The most severe sanctions of the West are against Russia, but this does not prevent it from earning hundreds of billions. Western economists are waiting for our country's record revenues from the sale of energy resources and an unprecedented current account surplus. The US can use this to shame Europe, which refuses to impose an embargo on oil, gas and coal. However, the rosy picture is not so unambiguous.
Despite tough financial sanctions from the West, Russia will earn almost $321 billion this year from energy exports, economists at Bloomberg Economics calculated. This is about 35% more than in 2021. Of course, if the EU, as the largest buyer of Russian energy resources, does not dare to turn off the taps.
Moreover, Russia can also expect a record current account surplus, which, according to the Institute of International Finance (IIF), could reach $240 billion. This will happen, including due to a drop in imports. Imports of goods, according to the forecast of the Institute for Transition Economies of the Bank of Finland, will decrease by about 50 percent, which will form a positive balance.
The current sanctions have not been able to stop the influx of “hard currency” into Russia. Revenues from the sale of energy commodities soften the effects of severe restrictive measures imposed by the West, the IIF report notes.
The West does not like the fortress of the Russian economy under sanctions. And this could be another reason for the US to put pressure on Europe to strike at Russian energy resources. On Monday, French President Emmanuel Macron called for a ban on oil and coal imports from Russia as new sanctions. However, he is not talking about a ban on Russian gas. Poland has repeatedly stated that it is necessary to abandon all energy resources from Russia - not only oil and coal, but also gas. Polish Prime Minister Mateusz Morawiecki directly blames Germany for creating the main difficulties for tightening sanctions against Russia. Hungary, he said, does not block the possibility of strengthening sanctions against Russia.
Unlike Poland, which plays the US geopolitical party in the European Union, Germany is more pragmatic and sensible about the economic consequences of the energy embargo both for itself and for the whole of Europe.
Since March 21, the EU has been preparing a new - fifth - package of sanctions against Russia. It is stated that they can be taken this week. However, the chances that they will still affect energy resources are still small, although any outcome cannot be ruled out. The EC is working on further restrictive measures against Russia, but they do not include the energy sector, Paolo Gentiloni, European Commissioner for Economic Affairs, said on April 2.
“Our goal is to become independent of energy supplies from Russia as soon as possible. We must envisage serious sanctions. But gas is indispensable in the short term, we would hurt ourselves more,”
German Finance Minister Christian Lindner answered on Monday when asked whether the EU should include in the fifth package of sanctions a ban on gas and oil supplies from Russia.
Forecasts for the growth of Russia's export earnings from the sale of energy resources by 35% are primarily due to rising prices for raw materials. “Now the price increase is significant compared to last year. True, some price reduction has already begun. Most likely, opposite factors will continue to operate. On the one hand, political instability, disruption of supply logistics, possible restrictions on supplies to Europe and the USA from Russia will act in the direction of rising prices. On the other hand, a decrease in demand due to high prices, the impact of speculation, and possible steps to stabilize the market, for example, the United States is unfreezing stocks, can limit price growth,” says Alexander Daniltsev, director of the HSE Trade Policy Institute. Prices cannot rise indefinitely, at some point they become so high.
According to the Ministry of Finance of the Russian Federation, the average price of Urals oil in March was $89 per barrel. Given that the average cost of the Brent benchmark was $113 per barrel, Russian oil is sold at a discount of $24.
The cost of gas this year in Europe is also higher than last year, both on the stock exchange and in Gazprom contracts. Now spot prices on European hubs do not fall below $1,100 per thousand cubic meters. The average price for TTF for February was at the level of 935 dollars. Whereas in 2021, the cost of gas for the first time exceeded $1,000 only on September 28. Prior to this, prices were much lower.
Russian gas under contracts with Gazprom is even cheaper for European consumers, even taking into account the link to the spot component in 80% of contracts. According to the Federal Customs Service, the average price of pipeline gas exported from Russia in 2021 was $274 per thousand cubic meters, liquefied gas - up to $273. This is higher than it was in 2020 ($140 and $228, respectively). But a new record is expected in 2022. According to expert estimates, the Europeans are now buying Gazprom's gas at $500-600 per thousand cubic meters. The price increase is explained by the price formula, according to which the cost of gas is formed based on the spot price with a time lag, usually six months. That is, the autumn increase in spot prices is already reflected in the contracts. An increase in the price of gas automatically leads to an increase in the price of coal, which can partially replace scarce gas.
