Oil, ruble and interest coalitions | Latest news The Moscow Post
25 September 2022

Oil, ruble and interest coalitions

World energy markets were in motion even before the start of a special military operation in Ukraine. Moscow's decision to redirect hydrocarbon supplies to Asia is a response to the Western sanctions policy. This was stated in an interview with TASS Deputy Foreign Minister Alexander Pankin.

According to estimates by the International Energy Agency (IEA), after the start of a special military operation in Ukraine, exports of Russian oil and petroleum products to European countries, the United States, Japan and South Korea decreased by almost 2.2 million barrels per day. Two-thirds of these volumes went to other countries, including India, China and Turkey, according to a correspondent for The Moscow Post.

Interim Results and Emerging Threats

This is the first obvious result of Moscow's opposition to Western pressure and sanctions. From the end of February to the end of May, Russia exported $98 billion worth of fossil fuels of all types. Including $46 billion of crude oil. Top export Urals crude is trading at a discount to benchmark Brent.

According to the International Institute of Finance, Russian oil supplies to the EU in the first half of the year amounted to 52 billion euros against 31 billion euros a year earlier, natural gas imports increased from 7 billion euros to 24 billion euros, coal - 1.8 billion euros to 4.9 billion euros, the cost of energy imports of all types doubled from 40 billion euros to 81 billion euros.

According to Eurostat, in the first half of the year, the increase in the cost of EU imports from the Russian Federation amounted to 78.9%, Russia remained the third largest supplier to Europe, although the physical volumes of supplies decreased.

Another result of the geopolitical conflict created by the United States and NATO is the threat of a global energy crisis. The West is entering its worst energy crisis in 50 years, former Obama adviser and energy expert Jason Bordoff told the NYT in an interview. In his opinion, the cessation of Russian oil exports can cause enormous harm to the global economy. The situation in Europe looks especially tense, where this winter it may be physically lacking in energy resources.

In addition to "ready for all" Europe, developing countries become victims of tensions in the global energy market. Europe, primarily Germany, is ready to compete in the LNG market with other importers. Pakistan, Bangladesh and other low-income countries may not be able to compete.

Coal generation is not going anywhere either, as was planned in detail at last year's meeting in Glasgow. Europe, on the other hand, has torpedoed its green transition strategy within the EU for years, and global scenarios for moving towards less dirty energy in other countries, including developing ones.

NATO, EU, Ukraine and hydrocarbons

There is an internal connection in this chain. The idea of ​ ​ spatial expansion of Europe at the expense of neighboring Russia is not new. In the post-Soviet period, the "new wave" of expansion into the East received a new content in the form of the American policy of "democratic expansion," which under Clinton was promoted by National Security Advisor Anthony Lake and Deputy Secretary of State for International Security Lynn Davis.

It was this policy that formed the basis of the strategy to draw Ukraine into NATO, which led to the crisis.

In particular, the Strategy for NATO's Expansion and Transformation Memorandum of September 7, 1993 provided that the third phase of the expansion of the alliance in case of "threatening" behavior of Russia would include Romania, Albania and the Baltic countries. And even this, as it would be stated, "should not be considered as a threat to Moscow."

But the "democratic expansion" went with a clear advance and aggressive filling, reached Kyiv and was accompanied by uncompromising European efforts to drag Ukraine into its economic space. Despite the problems with the transit of Russian gas through Ukraine, the European Union gave priority to the Ukrainian GTS. This was followed by pressure from Kyiv, the "new Europe," the United States and the European Union on the Nord Stream -2 project.

The European Union, primarily in the person of the European Commission, has long been "preparatory" work against this project, "said Russian Deputy Foreign Minister Pankin. In 2019, the EU adopted amendments to the "gas directive" of the notorious "Third Energy Package," which extended EU legislation exclusively to the Nord Stream-2 project, putting it in an unequal position in relation to other gas pipelines and violating the legitimate interests of its investors.

All this happened against the background of the fact that Europe developed and in 2020 presented its "green deal" and began to actively plan measures to reduce imports of hydrocarbons and reduce dependence on Russia. The Biden administration also announced the decarbonization of the US economy. In 2021 alone, it was planned to spend at least $500 billion for these purposes.

In the green transition strategy, Brussels assigned an important role to the task of limiting Moscow's export revenues and achieving changes in Kremlin policy. In this debacle of "democratic expansion," Europe has thoughtlessly sidelined its energy security interests without thinking about the consequences.

"Fragile Equilibrium"

Russian Deputy Foreign Minister Pankin stressed that the global oil market, which is in a state of fragile equilibrium, "will experience a shock with a sharp rise in quotations, which the initiators of the introduction of a ceiling for Russian fuel prices are so afraid of." The first blow to the "fragile equilibrium" was dealt back in 2014, when the West imposed investment restrictions on marine exploration and oil production at depths over 150 meters, on projects on the Arctic shelf, as well as shale oil production by hydraulic fracturing.

In response to the start of a special military operation, the European Union has already introduced large-scale trade sanctions against Russian oil and petroleum products, postponing restrictions on oil imports by sea until December, and imports of petroleum products until February 2023. At the same time, Brussels, according to Pankin, promised to return to the restrictions on the supply of pipeline oil.

The danger is posed by the measures of the EU and Great Britain to isolate Moscow from the tanker insurance market. The introduction of a ban on the insurance of ships with Russian cargo, which the European Commission insisted on, could lead to an increase in world prices, the interests of food and energy security of many countries will suffer.

