In early March, as the US and its allies unleashed a wave of sanctions on Russia, President Joe Biden stood in the White House and said they wanted to deal a “powerful blow to Putin’s war machine.”
Butas the war in Ukraine approaches its 100th day, that machine is still very much operational.Russia is being propelled by a flood of cash that could average$800 million aday this year —and that’s just what the commodity superpower is raking in from oil and gas.
For years, Russia has acted as avast commoditysupermarket selling what an insatiable world has needed: Not just energy, butwheat, nickel, aluminum andpalladium too. The invasion of Ukrainehas pushed the US and the European Union to rethinkthis relationship. It’s taking time, though the EU took a further step this week by hammering out acompromise agreement on Russian oilimports.
Russia is far from unscathed by the sanctions, which have made it a pariah across the developed world. Corporate giants havefled,many walking away from billions of dollars of assets, and theeconomy is heading for a deep recession. But Putin can ignore this damage for now, because his coffers are overflowing with the revenue from commodities, whichhave become more lucrative than ever thanks to the surge in global prices driven in part by the war in Ukraine.
Even with some countries halting or phasing out energy purchases, Russia’s oil-and-gas revenuewill be about $285billion this year,according to estimates from Bloomberg Economics based on Economy Ministry projections. That would exceed the2021 figureby more than one-fifth. Throw in other commodities, and it more than makes up for the$300 billion in foreign reserves frozen as part of the sanctions.
EU leaders know that they should stop buying from Russia andindirectly funding a devastating war on Europe’sdoorstep. But for all that ambition, national governments also know there will berepercussions for their own economies.
They agreed this week to pursue a partial ban on Russian oil, paving the way for a sixth package of sanctions, but only after weeks of haggling and division.
“There are always political constraints on the use of sanctions,”said Jeffrey Schott, a senior fellow at the Peterson Institute in Washington. “You want to maximize the pain on your target and minimize the pain on your constituency at home, but unfortunately, that’s easier said than done.”
In the US, officials are debating ways to ratchet up thefinancial pressure, possibly by helping to imposea cap on the price of Russian oil or slapping sanctions on countries and companies still tradingwith Russian businesses under restrictions. But such secondary sanctionsare deeply divisive and risk damaging relations with other countries.
The US has already banned Russian oil, but Europe is only slowly weaning itself off this dependency. That’s giving Moscow time to find other markets —such as commodity guzzling behemoths China and India —to limit any to damage to export revenue, and its financial war chest.
That means the money is gushing into Russia’s accounts, and the financial figures are a constant reminder to the West that dramatic change is needed. Oil-export revenue alone is up 50% from a year earlier, according to the International Energy Agency. Russia’s top oil producers made their highest combined profit in almost a decade in the first quarter,Moscow-based SberCIB Investment Researchestimates. And wheatexports continue —at higher prices —as sanctions on Russian agriculture aren’t even being discussed because the world needs its grain.
The current account surplus, the broadest measure of trade in goods and services, more than tripled in the first four months of the year to almost $96 billion. That figure, the highest since at least 1994, mainly reflected a surge in commodity prices, though a plunge in imports under the weight of international sanctions was also a factor.
The ruble has become another symbol used by Putin to project strength. Once mocked by Biden as “rubble” when it initially collapsed in response to the sanctions, it’s since been propped up by Russiato become theworld’s best-performing currency against the dollar this year.
Putin has also tried to leverage Russia’s position as a commodity superpower. Amid concern about food shortages, he’s saidhe’ll allow exports of grain and fertilizer only if thesanctions on his country are lifted.
“If the goal of sanctions was to stop the Russian military, it wasn’t realistic,”saidJanis Kluge, senior associate for Eastern Europe and Eurasia at the German Institute for International and Security Affairs in Berlin. “It can still fund the war effort, it can still compensate for some of the damage sanctions are doing to its population.”
One of the big holes in the sanctions against Russia is the willingness of other nations to continueoil purchases, albeit at a discount in some cases.
Indian refinerspurchased more than 40 million barrels of Russian oil between the start of the Ukraineinvasion in late February and early May.That’s20% more thanRussia-India flowsfor the whole of 2021, according to Bloomberg calculations based on trade ministry data.Refiners are seeking private deals instead of public tenders to get Russian barrels cheaper than market prices.
China is also strengthening its energy links with the country, securing cheaper prices by buying oil that’s beingshunned elsewhere. It’s boosted imports and is also intalks to replenish itsstrategic crude stockpileswith Russian oil.
It’s a similar story for steelmakers and coking coal. Imports from Russia rose for athird monthin April to more than double last year’s level, accordingtoofficial custom office data. And some sellers of Russian oil and coal have tried to make things easier for Chinese buyers by allowingtransactionsin yuan.
“The vast majority of the world is not involved in imposing sanctions,” saidWouter Jacobs, founder and director of the Erasmus Commodity & Trade Centre at the Erasmus University in Rotterdam. “The trade will go on, the need for fuels will be there” and buyers in Asia or the Middle East will step up, he said.
When it comes to gas, Russia has fewer options for diverting supplies, but the countries at the end of pipelines from Russia —some of which run through Ukraine —are also locked into a mutual dependency.
About 40% of the EU’s gas needs are met by Russia, and this will be the bloc’s hardest link to sever. European deliveries even jumped in February and March as the invasion caused a price spike in European gas hubs, making purchases from Russia’s Gazprom PJSC cheaper for most customers with long-term contracts.
Volumes have decreased since then, thanks towarmer weatherand record inflows of liquefied natural gas from the US and other countries. There’s also been disruptions because of military activity, and Russia itself halted supplies to Poland, Bulgaria and Finland, which refused Putin’s demand topay inrubles.
Even as the EUreduces its dependency—Germany says it’s down to 35% from 55%—there are complications at every step.Several big buyers of Russian gas have gone out of their way to keep buying the crucial fuel, and utilities such asItaly’sEni SpA and Germany’sUniperSE expect supplies to continue.
While progress is slow, the direction is only toward more and more restrictions. Even with the uncertain timetable, the pressure on the Russian economy, and Putin’s finances, will eventually mount.
The country’s energy sector is also facing an array of other factors beyond demand, from shipping and insurance restrictions to weak domestic demand. Oil production may drop more than 9% this year, while gas output may decline 5.6%, according to Russian Economy Ministry’s base-caseoutlook.
“In the Kremlin there’s some optimism and even surprise that the Russian economy didn’t collapse from the onslaught of sanction,”saidTatiana Stanovaya, founder of political consultant R.Politik. “But looking ahead two to three years, there’s a lot of questions about how the energy and manufacturing sectors will survive.”
–With assistance fromJames Herron,Nick Wadhams,Debjit Chakraborty,Libby Cherry,Grant Smith,Daniel Flatley,Julian Lee,Aine Quinn,Todd Gillespie,Sarah Chen,David Stringer,Elena MaznevaandAnna Shiryaevskaya.
