During a June 2 call with reporters, Kremlin spokesman Dmitry Peskov minimized the effect of the sanctions the European Union, United States, and other countries imposed on Russian oil.
“Certainly, Russia will not sell anything without a profit. The demand may fall in one place and rise elsewhere. The supply chains reorient as parties seek best conditions for trade,” Peskov said.
That is misleading.
In fact, the sanctions have forced Russia to find buyers for oil it can’t sell to former customers. And it’s offering crude at discounts for buyers willing to flout the sanctions.
Since Russia launched a full-scale invasion of Ukraine on February 24, Australia, the United Kingdom, Canada, Japan and the United States have banned or sharply restricted imports of Russian oil.
The United Sates acted in March. In 2021, the U.S. imported on average some 20.4 million barrels a month of Russian crude and refined oil, or about 8% of all U.S. liquid fuel imports.
The EU followed in May, agreeing to phase out 90% of Russian oil exports to Europe. By the end of 2022, Russia is expected to be losing around $400 billion in annual payments that it has been receiving from European countries.
Even before the latest sanctions, Russian oil exports were falling. In December 2020, Russia’s crude exports fell to about 4.6 million barrels a day, down from 5.3 million barrels a year earlier.
Some European refineries continue to take Russian crude oil via pipelines. According to Reuters, in late May they included:
- – Italy’s largest refinery ISAB, owned by Litasco SA, a Lukoil-controlled, Swiss-based Russian firm;
- – In Germany, the Leuna refinery, majority-owned by France’s TotalEnergies; MiRO, the country’s largest refinery, which is 24% owned by Russia’s state-run Rosneft; and PCK Schwedt, a refinery 54% owned by Rosneft;
- – Hungary’s MOL oil and gas company;
- – Bulgaria’s Lukoil Neftohim Burgas refinery, owned by Russia’s Lukoil;
- – Indonesia’s PT Pertamina state energy firm.
But India and China are the largest importers of Russian crude. And that’s where discounts are making up lost ground for the Kremlin.
This May, India imported about 841,000 barrels daily of Russian oil, compared to 137,000 in May 2021, and the country plans to further increase imports, India’s Economic Times reported. Russia’s trade partners include the country’s six-largest state and private refiners.
In February, before the invasion, Russia had been selling its Urals-grade oil to India at $11.60 per barrel below the price for Brent crude, the international benchmark. Bloomberg reported that this was the biggest discount Russia had offered on its oil in 11 years.
In April, Russia was selling crude to India at $35 per barrel below the Brent benchmark. As of June 2, that discount increased to about $40 per barrel below the Brent benchmark.
Analysts say that cheap Russian oil carries political risk for India and exposes it to sanctions for violating international embargoes, the Economic Times reported. There are also reports that India may be considering paying for Russian oil in rubles to get around Moscow’s exclusion from the SWIFT global financial payments system because of the Ukraine war.
The United States is ready to assist India in diversifying its energy sources but is not setting any “red lines” for Indian trade with Russia, Reuters reported in March, citing a top U.S. official.
China is the world’s leading oil importer and a major customer for Russia. Despite Western sanctions, China’s state-owned SINOPEC, the largest refinery in Asia, and other Chinese refineries like CNOOC, PetroChina and Sinochem, continue to purchase crude oil from Russia under long-term contracts.
Reuters said in April that these buyers did not sign new contracts despite offers of “steep discounts,” as Beijing is conscious about being seen as a supporter of the war in Ukraine.
By May, however, something changed. Reuters reported that China was slurping up ever more Russian crude, with imports that month expected to hit a near-record 1.1 million barrels per day, more than 40 percent above the first quarter of the year.
“The low price of Russia's oil – spot differentials are about $29 less per barrel compared with before the invasion, according to traders – is a boon for China's refiners as they face shrinking margins in a slowing economy. The price is well below competing barrels from the Middle East, Africa, Europe and the United States,” Reuters said.
Before its invasion of Ukraine, Russia supplied 15% of China’s oil imports using the East Siberian and Atasu-Alashankou pipelines, as well as tankers. China some day may become less dependent on Russian oil thanks to its Kenli 6-1 oil field in the Bohai Sea, which is ranked among world’s 10 largest reserves.
Peskov’s remarks about oil came after U.S. President Joe Biden said the EU embargo would present “an overwhelming need for the Russians to sell (crude), and it would be sold at a significantly lower price than the market is generating now.”
Oil and gas dropped as a share of Russia's economic output from 19.2% of gross domestic product in 2019 to 15% of GDP in 2020. Still they are vital; in 2021, according to Russia's central bank, oil, oil products and gas made up more than half the country's exports.
The West imposed multiple layers of sanctions on Russian industries and financial institutions to curb the Kremlin's ability to continue financing the war against Ukraine.