Trump's sanctions sink Russian oil

MoscowThe sanctions of the United States in the two main Russian oil companies, Rosneft and LukoilThese measures are causing a steeper-than-expected drop in the price of Russian crude. A month after Donald Trump finally decided to impose them, the bulk of the restrictions come into effect this Friday. Russian producers are rushing to sell off their barrels at rock-bottom prices, while China and India, the two largest buyers, remain cautious. They have already frozen most orders due to threats of retaliation from the White House.Russian oil exports by sea have fallen by 20% in a month. Before the sanctions announcement, Russia shipped about 3.6 million barrels per day; a week later, that figure dropped to 3 million. For example, a group of five Indian refineries, which account for about 65% of all Russian crude shipped by sea, have already preemptively suspended imports for December. And in China, two state-owned oil companies have also canceled almost half of their operations at the port of Kozmino in the Russian Far East. As a result, Russian companies are accumulating huge quantities of oil on ships converted into floating storage facilities. According to JPMorgan estimates, approximately one-third of Russia's crude exports are stuck at sea—that is, 1.4 million barrels per day.

Another consequence is that the price of Russia's benchmark crude, Urals, has plummeted to $36 per barrel at the main Black Sea port. This is the lowest level since March 2023. The difference between the price of Brent crude—the European benchmark—and Russian crude has also doubled since the sanctions were imposed: in October it was $12, and with the price collapse, it has widened to $23, although in recent days...

Economist Sergei Vakulenko is hesitant to predict whether this scenario will continue in the long term. From his perspective, buyers are now "trying to figure out if they can continue acquiring Russian oil" and "through what schemes." He explains that some are pausing, while others haven't stopped trading but have added extra intermediaries to the equation, which has momentarily widened the margin between Russian crude and that of other international producers.

If US pressure on China and India increases with prohibitive tariffs, and the Kremlin is unable to compensate for the blockade through alternative distribution channels, such as the so-called shadow fleet or pipelines, the impact on Russian coffers could be substantial. Some experts estimate that exports could fall to 2.8 million barrels per day, a far cry from the nearly 5 million sold before the trade war.

The Russian economy suffers

The Russian state budget, which relies heavily on hydrocarbon revenues, is based on the assumption that each barrel of oil sells for $70. The government had already lowered this expectation to $60 due to the drop in oil prices in the spring, the Western ban on the shadow fleet, and Joe Biden's sanctions against two other major Russian oil companies, Surgutneftegas and Gazprom Neft, at the end of his term. Energy revenues fell by 21% between January and October compared to the same period last year, and this outlook could now worsen.

The US Treasury has already declared victory this week, asserting that its sanctions are having "the intended effect of reducing Russia's revenues" and, therefore, "the country's ability to finance its war effort against Ukraine." However, although Vladimir Putin allocates around 40% of the budget to pay for the war, experts doubt that the losses caused by oil will influence the Russian president's decisions on the front lines.

Vladislav Inozemtsev, also an economist, is emphatic: "No state of the Russian economy, whatever it may be, will be a reason to end the war. Neither sanctions, nor budget deficits, nor a lack of money, Neither a reduction in oil exports will prevent Putin from continuing this aggressionOn the contrary, Inozemtsev believes the Russian president will find a way to further increase military spending. One of the most feasible scenarios for addressing the budget deficit is a tax increase, something the Kremlin leader denied during his campaign, but which he could be forced to implement if the economic situation continues to deteriorate.