Key Takeaways
Russia is reducing its oil output as part of its agreement with OPEC+ that seeks to support world oil prices.
The announced cuts come on the heels of Ukraine drone attacks on Russian refineries which have idled almost 1 million barrels per day of throughput.
The latest oil output reduction comes during seasonal maintenance of refineries, many of which had already reduced production as a result of outages and Ukrainian drone attacks.
Banks in some countries have been increasing scrutiny of purchases of Russian oil and petroleum products in the wake of escalating sanctions by the Biden Administration, delaying payments.
Biden has asked Ukraine to cease attacks on Russian refineries, reportedly expressing concerns about possible increases in oil prices in an election year and retaliation by Russia.
Russia’s government ordered oil companies to reduce their output in the second quarter to ensure they meet a production target of 9 million barrels per day by the end of June in line with its pledges to OPEC+. Russia provided specific targets to each company, signaling its intention to meet its OPEC+ pledge to cut output to support international oil prices. The production cuts would facilitate a seasonal peak in maintenance at refineries, many of which had already reduced production as a result of outages and Ukrainian drone attacks. Those attacks on Russian oil refineries have so far knocked out an estimated 900,000 barrels per day of refining capacity. According to Ukraine, it will continue to target Russian oil refineries if it wants to, calling them legitimate military targets, after the United States reportedly urged it not to attack them over concerns about rising oil prices before the upcoming election and the potential for retaliation.
Nonetheless, Russia plans to cut back on oil production and exports. In March, Russian Deputy Prime Minister Alexander Novak said that Russia would cut its oil output and exports by an additional 471,000 barrels per day in the second quarter, after it had already cut oil production by 500,000 barrels per day in the first quarter. If the reduction is implemented as planned, oil production would drop to almost 9 million barrels per day in June. According to Novak, Russia will reduce output by an extra 350,000 barrels per day in April, and exports will be cut from March levels by 121,000 barrels per day. In May, output will be cut by 400,000 barrels per day and exports by another 71,000 barrels per day. In June, all the additional cuts will be from oil output. That is, Russian oil production in April, May and June is set to fall by around 3.6 percent, 4.1 percent and 4.9 percent respectively from March.
Russian oil and gas condensate production have declined from an annual peak of 11.7 million barrels per day in 2019 to around 10.8 million in recent months as a result of coordinated actions with OPEC. According to Novak, Russian oil output was 9.5 million barrels per day in late February. The cuts do not include production of gas condensate, a type of very light oil, which in 2023 was around 1.3 million barrels per day.
Russia Orders 6-Month Ban on Gasoline Exports
Russia ordered a six-month ban on gasoline exports from March 1, just before its mid-March Presidential election, to keep prices stable amid rising demand from consumers and farmers and to allow for maintenance of refineries and repair from outages and Ukrainian drone attacks. Russia and Ukraine have targeted each other’s energy infrastructure to disrupt supply lines and logistics. Exports of oil, oil products and gas are by far Russia’s biggest export, a major source of foreign currency revenue for Russia’s $1.9 trillion economy.
In 2023, Russia produced 43.9 million tons of gasoline and exported about 5.76 million tons, or around 13 percent of its production. The biggest importers of Russian gasoline are mainly African countries, including Nigeria, Libya, Tunisia and also United Arab Emirates.
In January, Russia reduced gasoline exports to non-Commonwealth of Independent States countries to compensate for unplanned repairs at refineries amid fires and drone attacks. Last year, Russia banned gasoline exports between September and November in order to tackle high domestic prices and shortages. This time, the ban will not extend to member states of the Eurasian Economic Union, Mongolia, Uzbekistan and two Russian-backed breakaway regions of Georgia – South Ossetia and Abkhazia.
Western Sanctions Are Beginning to Hurt Russia’s Oil Exports
Recently, Elvira Nabiullina, the governor of the Bank of Russia, said that the West’s tightening of sanctions against the country is hitting its oil export revenue. Secondary sanctions, or trade restrictions aimed at preventing third parties outside the U.S. or EU from doing business with Russia, are hurting its oil export business. Russia has been managing to keep up with its exports by turning to alternative markets such as India and China. But some Chinese banks have halted payments from sanctioned Russian financial institutions. And, other global banks that Russia was using to skirt sanctions are also turning away from doing business with the country for fear of reprisals from the West. As a result, Russian banks and companies are exploring different ways to conduct cross-border payments.
Banks in China, Turkey and the United Arab Emirates (UAE) become wary of U.S. secondary sanctions, resulting in delays of up to several months for Russian oil companies to be paid for their oil. Payment delays reduce revenue and make them erratic, allowing sanction goals to be achieved – i.e., to disrupt money going to Russia because of its invasion of Ukraine while not interrupting global energy flows. Several banks in China, the UAE and Turkey have increased their sanctions compliance requirements in recent weeks, resulting in delays or the rejection of money transfers to Russia. Banks are asking their clients to provide written guarantees that no person or entity from the U.S. Special Designated Nationals (SDN) list is involved in a deal or is a beneficiary of a payment.
In the UAE, banks First Abu Dhabi Bank (FAB) and Dubai Islamic Bank (DIB) have suspended several accounts linked to the trading of Russian goods. UAE’s Mashreq bank, Turkey’s Ziraat and Vakifbank and Chinese banks ICBC and Bank of China take weeks or months to process payments.
On December 22, 2023, the U.S. Treasury Department issued an executive order that warned it could apply sanctions for the evasion of the Russian price cap of $60 a barrel of oil on foreign banks and called on them to increase compliance. Following the U.S. order, Chinese, UAE and Turkish banks that work with Russia have increased checks, started asking for extra documentation and trained staff to make sure deals were compliant with the price cap. Additional documentation can include details on the ownership of all companies involved in the deal and personal data of individuals controlling the entities, so that banks can check on any exposure to the SDN list. In February, UAE banks had to increase payment scrutiny as they were asked to provide data to the U.S. correspondent banks and the U.S. treasury if they have transactions that go to China on behalf of a Russian entity, which meant delays in processing payments to Russia.
Conclusion
Russia is lowering oil output again as it meets voluntary output cuts issued by OPEC+, for which it is a member. The goal is to strengthen oil prices, which are in the mid-$80 per barrel. Russia has also put a 6-month ban on gasoline exports as its refineries are undergoing maintenance and they are making repairs due to outages and attacks by Ukrainian drones. Due to its invasion of the Ukraine, the West placed a price cap on Russian oil of $60 a barrel. They have now issued secondary sanctions that is resulting in Russian oil firms facing delays of up to several months to be paid for their oil as banks in China, Turkey and the United Arab Emirates become more wary of U.S. secondary sanctions.
