Summary
- Russian state oil revenues decline 40% on sanctions
- Tanker owners post bumper profits, traders and bankers say
- China, India get cheaper oil
Western sanctions on Russia have substantially shrunk state oil revenues and diverted tens of billions of dollars toward shipping and refining companies, some with Russian connections. The majority of winners from the sanctions are based in China, Greece, India, and the United Arab Emirates, at least 20 banking and trading sources said. A few are partly owned by Russian firms.
None of the companies is violating sanctions, the sources told Reuters, but they have profited from measures designed by the United States and the European Union to shrink the revenues of what they call Russian President Vladimir Putin’s war machine.
As the Ukraine war enters into a second year, the calculations show that Russia’s income has declined but the volume of exports has remained relatively unchanged despite sanctions.
Putin told the West that sanctions would stoke an energy price rally. Instead, international benchmark Brent oil prices have dropped to $80 per barrel from a near-record high of $139 in March last year, weeks after the start of the conflict.
Before Moscow’s invasion of Ukraine started on Feb. 24, 2022, Brent traded at nearly $65-$85 per barrel. After the Group of Seven (G7) industrialized countries placed a price cap on Russian oil in December, Moscow’s oil export revenues reduced by 40% year-on-year in January, Russia’s finance ministry said.
“Low official oil price meant that the Russian state budget has suffered in recent weeks,” Sergey Vakulenko, a non-resident fellow at the Carnegie Endowment for International Peace, said.
Vakulenko was a former head of strategy at Russian energy major Gazprom Neft. He left the company and Russia days after the war started.
“Judging by the customs statistics, some of the benefits were captured by refiners in India and China, but the main beneficiaries must be oil shippers, intermediaries, and the Russian oil companies,” he added.
Sanctions on Russia – probably the most severe imposed on an individual state – include complete bans on purchases of Russian energy by the EU and the United States, as well as bans on the shipping of Russian crude anywhere across the world unless it is sold at or below $60 per barrel.
Russia has redirected most crude and refined products to Asia by offering big discounts to buyers in India and China compared to competing grades from the Middle East, for instance.
The price cap and the ban on shipping have made buyers wary and compelled Russia to pay for the shipping of crude as it does not have enough tankers to transport all of its exports.
As of late last month, Russian oil companies were offering discounts of $15-$20 per barrel for crude to buyers in China and India, according to an invoice seen by Reuters and at least 10 of the traders who are involved in operations. All of the sources requested not to be named due to the sensitivity of the issue.
In addition, Russian sellers have also paid $15-$20 per barrel to shipping firms to transport crude from Russia to India or China, according to the invoice and the 10 traders.
As a result, Russian firms earned only $49.48 per barrel of Urals at Russian ports last month, a 42% drop year-on-year and just 60% of the European Brent benchmark price, according to the Russian Finance Ministry.
By contrast, a U.S. exporter of Mars crude – a grade similar to Urals – would pay around $5-$7 per barrel for shipping a cargo to India. Given a discount of $1.6 per barrel against the U.S. benchmark WTI, a U.S. exporter would earn some $66 per barrel at a U.S. port, or 90% of the benchmark price.
With output of 10.7 million barrels per day (bpd) last year and exports of crude and refined products of 7.0 million bpd, the discount and additional costs would see producers’ revenues reduced by tens of billions of dollars this year.
The head of the International Energy Agency (IEA), Fatih Birol, said on Sunday the price cap shrank Moscow’s revenue by $8 billion last month alone. However, because some lost revenues are collected by Russian companies, the exact hit to earnings of producers and the state is difficult to quantify.
As an added complication, some Russian oil grades, including Pacific grade ESPO, are also worth more compared to Urals. The Russian energy and finance ministries would not comment on the impact.
‘Crazy Good’ Shipping Bonanza
Reduced revenues have coincided with greater profits for some intermediaries, experts including Vakulenko and traders in Russian oil say. After decades of small profits or losses, parts of the global shipping industry are enjoying a financial boom from shipping Russian oil.
Those firms include Russian state shipper Sovcomflot, run by Putin’s ally Sergei Frank, and Greek shipping companies Dynacom, Stealth Maritime, TMS Tankers Management, NGM Energy, Kyklades Maritime, Delta Tankers, and New Shipping.
Some Greek and Norwegian tanker owners sold their old ships at record prices to shipping companies such as Fractal Shipping, with owners in Dubai. The UAE and Saudi Arabia have refused to criticize Russia’s war in Ukraine and have increased cooperation with Moscow despite Washington’s pressure.
All shipping firms would not comment on any profits they gain from Russian oil.
According to the invoice seen by Reuters, a shipper charged a Russian crude seller almost $10.5 million for one voyage to transport a regular-size Aframax tanker with 700,000 barrels on board from a Baltic port to an Indian refinery last month.
A year ago, a seller of Russian oil would have been charged $0.5-$1.0 million for a similar journey depending on shipping rates. For the shipper, the running cost of such a journey in today’s market extends from $0.5 to $1.0 million, meaning the shipper’s net profit from one voyage could be $10 million.
A trader in Russian crude described the tanker business as “crazy good”. While tanker owners charge the highest rates for Russian crude shipments, refiners in China and India have also profited from steep discounts.
India’s Russian oil imports reached a record high of above 1.25 million bpd in recent weeks, signifying the country has saved over half a billion a month on its oil bill with Russian oil sold at a discount of about $15 per barrel.
Major Indian importers – IOC, BPCL, HPCL, Nayara, and Reliance – would not comment on discounts and profits.
Nayara is 49%-owned by Russian state oil major Rosneft, led by Putin’s ally Igor Sechin, meaning some of the profits are indirectly bagged by Russia. Rosneft would not comment on its role in Nayara and how it could recapture some profits.
Buy Crypto NowChina imported more than 1.8 million bpd of Russian oil between April last year and January this year, Emma Li, China analyst at Vortexa Analytics, said. Based on an estimated $10 a barrel discount for both ESPO and Urals crude on a delivered basis that saved Chinese refiners close to $5.5 billion over the 10-month period, according to Reuters’ calculations.
Independent refiners in the eastern province of Shandong were the greatest beneficiaries. State refining titan Sinopec Corp also profited from the cheaper oil, and state-run PetroChina, CNOOC, and Zhenhua Oil captured profits from trading the barrels, traders said.
All the firms, as well as Shandong provincial government, did not reply to requests for comment.