Russia’s Export Woes Continue as non-European Buyers Still Reluctant
- May 10, 2022
- Posted by: Quatro Strategies
- Category: Politics
Putin has ordered the government to find new markets for Russia’s commodities with Europe weaning itself off Russian oil, natural gas and coal, but there are serious hurdles despite Moscow’s effort to ship more cargoes to Asia, build new pipelines and expand railroad links to the East.
The EU is set to announce its sixth wave of sanctions on Russia this week. The new sanctions are expected to aim to undercut Russia’s energy exports. The EU not only prepares a phased ban on Russian oil, but it will also target service providers, such as ship insurers, to prevent Russian crude shipments to other parts of the world.
While Russia is working on new infrastructure for new markets for its commodities, they will take years to build. Russian exporters are also having difficulty booking charter ships to transport oil as banks and insurers fear the impact of sanctions. Major trading houses, meanwhile, are cutting their Russian business. It is also uncertain how much of Russia could rely on China to sell its commodities as Beijing looks to diversify its suppliers.
It is crucial for Kremlin to reroute its commodities from Europe to other markets.
Oil-and-gas sales contributed nearly 42% of Russia’s budget revenues in the first quarter of the year. Soaring energy prices following the invasion of Ukraine have been filling Russia’s coffers, partially compensating for the loss of customers in Europe. However, a long term drop in exports could make spending cuts necessary at a time when Russia needs to support its economy to prevent social unrest.
Russia’s predicament could also shake up the global economy. Russia has become one of the leading exporters of energy and minerals in recent decades. Disruptions in the trade amid already tight global markets would further fuel inflation in the West.
Putin ordered the government last month to review plans to expand energy export infrastructure to Asia, Africa and Latin America by June 1. The plan includes building new oil-and-gas pipelines from Siberia as well as the development of the Northern Sea Route, a shipping passage along the Russian Arctic coast.
Putin said they should assume energy exports to the West will go down in the foreseeable future. He added that it is necessary to speed up infrastructure projects that would redirect supplies from the West to markets in the South and the East in the next few years.
One of those projects is a gas pipeline to China via Mongolia that would create an alternative to the $55 billion Power of Siberia pipeline opened in 2019. Russia’s state run gas company Gazprom signed a contract to design part of the new project days after Russia invaded Ukraine. China, however, has yet to sign on to the project.
Beijing’s main strategy for oil is to diversify its suppliers and it has cut back purchases from Russia by 14% in March. It has other suppliers from the Middle East for oil and gas to Australia and the U.S. for LNG.
Japan, on the other hand, looks to increase Russian gas purchases as it has pushed ahead with a Siberian natural gas project.
Russia has tied its oil and gas export fortunes to Europe for decades and its export infrastructure has geared mainly towards Europe, which is the biggest buyer of Russian energy by far.
Russia has found a customer for its oil in India, which bought 700,000 barrels of Urals crude in April after purchasing only one cargo in the first two months of 2022. However, it may not stay feasible for Russia as they are selling the crude with a discount of at least 20% to global benchmark prices.
Another problem for Russia is that some insurers have been unwilling to deal with tankers carrying Russian crude, arguing that compliance risks are too high. The next round of European sanctions could make it even tougher on insurers to do business with Russian oil.
Banks have also been reluctant to do business with Russian products, as some Chinese and Indian customers, such as refineries, have been having trouble getting bank funding for the shipments.
Coal exports have seen difficulties as well. Typically, Russia sells half of its coal to Asia and one third of it to Europe. While demand for coal in Asia is growing, Russia is facing problems getting it there because of longer distances than to Europe, railway congestion and higher insurance premiums.
In metals, steelmaker Severstal has said it would redirect its sales to Asia, South America and the Middle East, but Asia and South America have enough of their own steel. The sudden strengthening of the rouble, propped up by Russia’s central bank, is also eroding a competitive advantage.
Even where Russian companies aren’t sanctioned, they have faced steep barriers.
As an example, Norilsk Nickel hasn’t been sanctioned, and its palladium and nickel, two metals that are essential to greener transportation, are in massive demand. But it still has struggled with logistics. Palladium is transported by plane, but the closure of the skies around Russia has made getting it out of the country harder, while European ports have refused to unload the company’s cargo.
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