Russia's oil revenues grow despite Western sanctions
Bill of the war

ANALYTICS  26 April 2024 - 17:05

As of May 2024, Russia has entered the third year of war with Ukraine, gradually exerting more pressure on the Ukrainian forces. Although the collective West imposed economic sanctions on Russia since its intervention in Ukraine, the results of economic sanctions were insufficient to neutralize Moscow. Given Russia's long-term leverage as one of the leading fossil fuel exporters to Europe, the sanctions were set to decrease its monopoly and collapse the economy by forcing it to withdraw troops from Ukraine.

However, contrary to expectations, Russia's decreasing exports of natural gas, coal, and oil did not have significant repercussions on the economy. According to recent data, Russia’s oil and gas revenues surged in the first three months of this year by 79 per cent compared to a year earlier. The results of the first three months saw Russia’s budget deficit halved from a poor result in February. Russia's budget deficit fell from RUB 1.5 trillion in February against the full-year forecast of RUB 1.6 trillion but narrowed to RUB 607 billion for the first three months of the year, or 0.3 per cent of gross domestic product (GDP), supported by a surge in oil prices. Oil and gas revenues in the first three months of this year surged by 79 per cent, making up about a third of Russia's tax take.

The growth in Russia's energy revenues has not only defied expectations but also triggered criticism from Ukraine and the West. Despite sanctions, Russia has managed to reroute its oil and natural gas exports to alternative markets, such as India, China, and Pakistan. This shift in trade flows, which has significantly benefited Moscow, has raised concerns about the effectiveness of the sanctions and their impact on Russia's international relations.

Indeed, revenues from Russia’s oil and gas industry have long been one of the most important metrics for the Russian government. Despite earlier reports that Russia’s economic growth is expected to slow during 2024 and will remain on par with growth in its peer group of developing countries, Moscow does not seem in a rush to reconcile or seek a peaceful resolution to the war in Ukraine. Moreover, the increase in oil revenues is not a new phenomenon, as the International Energy Agency (IEA) indicated in January 2024 that Russia's earnings on oil exports were up slightly from previous months due to slightly higher global oil prices.

While Russian crude sales to India are not subject to sanctions and are entirely legitimate, an examination of shipping routes by experts suggests this huge volume of shipments might involve the so-called shadow fleet of crude tankers, specially created by Moscow to try to disguise who it is trading with and how, and maximize the Kremlin’s profits.

Nevertheless, Russia does not hide its concerns regarding the potential risks of the low percentage of growth in the next decade due to the switching to a war economy and ongoing economic sanctions. Given Russia’s unwillingness to withdraw, it is likely that Russian-Western relations will remain nearly cut off. This means that unless there is another spike in global commodity prices during the next few years, Russia could fall behind its key international competitors in economic development, and its share of the world GDP could shrink.

Throughout 2024, oil taxes were calculated using an average price of Urals—Russia's main export blend—of $65 a barrel. Even Western nations' attempts to curb Russia’s oil revenues to keep the price of Ural oil below $50 a barrel in 2023 did not yield major results. While buyers from other countries have been free to buy Russian barrels at a higher price, they’re not allowed to use Western services like insurance and shipping for those supplies.

For 2024 as a whole, the Russian government budgeted for federal revenue of 11.5 trillion roubles from oil and gas sales, a 30 per cent increase from 8.82 trillion roubles in 2023. Overall, oil sanctions are largely a spent cannon, and technology sanctions have also largely failed, as Russia imported more equipment and electronics in 2023 than it did pre-war.

Caliber.Az