Dr. Ajay Kumar PhD
Chairman and Managing Director
Fox Petroleum Group
Fox Capital and Investment (South Africa and Australia)
India and China are the beneficiaries as Asian nations buying at discounts and they have chiefly replaced Russia’s European customers
Lets us first decide – Russia is having a war, or Russia made an invasion on Ukraine. My understanding of invasion is very clear – an invasion is the entering or taking over of a place or being entered by force putting negotiation at rim. An example of an invasion is a military attack on a town – capturing Ukrainian town by Russian.
An example of an invasion is the infestation of a bug on a crop known as Entomological warfare – example – A 14th-century plague epidemic in Asia Minor that eventually became known as the Black Death (carried by fleas) is one such event that has drawn attention from historians as a possible early incident of entomological warfare. That plague’s spread over Europe may have been the result of a biological attack on the Crimean city of Kaffa.
An example of an invasion is the spread of a virus – the recent one – Covid – 19 Corona Virus also known as Chinese Virus also know as Biological Weapon attack on economy.
But #War is a phenomenon of organized collective violence that affects either the relations between two or more societies or the power relations within a society. War is governed by the law of armed conflict, also called “international humanitarian law.” It is guided by law.
Hence, I find that Russia invaded Ukraine. Hence, I will discuss – The Cost of invasion and impending burden on Russia’s oil industry. Some recent data states is very negative for Russia & Russian. The information available to me as–MAJOR MACRO ECONOMIC INDICATORS 2023 as follows : GDP growth (-3.3%), Inflation (yearly average (%6.1), Budget balance (-3.8 % GDP), Current account balance (6.2% GDP), Public debt (20.1% GDP). (Not all information from Russia and you know well it is now-a-days, no information comes from there, Media is Kremlin Kids). A year plus after Russia’s invasion of Ukraine, the Russian economy is doing better than expected. The predicted collapse has been avoided, and the forecasted 8–10 percent fall in GDP for the year has been reduced to a – 3 to -4 percent drop.
The above data shows that Russian economic situation is at its best still having burden of almost 10K economic sanctions. It is because – Kremlin been supported by large number of people in his country. But all these good thing is at the cost of “Russian Oil Industry”. The entire war shock is daily taken by THE RUSSIAN OIL & GAS INDUSTRY.
Strengths of Russia during invasion and after sanction – Abundant natural resources (oil, gas, wood, cereals, diamond, potash (used in the production process of fertilisers) and metals). Market size and skilled labour force. Low debt level, however, the macroeconomic stability is expected to deteriorate due to sanctions more om this year too. Digitalisation and innovation capacity. Immense territory bordering Europe and China easy to surpass trade barrier. And, Sovereign fund.
The weakness are too harsh – Bleak and abundant sanctions implemented on the country after its invasion of Ukraine. Dependence on hydrocarbon prices (39% of GDP). Declining demographics. No trade agreements beyond the neighbouring region. Dependence on foreign technology. Weak infrastructure aggravated by the lack of public investment, evident especially outside major towns. Heavy social security contributions (30% of salaries) favouring informality. Institutional and governance weaknesses (insolvency treatment, property rights, corruption), weak investment climate.
The above information was need before I go to Russian Oil & Gas deepening crisis. A hit on oil industry of Russia may put Russia’s Economic Prospects from Bad To Terrible. And, it has started showing its symptoms. Major sanction played on Russian Oil by USA and allies are resulted in Russian oil prices soar amid falling freight rates, despite strong demand. he European Union, G7 countries and Australia introduced a $60 per barrel price cap on Russian oil from Dec. 5, aiming to curb Russia’s ability to finance the invasion cost against Ukraine.
If we go with the statement of Feb 2023, Russian Deputy Prime Minister Alexander Novak said on Friday there were risks that Russia’s oil production could drop in 2023, under the pressure of a European Union embargo and a G7 price cap on Russian oil, Russian news agencies reported. Russian oil production defied numerous predictions of a decline amid Western sanctions over Ukraine and rose by 2% last year to 535 million tonnes (10.7 million barrels per day) thanks to a jump in sales to Asia, especially, to India and China. (Note: Where, in India it may lead to a scam in near future. As no data available, who has used the oil purchased from Russia, and what end use benefits has Indian received. Because election year, the data will be supplied soon in the market from West and USA media for enjoying Russian oil. #BigSacm waiting on the Government, and non recoverable).
