The budget of the Russian Federation under the threat of sequestration: experts assessed the consequences of the price ceiling for petroleum products

In contrast to the marginal prices for crude oil set by the collective West at $60 per barrel, there will be two price ceilings for oil products: the quotes of a “barrel” of diesel fuel will be limited to $100, and fuel oil to $45. This discrepancy is easily explained. “Diesel” in the world market is the most demanded type of energy resources: it can be further processed to obtain expensive grades of fuel. Therefore, such fuel is sold at a premium to oil prices. In turn, fuel oil is often used for electricity and heat supply. Its production is less expensive than gasoline and other fuels used in internal combustion engines. Therefore, on international commodity exchanges, fuel oil is traded at a discount to crude oil. “This approach will better calibrate the policy of limiting the cost of petroleum products, given the wide range of market prices at which fuel is sold,” the US Treasury said in a statement.

Duel with petrol pistols

Russian officials also do not sit idle and try to adequately respond to Western sanctions attacks. Since February 1 this year, domestic companies have been banned from supplying oil products to unfriendly states that have decided to support the introduction of a price ceiling. The corresponding decree was signed by Vladimir Putin at the end of 2022. Now all firms involved in the supply of motor fuel from our country abroad will not be able at any stage to directly or indirectly include mechanisms for limiting its quotations in the contract. If transactions are regulated by cost limits, then counterparties will be denied the acquisition of our energy resources. The execution of the document is entrusted to the Ministry of Energy, which, with the support of the Ministry of Finance, will have to check the pricing mechanism and monitor the cost of raw materials for each transaction. The decree will be valid until July 1 with the possibility of extension to a later date. Unfriendly countries are members of the European Union, as well as members of the G7 – the USA, Canada, Great Britain and Japan.

It is worth noting that, until recently, Russia produced twice as much oil products as it consumed. Until 2022, approximately 140 million tons of fuel were supplied abroad, with about half of the exports accounted for light grades of fuel. The proceeds from the sale of gasoline and diesel were constantly growing: at least $ 70 billion came out a year. And almost everything, up to 90% of deliveries, went to the European market. Dependence on Russian raw materials in a number of countries, such as Germany, Hungary, the Czech Republic and Slovakia, was over 50% of total consumption, and in some countries sometimes approached 100%.

Last year, the situation changed dramatically. Russian producers doubled supplies to the Middle East and Asia: from January to September, daily fuel exports to China, India and Turkey, which did not impose sanctions against Russia, increased from 820 thousand to 1.42 million barrels. The eastern direction has become a priority for domestic suppliers: in total, 2.5 million “barrels” of oil products were sent abroad from our country.

However, the situation in the Asian market, to which Russian fuel producers have switched, may also turn out to be not entirely favorable. “It will most likely not be possible to fully redirect fuel supplies comparable in volume to current exports to Europe due to the lack of a sufficient number of tanker fleet,” says Kirill Melnikov, head of the Energy Development Center. – During February-March, the export of oil products from our country may be reduced by 30%. In addition, Asian buyers will insist on discounts for sanctioned Russian fuel.”

Truckers go to the curb

The introduction of marginal prices for Russian oil products will ricochet against the sanctions-approving European states. According to analysts at The New York Times, the embargo on maritime supplies of fuel from our country to the EU creates risks “for most European truckers and up to 40% of ordinary motorists”, who are likely to face a shortage or a sharp increase in fuel costs. According to the American publication, contracts for the supply of gasoline and “diesel” began to rise in price long before the embargo entered into force, with oil refiners of the Old World in recent weeks choosing to increase their reserves in order to make higher profits at the peak of fuel consumption. The growth of imports of “diesel” from other oil-refining powers, in particular, from Saudi Arabia and the United Arab Emirates, is still rather doubtful. The European Union pinned certain hopes on Kuwait, which promised in 2023 to five times increase the export of “diesel” to the Old World. But in fact, this Middle Eastern country now sells only 10,000 barrels per day to Europeans, so even a fivefold increase in supplies will not replace the falling Russian share. An additional unpleasant moment is the fact that against the backdrop of the resumption of passenger flights after the coronavirus pandemic, many European oil refineries switched from the production of diesel fuel to aviation fuel, making it difficult for ordinary motorists.

