Offshore oil exports from Russia broke records despite sanctions

Suppliers of domestic raw materials have learned how to effectively bypass Western restrictions

Western sanctions against Russian oil introduced at the end of last year do not prevent our country from increasing the export of “black gold”. Deliveries of raw materials from our country, including by sea, promise to reach record levels in December-January. However, there are not so many reasons for optimism: energy resources from our country on the world market are much cheaper than reference oil grades.

The price limit of $60 per barrel set by the EU and G7 countries for the export of Russian oil does not yet lead to any particular difficulties in the issues of maritime transportation of our hydrocarbons. According to Bloomberg, in the first two winter months, domestic suppliers will transship in various ports a total of 19 million “barrels” of Urals, of which about 14 million will be in January.

The total volume of oil exported from our country, depending on the harbor, increased by 30-50% compared to the pre-sanction months, and shipments increased both at the Baltic and Black Sea marinas, and from Pacific ports.

Formally, in foreign contracts for the sale of Russian oil, there should not be a specific “ceiling” for the cost of export raw materials. “Direct or indirect use of the price cap mechanism” was banned in the retaliatory sanctions that Moscow presented to the collective West. Meanwhile, to all appearances, domestic companies still have to sell barrels abroad with discounts. Not so long ago, the Russian Ministry of Finance reported that the average Urals quotes from December 15, 2022 to January 14, 2023 were below $47, while the cost of the international benchmark Brent over the same period exceeded $80.

Experts note that the discount of Russian raw materials in relation to the Norwegian grade, as well as American and Middle Eastern blends, has historically always existed: due to higher density and higher sulfur content. However, in past years, the difference between Urals and Brent fit into a few dollars. Now the concessions are much more noticeable and reach almost half the cost of hydrocarbons. You have to put up with other additional costs. The ceiling of $60 per barrel introduced by Western countries against the sea transportation of Russian “black gold” is forcing domestic companies to redirect supplies from Europe to China and India.

To this end, in 2022, Russia created a “shadow” fleet of more than a hundred tankers, which will help ensure the uninterrupted shipment of raw materials to the main buyers from friendly states, bypassing the Western moratorium, Vladislav Antonov, a financial analyst at BitRiver, believes. The lion’s share of Russia’s Urals oil exports have to be transported thousands of miles to Asia in modest-capacity tankers with fairly small shipments, driving up freight rates for smaller ships.

“Such deliveries have become significantly less transparent,” notes Mark Goykhman, chief analyst at TeleTrade. “And they turned out to be uncommonly more expensive for freight.” However, on the other hand, they help circumvent Western restrictions, because the payment of freight is actually a payment for the oil itself, since the sellers from such transactions receive additional income that is not directly included in the quotations of raw materials. If the carrier is not domestic, but foreign, then even higher freight rates can be set, some of which will also go to the exporter.”

Asian buyers, primarily China, India and Turkey, are now actively purchasing our raw materials in order to subsequently resell their oil products, purchased at significant discounts, to Europe. In the spring, the cost of Russian oil may fall even more, as the United States is thinking about lowering the “ceiling” from $60 to $50, private investor Fyodor Sidorov warns. This means even greater losses for domestic commodity companies and the budget, the deficit of which in 2022 amounted to 1 trillion rubles, and by the end of this year it may triple – up to 3.3 trillion rubles.

Partially leveling the financial damage can be done by various tricks that oil producers have to resort to. According to Natalia Milchakova, a leading analyst at Freedom Finance Global, exceptions can be found in the Western embargo, for example, for commercial ships that transship our “black gold” directly into the sea.

Energy resources will be sent, say, to Spain or Greece, then from there they will be transported for “processing” to Singapore, where they will be mixed with “non-toxic” oil from another region, and then sold to Western end consumers. “Russia will be able to continue to receive super profits, but not from the export of Urals in its pure form, but from the supply of jointly produced finished motor fuel. A similar scheme has long been quite effectively used by Iran and Venezuela, which are under US sanctions,” the expert points out.