Russian Deputy Prime Minister Alexander Novak didn’t mention the reason behind the fall, let me explain, the Year end December 2022, New sanctions on Russia’s oil exports have come into effect in recent months, including EU bans on seaborne oil imports from Russia and price caps on Russian oil in response to Russia’s continuing war of aggression in Ukraine. The EU ban on seaborne imports of Russian crude oil entered into force on 5 December 2022, followed by the embargo on refined oil products as of 5 February 2023. In tandem with the EU embargoes, the G7, the EU and partner countries have also prohibited the provision of maritime services for Russian crude oil shipments and for Russian oil products, unless the oil is being purchased at or below a capped price. It will blow Russia for a moment but to oil industry a little heavily.
The question becomes relevant – What’s next for Oil And Gas Prices as sanctions on Russia intensify? The West’s strategy to cut Russian prices while keeping its supply on the market has many faults, directly it is helping Russia. As I said above, India and China are the beneficiaries as Asian nations buying at discounts and they have chiefly replaced Russia’s European customers. Whereas some customers are still directly attached to leak Russian oil in Europe – a temporary exemption given to Hungary, Bulgaria and Croatia because of their limited alternatives. Still it is going to impact Russian oil industry to come to normally post war – minimum time span of 10 Years. Russia’s higher-cost oil products are exposing weaknesses to themselves. But at the moment, the west has taken careful steps to ensure that current SWIFT (Society for Worldwide Interbank Financial Telecommunication) and Russian bank sanctions do not prove to be an obstacle for Russian natural gas exports to Europe. It has been sold via and a little costlier but from black market. (Black Market of natural gas will be the new history in oil and gas, over 42 percent natural gas and refined petroleum products sold by new origin has the Russian origin in actuals, and money earned under sanction may be in future under the name of compliance – will be treated as black money against black supply).
It is not an easy game for profiteers too, any third party willing to buy such products using enabling services provided by an EU entity – such as insurance and shipping – can only do so if the price they pay for the Russian products is at or below the price cap imposed by the EU. The price cap is set at $60 per barrel for crude oil and $45 per barrel for discounted petroleum products (such as fuel oil and naphtha) and $100 per barrel for premium petroleum products (such as diesel, kerosene and gasoline).
Recently, the market has been doing a better job than the price cap, with Russian crude oil selling below the $60 per barrel cap, at least before the 1.1 million barrels per day production cut that was announced on April 2 by OPEC+ nations, including Saudi Arabia and Russia. IT has given a jolt to Russia’s revenues from oil and gas exports nose-dived by nearly 40% in Jan 2023 ($18.5 billion) compared to Jan 2022 ($30 billion). The revenue decline will be even steeper in the coming months, the International Energy Agency (IEA) has predicted. It had a trillion dollar contraction in Russian Economy. Russia’s GDP shrank to an estimated $1.5 trillion, or 2.1 percent, in 2022. And 2023 is expected to be very turbulent.
How Russia maintaining the entire situation – by a business formula – “ Business of Volume”. Lets say high diesel sales by higher volumes, gives Russia oxygen at breakfast. Russia exports around 1 million barrels per day (mbd) of diesel in addition to a total of 700,000 barrels per day of petroleum naphtha and gasoline and 1 mbd of both fuel oil and vacuum gas oil. All the vacuum gas oil and part of the fuel oil are processed by refineries as an alternative to crude oil, so these products are more relevant to the crude oil supply and demand balance.
Natural Gas gives Russia a trident glamorous presence as its revenue still not bad, and Crude runs the Country. But still Russia needs many thing which only money can buy that much money its Oil Industry is suffocating to pay. Theis is overleveraged now, and USA Policy is let it end where they can make good bargain.
What has been less talked about is the state of Russian refineries. For years, they have supplied Europe from a position of a competitive disadvantage because they are located deep inland and therefore have a logistics penalty. In a free and undistorted market, a Russian refinery selling into the European market would earn $5-10 per barrel less because of the higher costs of delivery. To keep them in business, the Russian government created a system whereby export taxes, primarily on crude oil, subsidize those refineries. Without any subsidies, 80 percent of Russian refining capacity would halt operations immediately.
Conclusion: Kremlin killing its Oil Asset slowly and that is the West and USA Policy. They have given dent to Russian economy by $1.8 Trillion as if now. It is big, it is huge. If this continue, Russian government had to feed “Bullet” to poor Russian Society. Because, I am fan of Vladimir Putin since my college time, I am feeling sad, that the two hands – made Russia great, will be the reason behind the biggest fall of Russia, every day for him and Russia is terrible. He needs to see a way out, from this war. WHEREAS – USA has provoked and wanted war to be continued by adding Finland to NATO, which is 150 KM away from St Petersburg and Nuclear Base on 96 KM. Russia invited trouble to near. Whereas Ukraine will be Built again by $ 33.5 Billion. The invasion cost of Russia till date only in Dollar is in trillions and Ukraine earned almost 68 billion Dollars Charity, plus sympathy and now, Russian will be seen as north Koreans. Invasion was a bad decision.