Sanctions against Russia and energy market prospects
Review by Caliber.Az

ANALYTICS  11 May 2022 - 15:05

Following Russia's invasion of Ukraine on February 24, unprecedented sanctions pressure was applied to Russia. Foreign companies, including fashion and catering brands, began to exit the Russian market in large numbers one after the other. Nonetheless, if the consequences of total withdrawal of foreign consumer sector companies from Russia can be survived and compensated, because equipment, clothing, cars, and other necessities, as well as luxuries, can be purchased in neighbouring post-Soviet countries, then the departure of oil companies is a real problem for the Russian economy, and compensating for losses will be difficult.

This is confirmed by Russian economists who, under the threat of criminal prosecution for expressing a position other than the official one, spoke with a Caliber.Az correspondent on the condition of anonymity. First and foremost, they claim that the departure of foreign oil companies will result in a decrease in Russian Federation oil production. As a result, a decrease in oil production will inevitably result in a decrease in oil and petroleum product exports, which will result in a decrease in the Russian Federation's main items of budget revenue, with all the ensuing consequences.

Oil production in the Russian Federation has already begun to fall slightly, as expected. According to open-source estimates, the average daily output of oil with condensate in April was 8.8 per cent lower than in March. At the same time, it is worth noting that exports fell less dramatically. This suggests that refining in the country has slowed. This primarily impacted plants with a low output of light petroleum products. The truth is that gasoline was primarily consumed in Russia's domestic market. Large amounts of oil products, such as fuel oil and diesel, were exported. Russia is being forced to increase domestic sales in order to compensate for some losses. However, it is necessary to consider the fact that the Russian Federation lacks free capacity for long-term storage of petroleum products, which will have a negative impact on stock prices.

In the current conditions, transactions with Russian oil go into the gray zone. Meanwhile, fairly stable export indicators suggest that the problems that have arisen, including with the logistics of oil and petroleum products, are quite possible to solve. Already today, quite a few new supply chains have emerged. By and large, this is the merit of the existing shortage in the world oil market, and not the country's leadership, experts in the field of energy believe. Nevertheless, they do not lose hope that, perhaps, after a certain time (several months), it will be possible to reconfigure logistics and build a working supply chain. Currently, India is the leader in importing Russian oil with reserves, but the key uncertainty here is the possible sanctions pressure on Delhi from the West.

In addition, Moscow faces a serious problem - this is the planned EU embargo on the import of Russian energy products. To date, the details of the expected embargo are unknown, as discussions are still underway, but the results may have a significant impact on the global oil market and pricing in general. Many experts in this matter tend to think that this will be a step-by-step process, and there will be those who disagree with the embargo. We are talking about European countries whose refineries (refineries) are configured for Russian oil grades or are tied to pipes. For example, we can consider the refinery in Schwedt-on-the-Oder, which is completely dependent on Russian oil. The PCK Schwedt refinery, located about 100 kilometres from Berlin, has been reliably supplied with oil by pipeline from the Soviet Union and then from Russia since 1962. In this context, it is worth noting that Eastern Europe is more dependent on Russian oil than Western Europe.

In this context, it is not unnecessary to consider the future of the Azerbaijani economy in light of a possible embargo on Russian oil and gas imports. It should be noted that the current insecurity has already benefited Azerbaijan, owing to the phenomenal prices for energy resources. When it comes to gas, Baku expects significant dividends from natural gas price increases, even at a production level of 40 billion cubic meters per year. In terms of oil, Azerbaijani oil is currently trading around $108 per barrel. In this regard, an increase in oil production may provide Azerbaijan with an excellent opportunity to replenish the country's gold and foreign exchange reserves.

Caliber.Az