and refined products from Russia. Those measures — part of the West's response to Moscow's war in Ukraine — took effect on Dec. 5 and Feb. 5, respectively. Novak described the caps as "an interference in market relations and continuation of the destructive energy policy of the collective West." He said he hoped the cut "will contribute to the recovery of market relations."Whether it lasts for more than one month will depend on the "evolving situation on the market," he added.Frustrated by Huge DiscountsThe production cut is understood to reflect Moscow's frustration with low oil prices, which have put tremendous pressure on the country's budget. Revenues have been squeezed by the retreat in benchmark oil prices from levels above $100 per barrel in the months after the invasion of Ukraine, and by the deep discounts that Russia has had to offer to sell oil displaced by EU import bans.Discounts for Russian Urals crude have recently been assessed as wide as $40 per barrel to benchmark Brent.Novak's announcement pushed Brent crude futures up by around $2 per barrel on Friday, but prices remained within their recent range of the low-to-high $80s. Sources told Energy Intelligence that Russia hopes to narrow the discount for Urals crude to $20-$25/bbl, with Moscow prioritizing higher revenues over output.Some sources said the cut in output could give Russian exporters more leverage in price negotiations with buyers in India and China. Novak had already flagged in late December that Russia might have to cut output by 500,000-700,000 b/d in early 2023 in response to sanctions.Crude Exports to Hold SteadyCrude exports are unlikely to be hit by the production cut, with the impact expected to fall on deliveries to domestic refineries, leading to lower crude runs. Russian exporters have succeeded in rerouting crude flows to non-European markets, with January exports of 4.88 million b/d actually surpassing pre-war levels.Shipping data show that seaborne crude exports from key Russian ports remained high at the beginning of February.Exports from the Baltic Sea ports alone were over 1.4 million b/d versus 1 million b/d in December, although early February volumes were down slightly from January.But sanctions on sales of refined products — implemented less than a week before Novak's announcement — were always expected to cause greater problems for Russia.The marketing of oil products is inherently more challenging, given the complexities of fragmented markets, different regional specifications and shipping constraints. Moreover, deliveries of crude to Russian refineries were already forecast to decrease in March and April because of planned maintenance work.In addition, Russia does not have significant storage capacity for crude oil or refined products and therefore must adjust its output of crude and products according to demand in export markets.No Change in Opec-Plus PolicyEnergy Intelligence understands that Russia did not consult with its Opec-plus allies ahead of Friday's announcement.Kremlin spokesman Dmitry Peskov said there "had been talks with a number of the Opec-plus" producers, but Novak insisted that the decision to cut production was taken without such consultations.President Vladimir Putin called his counterparts in Saudi Arabia and Algeria earlier this month to discuss oil market matters, but Energy Intelligence understands that a Russian production cut was not discussed at that time.Opec-plus delegates said there were no signs that the group would adjust its production policy in response to Russia's move. The current Opec-plus agreement — which withheld a nominal 2 million b/d of supply — is due to remain in place until the end of this year.Russia produced 9.779 million b/d of crude oil (excluding condensate) in January, down just 18,000 b/d from December, according to official Russian data. That was 699,000 b/d below Russia's official Opec-plus production quota of 10.478 million b/d. Other exporters have looked on with concern as deeply discounted cargoes of Russia's Urals crude have flowed to Asia, traditionally the major export market for Mideast Gulf producers.Some Gulf sources previously expressed concern about the emergence of a two-tier pricing system for sanctioned and unsanctioned barrels.Tax Changes ComingLower oil and gas revenues have started to squeeze Russia's public finances, prompting the government to find ways to plug the gap.State oil and gas revenues in January were down 46% versus the same month of last year at 426 billion rubles ($6 billion). Combined with higher spending because of the war, this created a massive 1.76 trillion ruble ($24.6 billion) budget deficit for the month.The finance ministry plans a meeting with oil companies' top executives on Saturday to discuss tax changes, sources said. They said the production cut would be distributed proportionally among Russian producers, which means state-controlled Rosneft will carry the biggest burden.