Americans also, apparently, will have a hard time. Forbes magazine suggested that the rejection of Russian oil products would lead to devastating consequences on the global oil market, and advised Western motorists to “prepare for even more pain”: in the US alone, the cost of gasoline for car owners could double – from $3 to $6-8 per gallon. “Without Russia, one of the largest oil exporters, it will be difficult for the West to maintain reasonable fuel prices,” the publication warns. Gasoline prices are considered one of the main factors driving painful inflation in Europe, depriving the population of purchasing power and slowing down the economy. “This is a giant leap. We have no more opportunities for optimization, ”complains the head of the German trucking company Schuldes Spedition, Christopher Schuldes, about the rise in fuel prices.

According to Dmitry Alexandrov, head of the analytical research department at IVA Partners Investment Company, the EU is not ready to decisively abandon Russian fuel, since the supply of finished fuel from other sources, unlike crude oil, will be conditioned by more complex logistics. “It is easier to replace oil, because the market for “black gold” is uniform. If necessary, the EU will be able to tighten price ceilings, but for this the countries of the Old World will need to reconfigure their own processing industry, ”the expert believes.

How to break through the ceiling

“Increasing sanctions pressure clearly makes it clear that the Russian economy should not count on industrial progress based on high-tech industries,” said Sergey Suverov, investment strategist at Arikapital Management Company. — The revenue base of the federal budget will continue to be based on the sale of energy resources: natural gas and crude oil. The Europeans will prefer to deal with the processing of “black gold” on their own. Such a practice is quite familiar to them: fuel fabrication facilities are abundant on the continent, and transport routes even allow savings on the delivery of fuel to end customers.”

In this regard, Russia should concentrate on the export of crude oil. As Natalya Milchakova, a leading analyst at Freedom Finance Global, believes, domestic suppliers can use affordable schemes to exclude energy resources sold abroad from the price ceiling: for example, as part of the operation of independent commercial vessels that will transship Russian “black gold” directly into the sea onto a vessel representing the jurisdiction another state. Oil can indeed be transported at a price below the ceiling to European ports, for example, to Spain or Greece. Further, hydrocarbons can be sent for “processing” to third countries, for example, to Singapore. Russia will continue to receive super profits, but not from the export of “diesel”, gasoline and Urals oil in its pure form, but from the export of such politically “non-toxic” oil products that will belong to powers that are not subject to sanctions pressure. “A similar scheme has been operating quite effectively for several years against Iran and Venezuela, which are under US sanctions,” Milchakova notes.

At the same time, it is absolutely not worth counting that China or India will be able to completely switch over the supplies of Russian oil and its refined products, which previously fell on the European market. Firstly, both states are at the crossroads of transport flows of the world’s suppliers of energy resources; secondly, they are developing their own processing of hydrocarbons, gradually refusing to import gasoline and “diesel”. In particular, Delhi plans to become a motor fuel manufacturing center by 2025 and increase fuel production capacity to 400 million tons per year, which will not only satisfy growing domestic demand, but also partially close export requirements.

In turn, the volume of oil refining in China last December increased by 2.5% to almost 60 million tons. Exports of diesel fuel from China increased by about a third and reached historical records.

“The success of foreign manufacturers means new losses in Russian exports and an increase in our federal budget deficit. For oil, the revenue level set by the government for the budget (8 trillion rubles per year after taxes) will be much lower – the shortage risks reaching 2-3 trillion rubles. If we add losses on oil products, then in 2024 the government will have to sequester the budget and reduce the most expensive items,” warns Artem Deev, head of the analytical department at AMarkets.

According to experts, one can only wonder why, against the backdrop of a decrease in the export of petroleum products and the emergence of excess fuel in the domestic market, the cost of refueling at domestic gas stations is not reduced. In terms of the availability of gasoline, Russia is now in 17th place in the world: Russians can purchase 1,058 liters for an average monthly salary. For comparison, residents of Luxembourg, where fuel prices are low and salaries are among the highest in Europe, can buy more than 2.5 thousand liters with their average salaries. True, Hungarians, Belarusians, Latvians, Slovaks and Romanians can envy the Russians, for whom the monthly salary is barely enough for 600 liters of the 95th.

“Losses from Western sanctions strikes and a decrease in foreign shipments of fuel, which makes up a significant share of the income of Russian energy producers, will gradually be passed on to the pockets of domestic consumers,” Suverov argues. “Sadly, road transport in the country with the highest reserves of hydrocarbons is again turning from a means of transportation into a luxury item.”