Western move to sanction Russia's oil exports boomerangs, for now

Petrol prices are seen in LA on June 13, 2022. The economic pain from the boycott of Russian oil is being felt more in the US. PHOTO: REUTERS

SEOUL (NYTIMES) - When the United States and European Union moved to curtail purchases of Russian fossil fuels this year, they hoped it would help make the Russian invasion of Ukraine so economically painful for Moscow that President Vladimir Putin would be forced to abandon it.

That prospect now seems remote at best.

China and India, the world's most populous countries, have swooped in to buy roughly the same volume of Russian oil that would have gone to the West. Oil prices are so high that Russia is making even more money now from sales than it did before the war began four months ago. And its once-flailing currency has surged in value against the dollar.

Russian officials are smirking over what they are calling a spectacular failure to cow Mr Putin. And the economic pain the oil boycott was meant to inflict is reverberating not so much in Moscow but in the West, especially the United States, where skyrocketing oil prices pose a potent threat to President Joe Biden less than halfway into his term.

Some point out that Europe's oil embargo has yet to take effect and say that the long-term effects of Russia's economic ostracism over the war remain a powerful determiner of the country's fate. Those effects extend far beyond the trade in fossil fuels, hobbling Russian banking and other industries, but it is largely the sale of oil and gas that keeps the government - and its military - afloat.

"Things are much better than the worst case, and probably even better than the base case," Mr Yevgeny Nadorshin, chief economist at the PF Capital consulting company in Moscow, said of Russia's energy revenue. "Unfortunately, the most difficult period is only beginning."

Whether Mr Putin will now feel financially emboldened to prosecute the war indefinitely is an open question. But there is every indication that Ukraine and its supporters are girding further for a protracted conflict.

Ms Iryna Vereshchuk, Ukraine's deputy prime minister, made an urgent plea for hundreds of thousands of people living in Russian-occupied parts of southern Ukraine to evacuate in advance of a potential Ukrainian counteroffensive.

And on Tuesday (June 21), the Biden administration dispatched Attorney General Merrick Garland on a surprise visit to Ukraine, where he announced the appointment of Mr Eli Rosenbaum, a veteran prosecutor known for investigating former Nazis, to lead US efforts to help track Russians implicated in possible war crimes in Ukraine.

Mr Putin has categorically rejected any accusations of Russian atrocities in Ukraine, which he has long maintained is not even a legitimate country.

But in the short term, the United States and its Western allies had been counting on economic sanctions, not criminal prosecutions, to persuade Moscow to back down, or at least degrade its ability to sustain the war. For now, at least, that tactic appears to have boomeranged, given surging demand in Asia for oil from Russia, the world's third-largest producer of oil after the United States and Saudi Arabia.

In May, China's imports of Russian oil rose 28 per cent from the previous month, hitting a record high and helping Russia overtake Saudi Arabia as China's largest supplier, according to Chinese statistics. India, which once purchased little Russian oil, is now bringing in more than 760,000 barrels a day, according to shipping data analyzed by Kpler, a market research firm.

"Asia has saved Russian crude production," said Mr Viktor Katona, an analyst at Kpler. "Russia, instead of falling further, is almost close to its pre-pandemic levels."

According to Rystad Energy, an independent research and business analytics company, Russian crude sales to Europe dropped by 554,000 barrels a day from March to May, but Asian refiners increased their take by 503,000 barrels a day - nearly a 1-for-1 replacement.

Although Russia is selling the oil at a steep discount because of the risks associated with sanctions imposed over the Ukraine invasion, soaring energy prices have compensated. Russia took in c (S$2.36 billion) more last month than it did in April, according to the International Energy Agency.

It remains unclear whether Asia will buy all the Russian oil once destined for Europe, as the EU works to wean itself from dependence on the Kremlin's energy exports. But for now, the shift has enabled Moscow to maintain oil production levels and confound expectations that its output would plunge.

China's purchases in particular have underscored the support Mr Putin enjoys from his Chinese counterpart Xi Jinping, who has pledged to deepen cooperation with Moscow, whatever his qualms about the war in Ukraine.

The combination of discounted Russian crude and higher prices at the pump also means that Indian refiners are profiting doubly, according to analysts. Some of the oil products exported by India have been shipped to the United States, Britain, France and Italy, according to the Finnish-based Centre for Research on Energy and Clean Air.

Once the refiners turn oil into diesel or gasoline, no one can distinguish whether the fuels they ship to Europe and elsewhere come from Russian crude. That means Western motorists who think they are paying more for non-Russian fuel may be mistaken.

"Those molecules, a lot of them are Russian," Mr Jeff Brown, president of FGE, an energy consulting firm, said of the refined oil products exported to the West.

The high global demand for Russia's oil and gas is prompting Russian officials to declare that the West's efforts to limit Russian exports have flopped.

Mr Aleksei Miller, the head of Gazprom, the Russian energy giant, said at an economic conference in St. Petersburg, Russia, last week that he bore no ill will against Europe because even as the continent's imports of Russian natural gas fell by "several tens of per cent," prices rose "severalfold". "I won't bend the truth if I tell you that we bear no grudge," he said.

This month alone, Russia's Finance Ministry estimated, government coffers were expected to receive US$6 billion more in oil and gas revenue than anticipated because of high prices.

Still, the sanctions are likely to exact more pain on the Russian economy later this year. And while the rebound of Russia's currency, the rouble, is attributable in part to the country's surprising economic resilience, it also reflects the strict government controls on capital flows and plummeting imports into Russia.

Mr Putin's government also has sharply reduced how much budget data is made public, making it hard to quantify how much it is spending on the war. Analysts say there is no evidence that Mr Putin is under immediate pressure - economic or otherwise - to wind down his military campaign.

But Mr Nadorshin said that the data the government does release indicated it was trying to curtail spending across the board. And evidence of shortfalls in the Russian army's equipment, with volunteers scrambling to deliver first aid gear and other basic items to the troops, shows the limits in the Kremlin's ability to finance the war effort.

"The government's readiness to spend is clearly suffering, despite the bravado of the official pronouncements," he said. "It's not hard to guess that in terms of procuring weaponry, not everything is going well."

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