What's driving rising Russian crude prices?
Hello! This is Alexandra Prokopenko with your weekly guide to the Russian economy — brought to you by The Bell. This week we look at why rising prices for Russian oil are a tactical victory for Russia in its economic war with the West — and at attacks on the Kremlin and oil facilities inside Russia that could herald the start of Ukraine’s counteroffensive.
Why the Kremlin’s energy export revenues are rising
Russian oil is getting more expensive — and its discount against benchmark Brent is decreasing. The average price for Urals crude in April was $58.63 per barrel, according to the Finance Ministry. That’s up almost 23% compared with March and is approaching the $60 price cap imposed by the G7 last year to limit Russia’s export earnings.
Russia’s Finance Ministry calculates the average price for Russian Urals oil each month. At the start of this month, the ministry reported that in April the average price for a barrel of Urals crude on the world market was $58.63. That’s the first time we’ve seen this kind of level for Urals crude since late 2022 when the EU embargo on Russian oil and the G7 price cap came into force (causing the official price for Urals to collapse).
Moreover, rising Russian prices are outstripping global trends: the price of a barrel of Brent increased by less than 1% last month. As a result, the discount on Urals compared with Brent has fallen: in late February it was $38, in March it was $31.3, but in April it was $26.
Why is this happening?
To a large extent, the higher price for Urals is purely on paper. It is the result of changes introduced earlier this year by Russia in how prices are calculated for tax purposes.
Before the war, the Finance MInistry used figures from Britain’s Argus agency to calculate oil-related taxes — principally Mineral Extraction Tax (MET). Argus had access to a large volume of transparent transactions and could come up with a realistic average price. It was an arrangement that suited everyone.
However, after war broke out, the volume of market transactions plummeted to a barely-observable level. Prices for oil exports to China and India are not visible to the Finance Ministry. Argus continued to publish prices for Urals at European hubs, but these were largely meaningless as the volumes were so low. These prices fell lower and lower, but were increasingly not reflecting the price of real transactions. The Finance Ministry continued to rely on Argus for base figures, but this led to a radical fall in oil tax revenues. Russia’s reserves also suffered. According to Russia’s budget rules, a fall in oil-and-gas incomes obliges the ministry to start selling Chinese yuan held by the National Wealth Fund.
Oil companies were the big beneficiaries — they saw their tax bills drop. And Western politicians took the opportunity to claim that Russia’s falling export earnings demonstrated the success of the oil price cap.
But the collapse in oil-and-gas revenues forced a change in the rules. In February, the Finance Ministry announced that, from April 1, it will stop using Argus’ prices altogether. The Urals price will still be pegged to Brent, but the discount will now be set by the Russian authorities. Initially, the discount will fall to $34 per barrel and then it will drop incrementally until it reaches no more than $25 per barrel in July. This will increase the tax burden on oil companies and help ease Russia’s budget deficit.
Russia’s energy revenues are still falling
The amount of money Russia makes from selling oil and gas is less than this time last year, but the difference is less dramatic than at the beginning of the year. In April, oil-and-gas revenues were 648 billion rubles — 32.4 billion rubles down on the Finance Ministry’s prediction a month earlier. This was 64% down on the same month last year — but the size of this fall is mostly linked to a high base in April 2022.
What will be the result of the changes?
As oil-and-gas prices increase, so will revenues — and the Finance Ministry will reduce sales of foreign currency reserves. In May, sales of yuan from the National Wealth Fund are expected to reach 40.4 billion rubles – that’s the lowest level this year. If current trends continue, the Finance Ministry looks set to start purchasing foreign currency next month.
When the Finance Ministry starts buying foreign currency, that should reduce the supply of yuan — and weaken the ruble. But this is not a given. The ministry has the option of offsetting such transactions. Markets love the calculating, tenacious approach of technocrats and the ruble might even strengthen in response to belief in the ministry’s ability to raise revenue without imposing draconian measures. “Right now, things look a bit better than expected for the ruble,” said Loko-Invest’s director of investments Dmitry Polevoy. Exporters will have to sell a bit more foreign currency due to the increased price of Urals, and that’s generally good for the ruble, according to Gazprombank’s managing director Yegor Susin.
Why the world should care
Increasing oil-and-gas revenues for the Kremlin show that the G7’s oil price cap is not as effective as its supporters like to claim. To increase its effectiveness, the cap will either need to be lowered in conjunction with a crackdown on violations or India and China – the main buyers of Russian oil – must be persuaded to observe the cap. As things stand, the current rising oil-and-gas revenues look a lot like a tactical victory for the Kremlin.
Is a Ukrainian counteroffensive about to begin?
