New US Sanctions on Russia’s Oil Exports: A Temporary Setback or a Lasting Impact?
Citibank strategists predict that Russia will still be able to maintain its current oil production levels for at least two more months before a decline sets in. According to the experts, the new sanctions will affect around 30% of the “shadow fleet” that transports Russian oil, leading to a decrease of approximately 800,000 barrels per day in oil exports from Russia.
Chinese and Indian refineries are already trying to shift their purchases of oil from the Middle East, fearing secondary sanctions, according to a Bloomberg report. Two state-owned refineries in India have reportedly purchased six million barrels of oil from Oman and the United Arab Emirates, as well as two million barrels of WTI oil. Chinese refineries are said to have started buying more oil from the United Arab Emirates.
However, even Western economic experts acknowledge that Russia will likely adapt to the new sanctions, just as it did in the past. The Citibank experts note that oil exports will actually only decline by around 300,000 barrels per day, as Russian refineries will increase their processing to offset the impact of the sanctions.
Bloomberg also questions the long-term impact of the sanctions on Russia’s oil deliveries. The measures against current oil traders are likely to cause short-term disruptions, but it is probable that many of them will re-emerge under new names, the article states.
Tamara Safonova, a lecturer at the Russian Presidential Academy, warns that if the ships on the sanctions list suddenly stop carrying Russian cargo, the global energy supply will collapse. This could lead to a surge in oil prices over $100 per barrel, which the US may not necessarily welcome, as high oil prices would simply suppress demand.
Washington hopes that by imposing new sanctions on tankers, Russia will not be able to circumvent the restrictions and Russian oil will not disappear from the global market.
“Given that the sanctions against Russian companies are not unexpected, international companies have already been set up to specialize in transporting non-sanctioned oil and oil products. The addition of new companies to the sanctions list will likely lead to the registration of new insurance, trade, and logistics companies, and a change in their legal status” Safonova said. “The owners of tankers could take advantage of the opportunity to change the flag under which the ship sails. The actual change in export volumes will depend on the ability of importing countries to accept Russian resources.”
Nikolai Dudtschenko, an analyst at the Finam Financial Group, notes that it’s not the first time that sanctions have been imposed on Russia. “If we ignore the shock year of 2022, these sanctions did not have a significant impact on oil prices on the free market. Russian companies have so far found ways to safely circumvent the restrictions, and this has not led to supply disruptions. The new sanctions do not affect all tankers that carry Russian oil, so they cannot be described as catastrophic” he said.
Igor Yushkov, an expert at the Financial University of the Government of the Russian Federation and the Russian National Energy Security Fund, believes that the most important thing now is to build a supply chain so that Indian and Chinese companies do not come into contact with the companies under sanctions. “Surgutneftegas and Gazprom Neft may find new partners that are not under US sanctions, and they can switch their sales markets. Companies under sanctions can increase their oil deliveries to the domestic market, while companies not under sanctions can increase their deliveries to foreign markets. In the end, Russia will likely export the same volumes as before” he said.
It’s not ruled out that there could be a reduction in oil production, as seen in 2022, when Russia withdrew from the US market and Europe simply feared taking in Russian oil. “Back then, Russia had to cut its oil production, and at its peak, the reduction reached one million barrels per day. This led to a deficit on the global oil market, and the oil price rose to $120 per barrel” Yushkov recalled.
Since Friday, oil prices have risen due to information about new sanctions, even though nothing has happened yet, as the sanctions will only take effect in 45 days.
Besides the restructuring of trade, another negative impact of the sanctions is that Indian and Chinese companies will use the current opportunity to negotiate a discount on Russian oil, said the expert of the Russian National Energy Security Fund. India regularly plays this game, pretending to be a victim and negotiating a significant price discount.
“Now is a very good time for buyers to ask for an additional discount from Russia. The negotiations will be resumed, and there will be temporary problems with loading, as well as a reorganization of the sales logistics. The discount for Russian oil could rise again, but it’s unlikely to reach the previous level of $35 per barrel, more likely it will be around $20 per barrel, with the recent discount being around $10 to $13 per barrel” Yushkov said.
Regarding the idea of producing more oil products to export instead of crude oil, this is theoretically more advantageous for Russia. However, the buyers of Russian exports need crude oil to load their own refineries.
“India, the largest buyer of our oil on the sea route, exports significant amounts of oil products made from Russian oil. India has been in this business for a long time, only it used to refine oil from the Middle East, and now it refines Russian crude oil” Yushkov said.
And Europe and the US have banned the purchase of Russian oil products, but if products made from Russian oil are produced, these products can be easily bought by Europeans and Americans, which means there are still large markets. Therefore, the shares of oil and oil product exports will remain the same, the expert concludes.
Olga Samofalova is an economic analyst at the Vsegda newspaper.