Daily Update: As Sanctions Take Hold, Russian Oil and Gas Falters
Today is?Wednesday, March 1, 2023, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global . Subscribe?to be notified of each new?Daily?Update.?
The Russian economy has proven surprisingly resilient in the face of broad sanctions by the West since the invasion of Ukraine began in February 2022. Now, cracks are showing as tight restrictions on exports of oil and gas took effect Feb. 5.?
Russian President Vladimir Putin "has already lost the energy war he started," and attempts to hold Europe to ransom over energy have failed, European Commission President Ursula von der Leyen said in a Feb. 15 speech to the European Parliament.
Russia’s January oil and gas revenues slid 46% year over year as Western countries turned away from Russian supplies, wrote Tony Starkey, senior adviser for oil analytics trade flows and modelling at S&P Global Platts. S&P Global economists expect that Russia’s gross domestic product will contract in 2023, in contrast to forecasts from the IMF, which projected a modest expansion.
That decline is expected to steepen as the February sanctions — which include a ban on Russian refined petroleum products in the EU and a price cap on Russian crude established by the Group of Seven — take effect.?
A warm winter allowed European countries to weather the shutoff of Russian natural gas, preventing Putin from “weaponizing” energy flows, according to S&P Global Commodity Insights.?
"Russia played the energy card and it didn't win," Fatih Birol, executive director at the International Energy Agency,?wrote in a Feb. 24 LinkedIn post ?to mark the one-year anniversary of Ukraine’s invasion. "[Russia] now faces the likelihood of further declines in oil and gas output in 2023 and a permanent loss of standing in the energy world."
The value of Urals grade crude oil — Russia’s key export product — has?fallen to record lows ?compared with the price of Dated Brent, which refers to physical cargoes of North Sea crude.?
The new sanctions are also?affecting global shipping flows ?of crude oil and petroleum products. “Asia is preparing to see more Russian oil products flowing into the region following the EU ban that came into effect Feb. 5,” S&P Global Commodity Insights said, “while the supply squeeze in the West will create ample opportunities for Asian refiners to cater to those requirements and reap lofty margins.”
Shifting exports to Asia, however, will have limited effects in cushioning the blow of losing Western markets, Paul Sheldon, chief geopolitical adviser at S&P Global Platts Analytics, said on?a Feb. 22 “Commodities Focus” podcast . The physical challenge of getting large volumes of Russian oil and gas to the markets of Asia will reduce the economic benefits to Putin’s war effort.?
“The EU has always been Russia’s largest oil and gas customer, and most of the infrastructure was designed to send the oil west,” Sheldon said. “Now there has been this sudden total reconfiguration of [the] market, and Russia is limited in where it can send its products.”?
Russia has already said it will reduce crude oil production by 500,000 barrels per day, beginning in March. Russian natural gas exports are unlikely to fare much better.?
“It’s not that easy for [Russian state-controlled energy giant] Gazprom to redirect gas to Asia,” Stuart Elliott, senior energy writer at S&P Global Commodity Insights, said in the Feb. 22 podcast. “All the pipelines face west, there isn’t an easy way to move that gas instead to China. It would take years for Russia to build the infrastructure that would allow that west-facing gas to become east-facing.”?
Reduced government revenues from oil and gas exports will further reduce Putin’s room to maneuver as Western governments show no sign of relenting in their determination to squeeze the Russian economy. Putin, though, has hardly shown himself to be a rational actor in the Ukrainian conflict, and the unforeseen consequences of tightening oil and gas sanctions are hard, and possibly terrifying, to contemplate.
Today is?Wednesday, March 1, 2023, and here is today’s essential intelligence.
Written by Richard Martin.
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