Yuri Barsukov’s column on how the exchange rate affects the fuel market

An unscheduled meeting of the Board of Directors of the Central Bank on the key rate, scheduled for the morning of August 15, can ease the anxiety of not only ordinary citizens who are worried about the weakening of the ruble, but also other regulators for whom the dynamics of the exchange rate has become an ongoing nightmare. A striking example is the rising prices for fuel, with which the Ministry of Energy and the Federal Antimonopoly Service cannot do anything, despite verbal interventions and non-trivial decisions such as reducing oil exports that have not stopped in the last two months. While some recovery in wholesale prices from 2022 lows was inevitable and warranted, wholesale prices for both gasoline and diesel reached levels in July and especially August that will inevitably see them rise above inflation later in the year. Obviously, in the pre-election year, such a dynamic is considered unacceptable, and the government is forced to fight it.

The problem is that the Ministry of Energy is left without the most effective tool for controlling the supply of petroleum products on the domestic market – the damper. Its halving since September no longer provides oil companies with compensation for losses from fuel supplies within the Russian Federation compared to exports. The Ministry of Energy tried to alleviate the severity of the problem by forcing oil companies to reduce oil exports in July and August, thereby stimulating them to load refineries. It was assumed that this would increase the supply of fuel on the domestic market and, at the same time, export prices for Russian oil, and with them, budget revenues. The idea worked only partially: oil prices rose, but oil companies only moderately increased oil refining while maximizing the export of petroleum products. And the key reason for this is the exchange rate of the ruble, which is paradoxically weakening rather than strengthening, despite the rise in prices for Russian oil. And, although the budget earns more in the form of oil taxes, this year the Ministry of Finance is not going to share these revenues with oil companies through damper payments.

In fact, the only thing the regulator can do in this situation is to limit the export of petroleum products. But this is a dangerous decision that must be combined with a restriction on oil exports, otherwise companies will simply reduce processing and there will be a shortage of fuel. It makes little sense to increase the export duty on petroleum products, since it will be canceled from next year anyway. And the idea of ​​export licensing being discussed now (creating a closed list of exporters) is extremely difficult to agree on, and in the opinion of some of my interlocutors, it is unlikely to be implemented. So, if the Central Bank succeeds in its attempt to stem the ruble’s weakening, this will likely allow the Ministry of Energy to avoid difficult and risky decisions and hold out until October, when demand for fuel will decline.