Despite expectations of the destructive effects of sanctions on the Russian economy, and nearly two months after President Vladimir Putin invaded Ukraine, his country’s financial sector has so far avoided a serious liquidity crisis, because his country’s oil exports to Europe and countries such as India and Turkey rose, which raises a question. On the responsibility of these countries for what Ukraine suffers.
Experts say, according to the magazine Foreign Policy Sanctions may work in the long run, but for now many of the same countries sanctioning Russia are still seriously undermining sanctions efforts by buying energy from Moscow, in some cases in larger quantities during April than in March.
The magazine quoted Edward Fishman, a former Europe specialist at the US State Department, as saying that “Putin continues to earn at least one billion dollars a day from the sale of oil and gas, and the lion’s share of this money comes from Europe.” He added, “Individual European countries send military aid to Ukraine, but these efforts are dwarfed by the payments it makes to Russia for oil and gas.”
And if the Russian economy continues to function, this will mean more Russian military operations in Ukraine, new human rights violations, and greater suffering for civilians there.
Despite Western restrictions on Russia’s financial sector, oil exports reached 3.6 million barrels per day in April, compared to 3.3 million barrels per day in March, Matt Smith of Kepler, a company that tracks oil cargo ships, was quoted by the magazine as saying.
“The big takeaway is that Russian crude oil exports are actually higher so far this month than they were last month, it’s surprising,” Smith said.
So far, experts from the Institute of International Finance said in a report this week that Russian oil shipments in April are going at a “record pace”.
Even allowing for a significant discount on Russian crude prices compared to world standards, this means that “oil export revenues are likely to exceed by a large margin the rates of the same month in previous years.”
These revenues have pushed Russia’s current account surplus to new records.
During the first three months of the year, the surplus was $60 billion, compared to $120 billion for the full year in 2021, providing the Kremlin with new revenue to counter sanctions, even though Russia is far less able to buy supplies and parts from abroad because of the embargo.
The exact amount of oil Russia is now exporting, and to whom it is going, remains a matter of debate.
Experts say some of this crude is still being transported, in some cases to unknown destinations or storage facilities.
Many of the shipments represent a commitment to long-term oil contracts.
Other energy experts point out that Moscow is loading or boosting exports from existing stocks as it anticipates more Western sanctions on oil.
Haines said domestic Russian refining has already declined.
By early April, Russian domestic oil production had fallen by 700,000 barrels per day, according to the International Energy Agency. This suggests that Russia may be shifting limited production to exports rather than domestic refining.
Gas
For many European countries, cutting natural gas is more difficult than oil, and at present, alternative supplies of LNG, which can be transported by sea, remain limited, especially in Central and Eastern Europe. The switch to major alternative producers such as the United States, Qatar or Canada could take years.
The European Union’s Executive Committee has laid out a plan to cut Russian gas imports by two-thirds by the end of 2022 by importing more LNG and switching to more pipeline gas from Norway and Azerbaijan, as well as increasing wind and solar capacity.
But the magazine says that this plan remains vague, and many experts describe it as futile.
In an interview with Der Spiegel magazine published on Friday, German Chancellor Olaf Scholz said that Berlin could not afford to cut off Russian supplies any time soon, saying that a ban on Russian gas would not only end the Ukraine war, but could lead to a “dramatic economic crisis”. Millions of jobs will be lost and factories will never open again.
“This will have dire consequences for our country, for all of Europe, and it will also severely affect the financing of the reconstruction of Ukraine, and as such, it is my responsibility to say, we cannot allow this to happen,” he added.
So far, Europe has managed to cut its dependence on Russian coal.
Russia’s Energy Ministry coal official, Peter Boblev, told the State Duma this week that there has been a 20 percent year-on-year decline in coal exports in recent months.
US and European officials insist that in the long run, Putin cannot avoid the catastrophic economic consequences of his aggression against Ukraine.
“The economic crisis that Russia is facing will leave the Kremlin with fewer resources to support the Russian economy, continue its invasion of Ukraine, and project power in the future,” US Deputy Treasury Secretary Wally Adeemo said in a press statement.
And the Biden administration this week imposed additional sanctions on Russian banks and individuals, meaning that 60 percent of Russian banking assets are now subject to US sanctions, while Europe is gradually following Washington’s lead.
Russian Central Bank President Elvira Nabiullina said on April 18 that shortages in supplies of technology and other parts would soon ease and that Russia was “entering a difficult period of structural changes linked to sanctions”.
Experts predict a serious contraction in the credit available to Russian individuals and companies this year, with the economy shrinking by 8 to 15 per cent.
In the long term, under current conditions, some experts expect the Russian economy to shrink by a fifth or more in the next few years.
But currently, according to the latest data, Russian crude exports have jumped in the first few weeks of April, and while the United States, Britain, Australia and Canada have directly banned Russian imports, most European countries, led by Germany, continue to buy.
The largest proportion of the increase came from India, which refused to accede to sanctions or condemn Putin’s invasion.
The IIF report said that “imposing sanctions on some banks only – as now – allows the continuation of Russian energy exports, the maintenance of the current account surplus and the rapid accumulation of Russian foreign assets.” In other words, the current sanctions restructure the accumulation of foreign assets, but they do not stop it, as only energy embargoes or sanctions on all banks can do that.”
For Putin, the more critical financial issue is that Russia may soon default on its foreign debt for the first time since the Bolshevik Revolution in 1918, having missed the April 4 deadline for a dollar payment.
The country has been granted a grace period, but Russia has already been banned from international borrowing, and at a press conference on April 22, IMF economist Alfred Kamer said that “while Russia at this point does not have any financing needs in the market,” Its companies are saddled with more than $400 billion in outstanding debt and will struggle to maintain credit over the long term. These pressures may eventually force Putin to accept peace sooner than he wants.
For Putin, the bigger question ahead will be whether he can adapt his economy to long-term isolation. Other economies that have faced a similar stranglehold, such as the Iranian economy, have done so.
But depriving the West of imports of consumer goods, production materials, and spare parts, and increasing pressure on Russia’s finances, will ultimately do serious damage to the economy.