In addition, oil exporting countries have exhausted the potential to increase production due to insufficient investment in new capacities. The chronic lack of investment in the oil sector will affect the supply-demand ratio after 2023. Russian oil is an important factor in maintaining a "fragile balance" in the oil market.

Interest coalitions

For the third month in a row, Russia has remained the largest oil exporter in general and to China, in particular. According to Chinese customs cited by Reuters, China received about 1.68 million barrels of Russian oil per day in July. In May-June, China's imports of Russian oil reached almost 2 million barrels per day, which corresponded to 15% of total demand.

In 2021, Russia exported about 800 thousand barrels of oil per day to China, including about 600 thousand barrels per day through the Eastern Siberia-Pacific Ocean oil pipeline, as well as another 200 thousand barrels per day through Kazakhstan. Since the beginning of this year, Russia has exported about 48.4 million tons of oil to the PRC and bypassed Saudi Arabia, whose export volumes to the PRC have decreased. China's imports from West Africa also fell from an average level of 1.15 million barrels in 2021 to 429 thousand barrels in the current one, which was the lowest in five recent years.

India has increased imports of Russian oil from almost zero to more than 760 thousand barrels per day, about eight times. Imports from China and Turkey rose 70% and 54%, respectively. Myanmar plans to import Russian gasoline and fuel oil to address supply and price hikes. Sri Lankan authorities showed interest in supplies from Russia.

Moscow can influence world oil prices, which is especially important in a conflict with the West. The OPEC + Group of Exporters brings together members of the influential Organization of the Petroleum Exporting Countries (OPEC) with other producing countries, including Russia. The overlap of interests gives the OPEC + group an advantage in the energy market in terms of maintaining a stable environment necessary to stabilize prices at about or above $100 per barrel.

In particular, the interests of Russia and Saudi Arabia in the energy market coincide. Saudi Arabia has doubled imports of fuel oil from Russia to generate electricity, freeing up crude oil reserves for exports. Aramco saw a 90% increase in net profit in the second quarter compared to the same period last year.

This year, Russia is expected to reduce oil production by 9% to 475 million tons in the baseline scenario and by 17%, to 434 million tons in the conservative scenario prepared by the Ministry of Economic Development in May. Oil exports in 2022 may decrease by 1.1% compared to 2021, or to 228.3 million tons, pipeline gas - by 10%, to 185 billion cubic meters, while LNG exports will grow by 5.5%, to 30.7 million tons.

According to the IEA's monthly report, in July, oil production in Russia was 310 thousand barrels per day lower than in January this year, a reduction of 3%. Oil export volumes decreased by 580 thousand barrels per day. Oil export revenues in June and July were $21 billion and $19 billion, respectively. The IEA raised its forecast for oil production for the second half of 2022 by 500 thousand barrels per day, and for 2023 - by 800 thousand barrels per day.

Hydrocarbons and rouble

Another consequence of the sanctions confrontation can be considered that Russia and its partners are moving away from using the dollar and the euro, which have become "toxic," in international settlements. Interest in the use of other currencies has increased. According to Deputy Minister Pankin, the West uses the current global financial system, in which the dollar dominates, for political purposes. Russia has already encountered this and proceeds from the fact that such a model does not meet the requests for a multipolar world order.

Europe intended to destabilize Russia with the help of large-scale sanctions, but now it itself is experiencing panic, preparing for the rationing of gas and electricity in the coming winter. Claims that Moscow uses gas as a weapon do not correspond in any way with the fact that Brussels and Berlin, under the leadership of Washington, have already used financial and other levers as weapons.

In particular, the United States and Western countries froze huge funds of the Russian Central Bank, but the ruble did not collapse. On the contrary, the exchange rate of the Russian currency even exceeded the pre-crisis level. In the past, countries like Argentina and Turkey have tried to control the stability of their currency and the movement of capital in more favorable conditions, but they have failed to achieve results, Al Jazeera wrote back in June.

According to the IMF report, the share of the dollar in global foreign exchange reserves is declining. If 20 years ago it was within 70%, then at the end of 2021 it fell to 59%, which is the result of the diversification of portfolios by many central banks. The ruble, according to the newspaper, can claim a place among other world currencies of developing countries competing with traditional currencies led by the dollar.

"Sanctions against Russia have made China realize the need to protect against possible financial sanctions in the future," said Rye Nakada of Japan's Daiwa Research Institute. Although he considers it unlikely that a sudden increase in yuan transactions due to capital controls by Beijing is unlikely. Nakada noted that more and more institutions are considering participation in non-dollar settlement networks.

Russian Deputy Foreign Minister Alexander Pankin also noted that some states have created mechanisms for settlements in national and alternative Western currencies, worked out the possibility of ruble payment for certain categories of Russian export goods, including energy and food. The issue of increasing the share of national currencies in mutual settlements has been on the agenda of the EAEU since the beginning of its functioning. During this time, payments in national currencies between the countries of the Union reached about 75% of the total volume of transactions, and the use of the dollar was reduced to 21%.

Multilateral dialogue on this issue has intensified within the BRICS, SCO and other international platforms. In June, Russian President Vladimir Putin, in a greeting to the participants of the BRICS Business Forum, said that the issue of creating an international reserve currency based on the currencies of the BRICS countries (Brazil, Russia, India, China, South Africa) is being worked out. Decisions to abandon Russian energy resources, Al Jazeera emphasized, were not crowned with success, and it does not seem that they will be crowned in the future. In other words, the need for Russia's energy resources, and therefore the ruble, will continue.

Photo: Maxim Bogodvid/RIA Novosti, Shutterstock

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