Russia reportedly prepares to lift fuel restrictions

Russia reportedly prepares to lift fuel restrictions
The Russian government will lift a ban on the export of oil products only two months after imposing it. / bne IntelliNews
By bne IntelliNews November 13, 2023

Russian fuel producers have been informed by the government that they should get ready for the lifting of restrictions on diesel and gasoline exports, less than two months after the measures were introduced, Reuters reported on November 8.

Russia, traditionally the largest exporter of seaborne diesel cargoes, imposed a ban on fuel exports on September 21 following a spike in domestic prices to record highs. The crisis in fuel prices was caused by an array of factors – increased fuel demand needed for Russia’s war in Ukraine, refinery maintenance during the summer and higher international prices. But the consensus among analysts is that a critical cause was the government’s reduction in subsidies to refiners at the start of September. These subsidies give refiners an incentive to supply more fuel to the domestic market rather than exporting it. 

The government already eased the restrictions on October 6, permitting diesel exports by pipeline to be resumed. But the ban on gasoline exports remains unchanged, applying to all deliveries of the fuel abroad by pipeline, truck and rail.

Energy Minister Nikolai Shulginov signalled on November 7 that Russia was considering ending the ban on exports of certain grades of gasoline. “They told the producers that exports will be opened up from next week,” one source at a Russian oil firm told Reuters. Another industry source confirmed this.

"They promised to lift the export ban next week. In regards to this promise, we have formed an export schedule and a plan for refining," the second source said.

Authorities are discussing with oil companies the potential lifting of the export ban on AI-92, but the restriction on AI-95 gasoline will remain in place, Russian state news agency Interfax reported on November 7.

Russia exported 35mn tonnes of diesel in 2022, of which three-quarters was delivered to market via pipeline. The country also delivered 4.8mn tonnes of gasoline abroad that year.

Shedding light on the decision to lift gasoline restrictions, one source said that the measures had caused a glut in supply on the domestic market, at a time of year when demand is usually low.

Russian online newspaper The Bell noted that the fuel crisis resulted in a tactical victory for the Russian oil industry. In early October, the government agreed to restore subsidies to encourage more domestic supply. It was clear that the ban would not last long, the newspaper said, as a long-term restriction would have risked irreversible consequences for oil companies’ production cycles. 

According to The Bell, the main loser from the crisis was the Russian finance ministry, which has the difficult task of limiting Russia’s budget deficit this year to 2% of GDP. Rising international oil prices, the weakening of the ruble and the rise in domestic fuel consumption caused subsidies to refiners under the so-called damper mechanism to increase significantly in recent years. In 2022 they reached a record RUB2.2 trillion ($24bn). The ministry adjusted the mechanism several times over the last year. But in August, the last month prior to the subsidies being halved, the payments still amounted to over RUB180bn.

After its attempt to slash refinery subsidies was shot down, the finance ministry is now looking to raise mineral extraction tax (MET) for Gazprom, according to The Bell. But lobbyists for the natural gas producer are pushing against this. And in any case, the hike in MET would only bring in RUB70-80bn annually. In contrast, damper mechanism payments are expected to amount to RUB150bn per month from November, the newspaper reported.

Russia’s oil and gas industry pays more tax than the sector in most other major producing-countries in the world. But the finance ministry is now under heightened pressure to extra budget revenue in light of the high cost of the war in Ukraine and the economic fallout from Western sanctions. Any measures it proposes to do so will face tough opposition from the industry and the Russian energy industry. And there is also a sound argument that increasing the tax burden too greatly would undermine investment, hinder production and therefore limit tax revenues in the long term.

Adjustments to fuel subsidies are particularly difficult to implement for the ministry, as the government is under pressure to keep domestic prices low to avoid increasing costs for both households and businesses. Because of Russia’s relatively low GDP per capita means that fuel prices must be kept significantly lower than export prices, which creates an unavoidable tension between protecting the interests of the populace and general economy, and those of the oil industry.