Moment Of Truth

The Russian economy is giving extremely contradictory signals.

I will try to inventory them in the next column. But more and more interesting information is coming from the outside - and it is largely related to the hard pressure on Russian oil companies by the U.S. administration.

And if Lukoil's loss of foreign business and its profitable purchase by foreign players looks like a matter of time - in fact, the international presence of a major Russian corporation over the past four years seems to be a strange misunderstanding - the overall impact of U.S. measures needs to be analyzed in detail.

U.S. sanctions are the most important factor in the U.S. government's efforts to "pass on the most difficult legacy possible" to Russia. (At the time, the Kremlin said Democrats were seeking to "hand Donald Trump the heaviest possible legacy in relations with Russia.") They did not then affect Russian oil exports in any catastrophic way. During the summer, exports remained close to the monthly average for the first half of the year, and the Urals price even exceeded $60 per barrel, the then maximum price (ceiling) for Russian oil. Purchases from China varied little, and the decline in exports to India was partly offset by deliveries to Egypt, from where most Russian crude was resold to India. The Russian Ministry of Energy recently predicted that the country's oil exports in 2025 will exceed last year's exports.

In the meantime, the consequences of the current sanctions already look much more serious.

Three trends

Experts note at least three important trends.

Firstly, it is a sharp increase in the discount on Russian oil grades: at the end of last week Urals in Novorossiysk fell in price below $38 per barrel, discounts against a basket of North Sea European grades NSD exceeded $25 per barrel, and in Baltic ports they rose above $20 per barrel. The market has not seen such a price differential since the spring of 2023, and this is a very alarming signal for the Russian economy as a whole: no matter how much the authorities talk about the decreasing dependence of the budget on oil and gas revenues, their significant drop this year has become the main reason for the formation of the federal treasury deficit.

Secondly, the market quickly became noticeably overstocked with Russian supplies: a large number of tankers remained unloaded at sea, as potential buyers, despite the fact that the sanctions themselves have not yet entered into force, preferred to wait for the clarification of the situation. By mid-November, more than 350 million barrels of oil from Russia had been "stored" in this way, or almost 40% of the world's reserves at that time at sea.

Thirdly, almost every day there is news that one or another buyer has stopped receiving Russian crude. It is said, in particular, that China may reduce purchases by more than two thirds during November, India refrains from signing contracts for December, and Turkey increases oil supplies from Iraq, Azerbaijan and Kazakhstan. If these trends persist or worsen, we have to assume that the Russian budget will feel additional pressure by the end of the year.

Is this going to last?

And then, of course, the question arises: how sustainable are these trends, and are we talking about a serious reorientation of traditional buyers of Russian oil - or just that they are taking a closer look at the changed situation? I am reminded of the US Treasury Department's decision in December 2023 on possible tough sanctions against Chinese banks involved in financing trade with Russia. At that time, the monthly trade turnover fell by almost 20% by March 2024, but during the rest of the year it recovered and reached a new record.

Could something similar happen in the oil market now? This is what is most likely built into the plans of both sellers and buyers of Russian raw materials. This is indirectly confirmed by the relative stability of world oil prices: despite the fact that Russian leaders have repeatedly said that it is impossible to replace Russian oil supplies to the world market, so far their restriction has not caused a sharp reaction: prices briefly jumped, responding to the news of Ukraine's devastating attacks on terminals in Novorossiysk, but fell back as soon as it became known about the resumption of shipments. There is a feeling that the reorientation of China and India to other suppliers does not change the rules of the game or is simply not perceived as inevitable.

In Washington, there is talk of resuscitating the draft law on "killer duties" against buyers of Russian oil, it was developed until mid-summer by Senator Lindsey Graham and Richard Blumenthal. U.S. President Donald Trump, who has assured that he would impose such sanctions - if necessary - by his own executive order, went to his congressmen and signaled that he would sign such legislation, but stipulated that he could enact it himself when he was "definitively convinced that Russia is not ready for a peaceful solution in Ukraine." (This option seemed reasonable to me back in the summer, and I didn't understand why the president would "call the fire on himself" instead of having the appropriate carte blanche from Congress.)

The passage of the 500 percent duties law could provide an additional argument for China and India to continue to refuse to buy oil from Russia even if the duties are not automatically enacted but remain, as the United States often does now, unrealized threats. Such a scenario looks viable based on Washington's desire to support a process that has already begun. In addition, an attempt to extend duties or other restrictions to all of Russia's partner countries (and not just China, as in 2023) could lead to caution on the part of all market participants, each of whom will "look back" at the others.

Moment of Truth

The "moment of truth," however, will not come in the coming weeks.

The problem of replacing Russian oil is not going anywhere, and it will be difficult for major buyers to give it up for the long term. Therefore, I am sure that Moscow is already offering them various options to circumvent the sanctions restrictions, some of which will be used in the coming weeks, pending whether Congressmen will pass the Graham-Blumenthal Act and whether the Americans will expand the list of sanctioned Chinese companies (so far, only the large refinery Shandong Yulong Petrochemical has become a scapegoat, and the market is clearly waiting for further steps). It is also quite obvious that a real move to pressure the PRC will reignite the trade war between China and the US, which has only slightly subsided after the meeting between Donald Trump and Xi Jinping in South Korea. There is little doubt that Washington will be assessing its implications when making any new sanctions decisions.

It's too early to summarize the results, but my prediction would be that the current round of sanctions fighting is more psychological than economic warfare. Donald Trump is still hoping that the Kremlin will come to its senses and begin constructive negotiations to end the war - and judging by the fact that the Russian side is annoyed by the failure of the dialog, such a chance should not be completely ruled out.

It's hardly necessary to assume that Vladimir Putin (even without the radical successes on the front that the Kremlin has been announcing for most of the past month) is willing to make serious concessions - and if negotiations are to be resumed, it will be around the same old positions: to change that, Washington needs not just to get Beijing to buy less Russian oil, but to make it its ally in a comprehensive crackdown on Moscow. This cannot be achieved by sanctions and customs threats alone - such a result requires a paradigm shift in relations, similar to what happened in the 1970s.

The US will continue to raise rates for some time, but even with the formal approval of tough measures against Russia's trading partners, no duties will be massively implemented - and as a result we will see, to some extent, a repeat of the scenario of early 2024: first, a dip in oil exports - in the long term, their gradual recovery. These expectations, I believe, explain the very sluggish reaction of world markets to what has been happening in recent weeks.

Vladislav Inozemtsev, The Moscow Times

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