Can the crooked become straight – Newspaper Kommersant No. 22 (7467) of 02/07/2023

“The crooked cannot become straight, and what is not, cannot be considered,” Rosneft head Igor Sechin said on February 6, describing with a quote from the book of Ecclesiastes the current method of forming Urals prices under the EU embargo. “If Russian oil does not enter the European market, then there is no reference price for Russian oil that does not enter. Reference prices will be formed where oil volumes actually go,” he explained at India Energy Week, held in Bangalore.

It is no coincidence that this remark was made in India, which in recent months has become the largest importer of marine shipments of Urals, and Russia, respectively, the largest supplier of oil to India. In January, deliveries approached 1.3 million barrels per day, which is significantly more than a year ago supplied to Rotterdam, the former pricing center for Urals.

Igor Sechin’s statements are the first publicly expressed position of the head of a major Russian oil company on such an important issue as Urals export prices. In fact, this position, it seems to me, boils down to the fact that the previous pricing procedure – when prices were determined on CIF terms in the ports of the main buyer – should be preserved, but instead of the EU, the main buyer of maritime cargo will now apparently become India. Igor Sechin also said that “there should not be any undue excitement around issues related to discounts” on Russian oil, since “specialists know how to solve these issues.” In my opinion, this is a call – including to the Russian authorities – not to interfere with the market itself, over time, to eliminate bottlenecks and inefficiencies that have now led to a sharp increase in the discount on Urals and which are mainly associated with expensive logistics.

While this approach seems perfectly logical and may even be optimal in the long term, I have doubts that the RF Ministry of Finance can not be “unnecessarily excited” by seeing its oil and gas revenues collapse in January by 46% yoy, and the budget deficit soared to 1.76 trillion rubles. In its assessment of budget execution published on February 6, the Ministry of Finance candidly admits that “taking into account the decrease in the representativeness of Urals oil prices as an objective price indicator of export prices for Russian oil, approaches are currently being developed to switch to alternative price indicators for tax purposes.”

Simply put, the Ministry of Finance seriously doubts that tying taxes to the Urals quote, no matter what basis it is calculated on, makes sense in the face of sanctions and falling market transparency. The next few weeks will show what approach the government ultimately takes.