Two drones attacked the dome of the Senate Palace of the Moscow Kremlin in the early hours of Wednesday. President Vladimir Putin was not in the Kremlin at the time. The Kremlin released a statement that read: "Two unmanned aerial vehicles were targeted at the Kremlin. As a result of the timely response by the military and special services, using radar warfare systems, the devices were disabled.”
Ukraine denied any involvement. "We didn't attack Putin," Ukrainian President Volodymyr Zelensky said Wednesday. “We fight on our territory.”
U.S. Secretary of State Antony Blinken warned against trusting Russia’s version of events and U.S. think tank the Institute for the Study of War said Thursday that the incident was most likely a false flag operation staged by the Kremlin.
It's worth noting that the area around the Kremlin has long been a no-fly zone: signs prohibiting the use of drones have long been on display and any filming with drones needs to be officially approved. Moreover, for years, commercial GPS systems stopped working near the Kremlin — for example, making taxis believe they are at one of Moscow’s airports.
In addition to the attack on the Kremlin, there have been several attacks on Russian oil facilities in recent days. A drone attack set fire to an oil depot in Russian-occupied Crimea on Wednesday. While in Bryansk Region, on the Ukrainian border, there were explosions on railroad tracks on two consecutive days this week. Also in the Bryansk Region, according to several Telegram channels, there was an attack on a military airfield. The Ilsky oil refinery in southern Russia was struck by drones on both Thursday and Friday.
Yevgeny Prigozhin, founder of the mercenary outfit Wagner, claimed Wednesday that a Ukrainian counteroffensive was already underway. According to him, this is evident from a sudden increase in activity from Ukraine’s Armed Forces, including its air force. He did not rule out that the coming days would bring the start of a major attack.
On Wednesday there were reports of Ukrainian troops movements in several areas of the front, but it soon became clear that these were small-scale operations. The main risk posed by this kind of military reconnaissance is that, if successful, it can be developed into a breakthrough and full-scale offensive, according to Vladimir Rogov, a member of the Russian-installed administration of Ukraine’s occupied Zaporizhia region.
Why the world should care
A Ukrainian counteroffensive was expected in April but was reportedly delayed due to poor weather. Many believe that, if successful, it could hasten the end of the war. Russia has prepared by building defensive positions and hundreds of kilometers of earthworks.
Attempts to establish bi-lateral trade in rupees between Russia and India have failed
Moscow and New Delhi suspended talks on the issue, Reuters reported, citing two Indian officials. In late April, Central Bank head Elvira Nabiullina said that Russian exporters have been experiencing difficulties in repatriating funds received from contracts in rupees. “These rupees must be requested for import ... or they must be invested in some kind of rupee-denominated assets,” she said. “This is a known problem. Of course, we are discussing this.”
- The Economic Development Ministry reported that GDP contracted 1.1% in March compared with the same month last year. That follows drops of 2.9% in February and 2.7% in January. Excluding seasonal factors, Russia’s GDP was up 1% after falling 0.3% in February. Industrial output was up 1.2% month-on-month in March. The Russian State Statistics Service (Rosstat) is due to publish a preliminary review of GDP trends on May 17.
- Real disposable incomes in Russia were up 0.1% in the first quarter of this year, according to Rosstat. The Economic Development Ministry projects a 3.4% rise in incomes in 2023 after a 1% drop in 2022 and a 3.2% rise in 2021.
- Retail trade continued its recovery in March: seasonally adjusted, it accelerated to 0.5% month-on-month growth, compared with 0.4% in February. Restrained retail dynamics and a trend for savings were the main reasons for reduced inflation in the first quarter. These trends might reverse, however, which could increase pressure on prices.
- The Federal Reserve raised its base rate this week by 0.25% but announced a pause in raises. That’s the 10th rate rise since the start of 2022. European regulators, as expected, raised their base rate to 3.75% this week.
- Inflation in Russia from April 25 to May 2 was 0.19%, Rosstat reported. That’s almost twice as much as last year. Consumer prices are up 2.18% since the start of the year.
What to watch out for
- Monetary policy report (Central Bank, May 11)
- Review of financial market risks (Central Bank, May 11)
- April inflation figures (Rosstat, May 12)
- Weekly inflation for May 3-10 (Rosstat, May 12)
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The author of this newsletter is one of Russia’s leading writers on this topic: independent economic analyst Alexandra Prokopenko. Alexandra worked as an advisor at Russia’s Central Bank and Moscow’s Higher School of Economics from 2017 to 2022 — and before that she was an economic journalist for Vedomosti, then Russia’s leading business newspaper. Today, Alexandra is a columnist at the Carnegie Endowment for International Peace and a visiting fellow a the Center for Order and Governance in Eastern Europe, Russia, and Central Asia at the German Council on Foreign Relations. She holds an MA in Sociology from the University of Manchester.