At the same time, there are no problems with the sale of Russian oil, despite Western news that some buyers are abandoning it due to fears of secondary sanctions (the US has imposed an embargo) or political position. First, the US embargo on Russian oil only comes into effect on April 22. Secondly, another one takes the place of the refused buyer. In particular, India began to actively buy up Russian oil at an attractive price. Refineries in India are the world's third largest importer and consumer of oil. They began to buy Russian oil through spot tenders after the start of the Russian military special operation, taking advantage of discounts. India has booked more than 14 million barrels of Russian oil since February 24. In 2021, oil from Russia accounted for just 2% of India's total oil imports. Its biggest supplier was the Middle East. Clearly, there is a redistribution of oil flows.
But Gazprom's exports in the first half of the year decreased by almost a third - to 38.5 billion cubic meters. Last year, he sold 14.3 billion cubic meters more to non-CIS countries (Europe plus China). This is due to the fact that in January Europeans bought more LNG than pipeline gas from Russia. But already in March, Europe in a panic began to order more from Gazprom, including for pumping gas into its underground storage facilities. Exports increased to nine European countries, including Italy, Poland, Greece, Bulgaria, Croatia and Turkey. Gazprom's deliveries to China via the Power of Siberia gas pipeline are also growing, the company stressed.
Difficulties with the sale of Russian oil, which is sold at a discount to Brent, as well as a third drop in sales of Gazprom, which sells gas at significantly lower prices than on spot exchanges, cast doubt on the conclusions of Western analysts about Russia's record earnings from hydrocarbons this year , says Fedor Sidorov, founder of the School of Practical Investing. In addition, from April 22, the US embargo on imports of oil and oil products from Russia (plus LNG and coal) will come into effect, and in Europe it is possible to reduce the purchase of raw materials from Russia in response to the requirement to pay for energy in rubles, the expert adds.
In addition, Sidorov notes, the consensus forecast promises a decline in Russian GDP in 2022 by 8-15%, and the share of coal, oil, gas and oil products in GDP is more than 50%.
“Therefore, there is no talk of the commodity sector of the Russian economy earning more in 2022 than a year earlier. Rather, the opposite will happen - a decrease in supplies abroad.
Two-thirds of our energy exports go to the European market, in the event of a reduction in this share, only partial replacement is possible - at the expense of China, India and other Asia-Pacific countries, as well as Turkey,” Fedor Sidorov believes.
As for the expectation of a record current account surplus in 2022, this will not be the result of a sharp increase in exports, but a sharp reduction in imports to Russia as a result of sanctions, he notes.
In general, it is always better to have a balanced trade, and a large surplus is needed only if there are large external debts that need to be paid off, says Alexander Daniltsev. Russia's external debt is not large, and there were more than enough reserves to pay it, if the West had not frozen $300 billion in the accounts of foreign banks.
The positive aspect of this story is the support of the Russian currency rate, which has already almost returned to the level of the beginning of Russia's special military operation in Ukraine, and remains strong. The sale of exports that have risen in price for rubles - and after gas supplies, the transition to ruble payments may follow for other goods: for oil, grain, etc. - adds strength to the national currency.
However, there is also a flip side to the coin. “A large current account surplus could fuel inflation. It is necessary to balance the inflow of foreign currency with rubles when selling foreign currency on the domestic market, that is, more money supply is required,” says Daniltsev.
In addition, the expert adds, there is a risk of some bias towards the flow of resources into the export commodity sector, especially if the entire economy is experiencing difficulties. “In this case, there are special methods for the so-called sterilization of export earnings. It's like blocking income. It can be carried out, for example, in the form of keeping part of the income in reserves, in particular, in the Welfare Fund, or by transferring funds into securities, etc.,” says Daniltsev.