In early March, as the US and its allies unleashed a wave of sanctions against Russia, President Joe Biden stood in the White House and said they wanted to “deal a powerful blow to Putin’s war machine”.
But as the war in Ukraine approaches its 100th day, that machine is still very much operational. Russia is being propelled by a deluge of cash that could average $800 million a day this year — which is exactly what the commodity superpower is pulling in from oil and gas.
For years Russia has acted as a huge commodity supermarket selling what an insatiable world needs: not only energy, but also wheat, nickel, aluminum and palladium. The invasion of Ukraine has prompted the US and the European Union to reconsider this relationship. It takes time, although the EU took the next step this week by reaching a compromise deal on Russia’s oil imports.
Russia is far from unscathed by the sanctions, which have made it an outcast throughout the developed world. Corporate giants have fled, many are running away from billions of dollars in assets, and the economy is heading for a deep recession. But Putin can ignore this damage for now, as his treasury is overflowing with revenues from raw materials, which are more lucrative than ever thanks to the rise in world prices, partly caused by the war in Ukraine.
Even if some countries stop or phase out their energy purchases, Russia’s oil and gas revenues will be about $285 billion this year, according to Bloomberg Economics estimates based on forecasts from the Department of the Economy. That would exceed the 2021 figure by more than a fifth. Add other commodities and it more than offsets the $300 billion in foreign reserves frozen as part of the sanctions.
EU leaders know they must stop buying from Russia and indirectly fund a devastating war on Europe’s doorstep. But for all that ambition, national governments also know that there will be consequences for their own economies.
They agreed this week to pursue a partial ban on Russian oil, paving the way for a sixth package of sanctions, but only after weeks of negotiations and division.
“There are always political restrictions on the use of sanctions,” said Jeffrey Schott, a senior fellow at the Peterson Institute in Washington. “You want to maximize the pain on your target and minimize the pain on your constituency at home, but unfortunately that’s easier said than done.”
Lesson #3: Only an energy embargo really hurts Russia. Two-thirds of the increase in the kv surplus this year comes from energy exports (blue). Only a third comes from import compression. Maritime sanctions will prevent tankers from shipping oil from Russia. We just need the political will… pic.twitter.com/AOnX28i8eB
— Robin Brooks (@RobinBrooksIIF) May 29, 2022
In the US, officials are debating ways to increase financial pressure, possibly by helping to impose a cap on the price of Russian oil or by imposing sanctions on countries and companies that still trade under restrictions with Russian companies . But such secondary sanctions are deeply divisive and can damage relations with other countries.
The US has already banned Russian oil, but Europe is only slowly weaning itself from this dependence. That gives Moscow time to find other markets – such as the resource-guzzling giants China and India – to limit the damage to export revenues and the financial war chest.
That means money is pouring into Russian accounts, and the financial numbers are a constant reminder to the West that drastic change is needed. According to the International Energy Agency, revenues from oil exports alone have increased by 50% from a year earlier. Russia’s largest oil producers made their highest combined profits in nearly a decade in the first quarter, Moscow-based SberCIB Investment Research estimates. And wheat exports continue – at higher prices – because sanctions against Russian agriculture are not even discussed because the world needs its grain.
The current account surplus, the broadest measure of trade in goods and services, more than tripled to nearly $96 billion in the first four months of the year. That figure, the highest since at least 1994, mainly reflected a rise in commodity prices, although a drop in imports under the weight of international sanctions was also a factor.
The ruble has become another symbol used by Putin to radiate power. Once derided by Biden as “debris” when it initially collapsed in response to sanctions, it has since been propped up by Russia to become the world’s best-performing currency against the dollar this year.
Putin has also tried to exploit Russia’s position as a commodity superpower. Amid concerns over food shortages, he said he will only allow grain and fertilizer exports if sanctions against his country are lifted.
“If the goal of sanctions was to stop the Russian military, it was unrealistic,” said Janis Kluge, senior associate for Eastern Europe and Eurasia at the German Institute for International and Security Affairs in Berlin. “It can still fund the war effort, it can still offset some of the damage sanctions inflict on its people.”
One of the big holes in the sanctions against Russia is the willingness of other countries to continue buying oil, albeit at a discount in some cases.
Indian refineries bought more than 40 million barrels of Russian oil between the start of the invasion in Ukraine in late February and early May. That’s 20% more than flows between Russia and India for all of 2021, according to Bloomberg’s calculations based on data from the Department of Commerce. Refineries are looking for private deals rather than public tenders to get Russian barrels cheaper than the market price.
China is also strengthening its energy ties with the country and lowering prices by buying oil that is shunned elsewhere. It has ramped up imports and is also in talks to replenish its strategic crude oil supplies with Russian oil.
It’s a similar story for steelmakers and coking coal. Imports from Russia rose for a third month in April to more than double last year, official customs data shows. And some sellers of Russian oil and coal have tried to make things easier for Chinese buyers by allowing transactions in yuan.
“The vast majority of the world is not involved in the imposition of sanctions,” says Wouter Jacobs, founder and director of the Erasmus Commodity & Trade Center at Erasmus University in Rotterdam. “Trade will continue, the need for fuels will be there,” and buyers in Asia or the Middle East will rise, he said.
When it comes to gas, Russia has fewer options to divert supplies, but also the countries at the end of the pipeline from Russia – some of which run through Ukraine – are locked in a mutual dependency.
About 40% of the EU’s gas needs are covered by Russia, and this will be the bloc’s hardest link to break. European deliveries actually rose in February and March as the invasion caused a price spike in European gas hubs, making purchases from Russia’s Gazprom PJSC cheaper for most customers on long-term contracts.
Since then, volumes have declined, thanks to the warmer weather and record inflows of liquefied natural gas from the US and other countries. There were also disruptions due to military activities, and Russia itself stopped deliveries to Poland, Bulgaria and Finland, which refused Putin’s demand to pay in rubles.
Even as the EU reduces its dependency – Germany says it has fallen to 35% from 55% – there are complications at every step. Several major buyers of Russian gas have struggled to keep buying the critical fuel, and utilities such as Italy’s Eni SpA and Germany’s Uniper SE expect deliveries to continue.
While progress is slow, it is only moving towards more and more restrictions. Even with the uncertain timetable, pressure on the Russian economy and Putin’s finances will eventually increase.
The country’s energy sector also faces a range of factors other than demand, from shipping and insurance restrictions to sluggish domestic demand. According to the basic forecast from the Russian Ministry of Economy, oil production could fall by more than 9% this year, while gas production could fall by 5.6%.
“In the Kremlin, there is some optimism and even surprise that the Russian economy has not collapsed due to the onslaught of sanctions,” said Tatiana Stanovaya, founder of political adviser R.Politik. “But if we look two to three years ahead, there are many questions about how the energy and manufacturing sectors will survive.”
(Except for the headline, this story has not been edited by NDTV staff and has been published from a syndicated feed.)