RIGA, Latvia — Russia’s revenue from oil exports dropped by nearly half in February compared to last year after a European Union embargo and new price caps intended to punish Moscow for its war in Ukraine went into effect, according to a new report by the International Energy Agency. But it is unclear if the measures are seriously hampering President Vladimir Putin’s war machine.
Moscow earned $11.6 billion from oil exports last month, down from $14.3 billion in January and a 42 percent drop from $20 billion earned in February 2022, according to the IEA. The IEA is an intergovernmental policy advisory body based in Paris, whose 31-member countries are also part of the Organization for Economic Cooperation and Development.
Russia, however, was still shipping “roughly the same” amount of oil to the world market, meaning that the punitive measures had not led to a disruption in global supply, a key concern that had led U.S. Treasury Secretary Janet L. Yellen to propose the price cap.
“This indicates that the G-7 sanctions regime has been effective in not restricting global crude and product supplies, while simultaneously curtailing Russia’s ability to generate export revenue,” agency said.
Shipments of Russian oil to European Union countries plummeted by 760,000 barrels per day, from 1.4 million, the report said, but Moscow has managed to reroute most of that oil — mainly to India and China, but also to other buyers in Asia, Africa and the Middle East, who are enjoying low prices.
“It remains to be seen if there will be sufficient appetite for Russian oil products now that the price cap is in place or if its production will start to fall under the weight of sanctions,” the agency said, adding: “Although it has been relatively successful in sustaining volumes, Russia’s oil revenue has taken a hit.”
Experts disagree over whether the price caps will significantly undermine Russia’s ability to finance its brutal war in Ukraine.
For the majority of 2022, no export sanctions were in place, allowing Moscow to earn $383.7 billion in hydrocarbon exports last year, an absolute record for the 27 years of historical data, according to the statistics released by Russia’s Federal Customs Service this week.
Over the first year of war and sanctions, Russia was also able to stockpile about $80 billion in foreign assets, which according to a Bloomberg Economics estimate, is now dispersed across cash deposits, real estate and investments, and helped the Kremlin maintain its financial footing.
“If we talk about the full financial sanctions, it was a freezing of around $300 billion, but at the same time, export revenue were twice that much, and imports have collapsed,” said Oleg Itskhoki, a professor of economics at the University of California. “As a result, there was this dramatic inflow of currency into the Russian economy of more than a billion dollars a day.”
That could now change as the new measures start to bite.
“This is the first time that we will see the Russian economy under a scarcity of financing, and it’s very hard to predict how sharp this will be,” Itskhoki said. “It doesn’t look like these effects are so dramatic, to be honest, and the reason is, Russia managed to reroute most of the oil, crude oil sales to Asia.”
Another record-breaking revenue year seems out of reach for Russia but a huge drop is hardly guaranteed.
“If we’re talking about a 20 to 30 percent decline relative to 2022, and 20 to 30 percent of those revenue is a lot of money,” Itskhoki said. “But the revenue were so high in 2022 because of high oil prices, so this decline is not going to be enough to trigger a crisis.”
In a sign that Moscow may be struggling to find customers for all of its oil, Deputy Prime Minister Alexander Novak said in early February that Russia would curb output by 500,000 barrels a day in March rather than sell to countries complying with the price cap.
Putin has taken a defiant stance, saying that the economic sanctions and turbulence of 2022 have only helped Russia in the long run.
“The calculation was that enterprises would stop due to the refusal of our partners to work with us, that the financial system would collapse and tens of thousands of people would be left without work, take to the streets, protest, so Russia would be shaken from within and collapse,” Putin said Tuesday in a staged meeting with workers of an aviation plant in Ulan-Ude. “This is what was expected, but this did not happen.”
“The financial system of the Russian Federation has not only survived but also strengthened, is developing steadily,” the Russian leader continued. “Russia has passed a very important stage of development this year, and perhaps this is the most important result of 2022. We have multiplied our economic sovereignty.”
The E.U. agreed to revise oil price caps every two months, and as the term of the first agreement nears an end, the bloc is headed for potentially heated talks in the coming days. A coalition of three countries — Estonia, Lithuania and Poland — has proposed reducing the oil price cap set in December to $51.45 per barrel from $60.
According to the group’s calculations, that would set Russian oil at 5 percent below market prices — a level that would have shaved off $650 million in revenue had it been in place in January.
The coalition must secure unanimous support from other governments to lower the cap. During the initial price review in January, the United States and its allies favored no change. The cap’s dual purpose is to keep global supplies stable while cutting Moscow’s profits.
Even as Putin has insisted things are going better than expected, the Russian economy faces a growing budget deficit and the government is expected to seek hefty one-time payments from state-owned companies to close the gap. Russian news agency Interfax reported that the government would ask for “voluntary” lump sum payments amounting to anywhere between $2.5 billion to $3 billion.
The budget deficit for 2022 was $43 billion, or 2.3 percent of economic output, Finance Minister Anton Siluanov said in January, a stark difference compared to more optimistic September forecasts.
January figures for Russian spending looked even more alarming with the country experiencing a record $23.7 billion deficit due to a sharp increase in expenses, most likely tied to defense and security, amid the decline in oil and gas revenue.
The deficit in February was about $10 billion, but together the first two months of the year now account for 88 percent of the projected deficit for all of 2023, according to The Bell, a Russian-language financial news outlet.
To keep the deficit within the planned 2 percent of economic output, the government will have to cut spending for the rest of the year, which experts said was unrealistic.
“It will be necessary to spend an average of 415 billion rubles [about $5.4 billion] less than last year in the remaining ten months,” Bloomberg Economics expert Alexander Isakov wrote on his Telegram channel.
“This will not happen — the spending plan has already increased by 0.5 trillion rubles,” he wrote, forecasting an overall deficit at 3 percent of economic output. Others put the deficit figure even higher.
According to Itskhoki, Russia would probably be able to withstand a deficit from 3 percent to 4 percent of economic output. “If we see that budget deficit is like above 6 to 7 percent that’s a telltale of major economic turbulence in 2023,” he said.
Russia can still tap into its reserves, allowing it to cover a 3 percent deficit for the next three years. The government could increase taxes on big businesses.
One year of Russia’s war in Ukraine
Portraits of Ukraine: Every Ukrainian’s life has changed since Russia launched its full-scale invasion one year ago — in ways both big and small. They have learned to survive and support each other under extreme circumstances, in bomb shelters and hospitals, destroyed apartment complexes and ruined marketplaces. Scroll through portraits of Ukrainians reflecting on a year of loss, resilience and fear.
Battle of attrition: Over the past year, the war has morphed from a multi-front invasion that included Kyiv in the north to a conflict of attrition largely concentrated along an expanse of territory in the east and south. Follow the 600-mile front line between Ukrainian and Russian forces and take a look at where the fighting has been concentrated.
A year of living apart: Russia’s invasion, coupled with Ukraine’s martial law preventing fighting-age men from leaving the country, has forced agonizing decisions for millions of Ukrainian families about how to balance safety, duty and love, with once-intertwined lives having become unrecognizable. Here’s what a train station full of goodbyes looked like last year.
Deepening global divides: President Biden has trumpeted the reinvigorated Western alliance forged during the war as a “global coalition,” but a closer look suggests the world is far from united on issues raised by the Ukraine war. Evidence abounds that the effort to isolate Putin has failed and that sanctions haven’t stopped Russia, thanks to its oil and gas exports.