Russia’s European Union trading partners will declare an embargo on all Russian gas exports starting December 5.
These sanctions will lead to a serious hit for the country, but they could potentially have more lasting effects if the Russians are using their energy revenues to fund their war in Ukraine.
With Russia’s shrinking economy, it will find the natural solution to curb its losses by shipping more goods to Asia. There, Russia has a large customer base due to increased trade between China and India.
But Russia’s heavily export-dependent economy is proving to be tricky. India and China currently account for about two-thirds of all Russian trade.
This makes them its major customers after the UK, and they are demanding heavy discounts from the country in exchange for their purchases.
Russia’s Urals crude oil was trading at a steep discount of about 40% to the international Brent crude oil last week. That’s a huge drop from the $2.85 discount that it was trading at in 2021.
Moscow’s discount pricing strategy is now costing the country an estimated $4 billion a month in lost energy revenues. The sudden drop in oil prices is significant considering the fact that they had been largely stable for a few years, and now there are serious concerns about a recession and falling demand.
Although India and China are gobbling up Russian oil, Washington is not too worried about them. That’s because Russia has generally not been a strategic threat in the past, and these countries don’t appear to be that interested.
The US Treasury Secretary spoke to Reuters and stated that Russian oil would be sold at a bargain price, and they are happy with the choice of purchasers, including India, Africa, or China. It’s all good.
Brent crude futures have risen a total of 4.3% in the year 2022. The currency markets are being heavily influenced by the continuing conflict in Ukraine, which has caused oil to spike to new heights.
Furthermore, even with the December 5 sanctions, importers have already begun reducing the amount they buy from Russia. Northern Europe reduced its seaborne imports of Russian oil by over 90% days before the sanction took place.
Russia’s exports of crude oil to Rotterdam have decreased significantly as they focus on other markets. Down from about 1.2 million barrels a day in early February to 95,000 in the four weeks leading up to November 18.
The drop in exports caused by sanctions is significant because the Northern European nations of Germany, the Netherlands, and Poland were the top European importers of Russian oil in 2021.
Further, as a result of the EU’s sanctions, Russia is likely to see over one million barrels of unsold crude a day.
To compensate for its declining exports of crude oil, Russia is using exports to Asia as a backup plan. China and India were two of the biggest beneficiaries of October’s surge in Russian crude exports.