Russia still takes in billions of dollars from the sale of oil, gas, and other commodities.
As the US and its allies launched a series of sanctions against Russia in March, President Joe Biden spoke out at the White House, saying they would “strike back at Putin’s war machine.”
As the war in Ukraine nears its 100th anniversary, this machine is still fully operational. Russia is being driven by an influx of cash that could average $800million per day this year. This is in addition to the oil and gas superpower’s earnings.
Russia has been a huge commodity retailer for years. It has sold everything the world needs, including energy and wheat. The US and the European Union have had to rethink their relationship after the invasion of Ukraine. Although it is taking some time, the EU made a significant step this week with a compromise agreement regarding Russian oil imports.
Russia is not immune to the sanctions that have made it a pariah in the developed world. Many corporate giants have fled and many are leaving behind billions of dollars in assets. The economy is headed for a deep recession. Putin can ignore the damage, as his coffers are overflowing due to the increased global prices of commodities. This has made them more profitable than ever, partly because of the war in Ukraine.
According to Bloomberg Economics projections, Russia’s oil and gas revenue will still exceed $285 billion even if some countries stop or phase out their energy purchases. This would surpass the 2021 figure by more than one-fifth. Add other commodities to the equation and you can more than make up the $300 billion in foreign reserves that were frozen under the sanctions.
EU leaders are well aware that Russia should be stopped from buying their goods and should not indirectly finance a war in Europe. However, even with all this ambition, the national governments know that there will be consequences for their economies.
They reached an agreement this week to seek a partial ban on Russian oil, opening the way for the sixth set of sanctions. However, it took weeks of negotiation and division before they agreed.
Jeffrey Schott is a senior fellow at The Peterson Institute in Washington. “There are always political constraints regarding the use of sanctions,” he said. “You want the maximum pain for your target and the least pain for your constituency at home, but that’s not always easy.”
Officials in the US are discussing ways to increase the financial pressure. This could include imposing a price cap on Russian oil or imposing sanctions on countries and businesses that still trade with Russian companies under restrictions. These secondary sanctions can cause division and damage to relations with other nations.
While the US has already banned Russian oil from its markets, Europe is slowly weaning off this dependence. This gives Moscow the time to locate other markets, such as India and China, which will limit damage to its export revenues and financial war chest.
This means that Russia is receiving a lot of money, and financial figures serve as a reminder to the West about the need for drastic change. According to the International Energy Agency, oil-export revenue is up 50% compared to a year ago. According to Moscow-based SberCIB Investment Research, Russia’s top oil producers had their highest combined profit for almost a decade during the first quarter. wheat exports are continuing at higher prices, as sanctions against Russia’s agriculture are not being considered. The world still needs its grain.
The current account surplus, which is the largest measure of trade in goods or services, increased more than three times in the first four months to $96 billion. This figure is the highest since at most 1994. However, it was largely due to a rise in commodity prices.
Putin uses the ruble to show his strength. Biden once called the ruble “rubble” after it collapsed due to sanctions. Since then, Russia has supported the currency to make it the best-performing against the dollar in the world.
Putin also attempted to capitalize on Russia’s status as a superpower in commodity trade. He has stated that he will allow the export of fertilizer and grain only if sanctions against his country are lifted. This is amid concern over food shortages.
“If sanctions were to stop Russia’s military, it was unrealistic,” stated Janis Kluge senior associate for Eastern Europe and Eurasia, German Institute for International and Security Affairs, Berlin. It can still finance the war effort and it can still compensate for some of the damage that sanctions are doing to its population.
One of the biggest flaws in the sanctions against Russia is the willingness of other countries to continue oil buying, even if at a reduced rate in certain cases.
Between the invasion of Ukraine in February and May, Indian oil refiners bought more than 40,000,000 barrels of Russian oil. This is 20% more than Russia/India flows for the entire 2021 period, according to Bloomberg calculations that were based on data from trade ministry records. To get Russian barrels at a lower price than the market, refiners prefer private deals over public tenders.
China is strengthening its energy relations with China, purchasing oil from countries that aren’t being bought elsewhere to get lower prices. It has increased imports and is currently in discussions to replenish its strategic crude oil stockpiles by purchasing Russian oil.
Similar stories are told by steelmakers and coking. According to data from the customs office, imports from Russia increased for the third month in April to more than twice last year’s level. Some sellers of Russian oil or coal tried to make it easier for Chinese buyers by allowing transactions to be done in yuan.
“The vast majority” of the world are not involved in imposing sanctions, said Wouter Jakobs founder and director of Erasmus Commodity & Trade Centre. He said that trade will continue, the need for fuels will still be there, and buyers from Asia or the Middle East would step up.
Russia has fewer options to divert gas supplies but countries that are at the end pipelines from Russia, some of which run through Ukraine, are still dependent on each other.
Russia supplies 40% of the EU’s gas requirements. This will make Russia the hardest link to cut. The invasion of Russia caused European gas deliveries to rise in February and March. This made it cheaper for customers with long-term contracts to buy from Russia’s GazpromPJSC.
Thanks to record-breaking inflows of liquefied gas from the US and other nations, volumes have declined since then. There have been interruptions due to military activity. Russia also stopped supplies to Poland and Finland. Putin refused to pay in rubles.
Even though the EU is reducing its dependency (Germany claims it’s down from 55% to 35%), there are still complications at each step. Numerous large buyers of Russian gas have made great efforts to continue buying it. Utility companies such as Uniper SE in Germany and Eni SpA in Italy expect supply to continue.
Although progress is slow, it is clear that the direction is towards more and more restrictions. Despite the uncertain timeline, pressure will continue to mount on Russia’s economy and Putin’s finances.
Other factors that affect the country’s energy sector include shipping restrictions and insurance restrictions, as well as weak domestic demand. According to the Russian Economy Ministry’s base case outlook, oil production could drop by more than 9% while gas output may fall by 5.6%.
Tatiana Stanovaya (founder of R.Politik), stated that there is optimism in the Kremlin and is even surprised that Russia’s economy has not collapsed due to the sanctions. “But, looking ahead for two to three years there are many questions about how the manufacturing and energy sectors will survive.”
