Russian exports of gas to Europe have tumbled by two thirds after Gazprom reduced flows of gas to Europe by 60% in June, but oil exports by sea have recovered to pre-war levels, according to the European Central Bank’s latest economic bulletin. 

The new ECB study contains information on Russia's foreign trade calculated using EU trade data. Russia stopped releasing details of its trade after the war with Ukraine started in February.

The ECB report also calculated that the discount on Russia’s Ural blend against the benchmark Brent blend has narrowed further to $10 a barrel. Historically the discount between the two types of oil has been around $2, but it blew out to $35 at its peak in March and April after oil traders self-sanctioned and refused to buy Russian oil.

“Following Russia’s invasion of Ukraine, weekly oil shipments from Russia declined (-15%) at end-March 2022 compared with the previous year’s level, amid war-related disruptions and the voluntary withdrawal of some energy companies and shipping merchants. This decline was especially pronounced for the United States (-60%) and the European Union (-35%),” The ECB said in its report.

In the meantime, Russia has managed to divert much of its export of oil to India, China, Kingdom of Saudi Arabia (KSA) and most recently Egypt. The supply of oil to China and India has doubled to account for 45% of their imports since the war started, but experts say both those markets have maxed out and cannot take in any more Russian oil.

In Europe, seaborne Russian oil exports recovered to 2021 average levels in early July after falling 15% in March, with demand driven by the deep discount. Now the discount is shrinking, and given the elevated transport costs of taking Russian oil much further to ports in India that add around $5 per barrel to costs, demand is beginning to cool again.

The share of Russia in oil imports by sea by China and India at the end of June rose to 11% and 14% from 6% and 2%, respectively at the start of the year.

Russian gas exports to the EU in the last week of June fell to 35% of last year's level and the government’s tax revenue from gas exports has fallen dramatically as a result.

“At the turn of the year, Russian gas pipeline flows via Central and Eastern Europe dropped substantially amid the tensions with Ukraine. With the start of the war, they remained volatile until the recent complete termination of gas flows to Bulgaria, Denmark, Finland, Lithuania, the Netherlands and Poland and voluntary reductions by, or partial cut-offs towards, Austria, the Czech Republic, France, Germany, Italy and Slovakia. As a result, total EU gas imports from Russia in the final week of June decreased by 65% compared with last year,” the ECB said.

Oil and gas revenues were hit by the reduced volumes being exported in June and July and will be reduced over the rest of the year, with the fall in gas exports doing the most damage.

“Russian oil & gas revenues collapsed in July, according to [Russia’s Ministry of Finance],” tweeted Carnegie’s Alexandra Prokopenko. “Failing of gas income is especially impressive, because of the energy war with the EU. Export duty fell 1/3: -32.9% y/y (64.9% y/y in June). We will see the reverse in o&g revenues during next month.”

Russia’s budget is currently in a surplus of about 0.5% of GDP, down from 1% in March, and in April Russian Finance Minister Anton Siluanov said the deficit could reach 2% by the end of the year that would be covered by the National Welfare Fund (NWF). However, after the currency account surplus hit a new record of $166bn in June, economists are now saying the end of the deficit could be less thanks to soaring revenues from the recovering oil trade.

“I think they’ll be nearly balanced at this pace. Maybe a small deficit of 1% is GDP. They still have large cash balances at MinFin they can use and banks’ liquidity is now up to over RUB2 trillion again. So plenty to cover borrowing if needed,” Elina Ribakova, deputy chief economist at IIF, said to bne IntelliNews.

Revenues could take a much bigger hit after December 5, when the EU is due to ban imports of Russian crude completely, followed by a ban on refined products on February 5 next year. How bad this will be remains unclear, but it will certainly reduce Russia's budget revenues noticeably. 

The EU has failed to replace Russian gas and has been forced to import record volumes of LNG at record prices, as bne IntelliNews reported in “EU gas imports from Russia in charts.”

Grain down too

 

The EU report also noted that grain deliveries to the world market from Russia fell by 40% in June, while from Ukraine they came to a standstill. The share of Turkey and Egypt in Russia's grain exports has increased, while imports from Turkey to Russia in general were up by just under half in the same period but continue to be well below par with Russia’s other trade partners.

“At the end of June, Russia’s weekly seaborne exports of wheat stood at 40% of the previous year’s level, amid a redirection of more shipments towards Egypt and Turkey,” The ECB said. “Until recently, with the complete blockade of ports in the Black Sea, grain shipments from Ukraine had come to a halt, aggravating global food security concerns.”

Compared to 2021, exports to Russia of all major trading partners decreased, including China, which did not impose sanctions (by 23%). Exports from the United States in May fell by 85%, from the eurozone by 45%.

Already the first round of sanctions in March dropped Russian imports by 15%, the ECB calculated on a sample of trade flows from 59 partner countries of Russia, covering 86% of Russian imports. On average, imports from countries that have imposed sanctions fell 20 percentage points more than from countries that did not, reports The Bell.

The ECB believes that the sanctions have been effective, especially in restricting the import of products needed for the production of military equipment. Vehicles, engineering products and production equipment accounted for more than half of the decline in Russian imports from the EU.

“The combined statistics of the ECB once again shows that the sanctions are working. What traps Russia has fallen into and why it is incorrect to say that the West has hit the sanctions ceiling,” The Bell wrote.

“Overall, Russia’s merchandise imports have significantly dropped since the start of the war, especially from sanctioning countries. Customs data show that exports to Russia have fallen significantly compared with 2021 levels, as Russia’s trade has been disrupted owing to the adverse macroeconomic and transport-related consequences of the war,” the ECB concluded. “The contraction is especially pronounced for the countries imposing sanctions (-85% for the United States and ‑45% for the euro area compared with the 2021 level as of May 2022), though exports from non-sanctioning countries also remain below their 2021 level (e.g. -23% in the case of China).”