Kyiv School of Economics (KSE) has released its latest December issue of the Russian economic chartbook, an extensive 35-slide drill down into the Russian economy and one of the best independent sources of the developed of Russia’s economy in war time. Download the full report here.

Effectiveness and credibility of energy sanctions remain on the line. October-November data suggest that Russia’s crude oil exports are increasingly slipping beyond the G7’s reach. First, compliance with the price cap appears to have been virtually zero in recent months. Second, Russia’s reliance on its “shadow fleet” continues, meaning that the cap’s leverage is fading quickly. Recent steps on stepped-up enforcement are encouraging, but more will be needed to impact Russian macroeconomic stability.

Higher oil export earnings reduce external pressure. Following a period of low export earnings as wide discounts on Russian oil weighed on prices, we observe a gradual improvement in recent months. The overall current account surplus increased moderately, partially driven by higher goods exports, resulting in higher foreign currency inflows into the Russian economy. Together with the CBR’s interest rate cumulative hike by 850 bps and re-introduction of capital controls, this has helped to stabilize the ruble.

Subsiding macroeconomic pressure creates more policy space. On the fiscal side, revenues from oil and gas rebounded strongly due to higher export prices, robust volumes, and the weaker ruble. At the same time, non-O&G receipts are up as Russia’s economy has proven to be resilient and bounced back from the initial shock from the war and sanctions. Russian authorities will likely be able to broadly fulfill the deficit target for this year, leaving macro buffers intact and allowing sharp increase of war spending next year.

Bold action is urgently needed to maintain pressure on Russia. Sanctions have put a heavy burden on Russian macroeconomic stability in the first half of the year, but their effect appears to be increasingly in question. In particular, the October-November data confirm that problems with price cap enforcement are much bigger than previously expected. We propose three concrete steps that can quickly and effectively address these challenges—and make sure that Russia’s policy space remains constricted.

(1) G7/EU authorities should ensure that authorities have sufficient information to determine if the price cap is complied with.

(2) EU coastal states should leverage geographical “choke points” to limit Russia’s ability to use a shadow fleet of tankers.

(3) Price cap coalition countries should step up penalties on entities that violate the price cap or facilitate such violations.

Widespread violations of the price cap sanctions

• In October-November, more than 99% of seaborne crude oil exports appear to have been sold above $60/barrel.
• At the same time, one third of the total volume was shipped with the involvement from G7/EU service providers.
• This points to very low compliance with the price cap, likely via falsified pricing information (attestation fraud).

1223 Russia Seaborne exports of Russian crude oil in October-November 2023 by price and service provider KSE

Energy sanctions, in particular the EU embargo, weighed on Russian exports via sharply wider oil price discounts. However, the Urals-Brent spread has narrowed from $40/barrel in January to around/below $15/barrel in H2 2023. The moderate widening in November may indicate that recent G7 price cap enforcement efforts have an effect.

Russian oil exports fell somewhat in November – down 2.7% vs. September-October to 7.2mn barrels/day. Lower shipments to India (1.4 mbd in November vs. 1.8 mbd in October) as well as China play a key role. KSE believes that higher prices for Urals as well as somewhat stronger price cap enforcement are behind this.

After exceeding $18bn in the two previous months, Russia oil export earnings decreased to $15.2bn. At the same time, the weaker ruble is supporting budget revenues from oil extraction taxes and export duties. Ukraine’s allies urgently need to take action to improve enforcement and preserve the price cap’s leverage.

1223 Russia Oil export & federal budget earnings, in US dollarbn Dec23 OOTT KSE

Weaker external environment than in 2022

Higher oil earnings have not led to a meaningful increase in total exports, which continue to fluctuate at suppressed levels. With imports broadly stable, this has resulted in a trade surplus of around $10bn per month in January-October 2023. Altogether, the external environment remains much less supportive than last year, but far from any critical pressure.

1223 Russia macro trade Monthly trade statistics, in US dollarbn KSE

The overall current account surplus fell at the end of 2023 in line with goods trade dynamics, significantly limiting FX inflows. While the surplus bounced back moderately to $17.0bn in Q3 2023, it remains 78% below its peak in Q2 2022. This improvement was driven by a larger goods trade surplus but also a much smaller income and transfers deficit.

In KSE’s December updated forecast, oil and gas exports will reach $225bn in 2023, $186bn in 2024, and $176bn in 2025. Considering the Q3 2023 outturn of current account components, KSE projects an overall surplus of $55bn for 2023.

1223 Russia macro trade current account surplus in US dollarbn KSE

1223 Russia macro trade current account oil adn gas earnings in US dollar billion KSE

Due to the shrinking deficit, Russia decreased reliance on key financing channels—National Welfare Fund (NWF) withdrawals and OFZ issuance. New issuance of domestic debt (OFZ) was RUB2.4 trillion in January-November 2023, less than in Q4 2022 alone. At the same time, the NWF only sold assets worth RUB560bn rubles to support the budget (vs. RUB3 trillion in Q4 2022)

 

The Kyiv School of Economics (KSE) is a bne IntelliNews media partner and a leading source of economic analysis and information on Ukraine. This content originally appeared on the KSE website.