OhN 22nd FebruaryTwo days before Russia invaded Ukraine, a German-flagged ship carrying 33,000 tons of oil left the Russian port of Primorsk. When it arrives at the British Oil Terminal Trammer on March 3, it receives an icy welcome. Some dockers refused to unload the goods when they found out where it came from. Similar boycotts have emerged elsewhere. Cairo, a data firm, estimates that the amount of oil “on the water” has risen by about 13% in the fortnight since the attack, largely looking for new buyers of crude Russian goods. The number of ships returning to Russia has also increased.
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Much of what has flowed from Russia in recent weeks has been bought and paid for before the war began. Now less oil is leaving the country in the first place. Concerns about bans and bad publicity have prompted many buyers to stop buying. Kpler, a data firm, claims that Russian oil exports on March 24 were 2.3m barrels (bpd) per day, about 2m below the level of March 1. Failing to sell those barrels, Brent crude is hovering around 5 115. Yet for countries willing to take the risk of repression and jump through the new logistics hoop, Russian oil is beginning to look like a bargain.
Russia’s partial embargo echoed the Western blockade of Iran in the 2010s, which led the Islamic Republic to compile an unparalleled playbook for oil smuggling. In May 2018, the United States imposed “maximum pressure” sanctions aimed at completely shutting down Iran’s oil exports. It has been almost successful: by October 2019 they had dropped to an average of 260,000 bpd from 2.3m before the ban. Since then, though, they have revived somewhat, averaging 850,000 bpd in the three months from February 2022.
Iran sells oil through two channels. The first is through approved but limited sales. The United States has imposed sanctions on eight importing countries. But there is a big catch: buyers must sell in currency and either keep an escrow account in a local bank or spend on a list of locally produced products. This is deeply disappointing for Iran. In December, it was forced to accept tea from Sri Lanka to pay off its 1 251 million oil debt.
Iran smuggles large quantities of oil to avoid sanctions – the second-largest channel of sales. Iranian tankers turn off their transponders and travel toward American enemies, such as Venezuela. Some are repaint to hide their origin. Others move their cargo to the high seas, often at night, on ships sailing under a different flag. Oil is also being pumped over the land by smuggling rings, says Julia Friedlander, a former intelligence officer now a member of the Atlantic Council, a think tank in Washington. Gold, pesticides and even petroleum were exchanged in Tehran with China, Turkey and the UAE against the project. Traders in Dubai, home to half a million Iranians, mix crude oil from the Islamic Republic with other similar grades that they later rebranded as Kuwaiti oil.
Russia is unlikely to pull a page from Iran’s book, mainly because, for the time being, it is not needed. The fines imposed on Iran include secondary sanctions that threaten third-country banks to deal with it with huge fines. This makes buying oil publicly risky. In contrast, Russia faces a weak embargo. Only the United States, which did not buy much in the beginning, has banned its oil. On March 25, Germany said it would halve its purchases, but it was unclear when it would begin. Sales shipped through pipelines, which are less clear than shipments and represent about one-fifth of Russia’s total crude exports, are still flowing. Secondary restrictions were not imposed.
Instead, maritime exports have declined because Western buyers, such as large energy companies, fear a backlash from the public. They face logical headaches because cautious banks reduce credit, shipowners struggle to get insurance and freight costs rise. And every time the sanctions are tweaked, Antonia Genova of Holland & Knight, a law firm, says compliance workers must study hundreds of pages of legality, which makes many Russian agreements worth the hassle. As a result, Ural crude, a grade pumped by Russia, is currently trading at a discount of about $ 31 per barrel. A trader expects the gap to reach $ 40 within a week.
The two big countries that have not joined Western sanctions – India and China – feel a bargain. India, of course, is seizing the opportunity. Loading of Russian ships bound for the subcontinent is expected to reach 230,000 bpd in March, up from nothing in the previous three months (excluding this). CPC, Mainly a mixture of Kazakh and Russian crude). However, India is unlikely to buy much in the short term. About half of its imports come from the Middle East and shipping from the Gulf is much cheaper than shipping from Russia. Payments cannot be settled in dollars, India will have to experiment with the ruble-rupee system (see next story).
At the Oxford Institute of Energy Studies, Adi Imsirovic, now Gazprom’s former oil boss, does not see India buying more than 10m barrels a month. This is small, considering that Russia’s unwanted oil pool is expected to reach 3m bpd in April, according to an official forecast from the International Energy Agency.
Then only China can save Russia. It imports a total of about 10.5m bpd (11% of the world’s daily production). Mr Imsirovich thinks China could opportunistically increase its purchases to 12 million bpd. This may allow to buy 60m from Russia in a relatively short order. It helps that China has plenty of empty storage.
None of this is happening yet. Even for China, transporting oil from Russia has become difficult. Where shipments from Russia to Europe usually take three or four days, in Asia it takes 40. Large tankers need to load oil, which is slow and expensive. Chinese banks lend much less.
Payment is another problem. Hong Kong financiers, who have considerable access to greenbacks, have in the past helped North Korea obtain hard currency. But Russia’s energy deals would be too big to hide in the city’s financial system, a trade lawyer said. And its main regulator cannot turn a blind eye to such transactions, lest they lead the United States to suspend Hong Kong’s ability to clean up the dollar locally, which is the focus of its economy.
One solution, however, is for Russia to use Chinese bank accounts within China to pay in yuan. Those accounts can then be used to finance the importation of necessary goods, avoiding the cross-border level of trade accounting.
China may also be setting its time. Even with the additional cost, buying Russian oil will save a lot of money. And Chinese traders know a bargain when they see one: during the cowardly-induced recession of 2020, when oil prices reached close to single digits, they stockpiled up to gills. Ural discounts will increase as Russia’s business position weakens. So will China’s purchases.
Such a move would not be easily reversed. Most refineries are configured to produce certain types of crude ghazals, which means it takes time and money to switch from a high-sulfur Ural variety to a super-light in Saudi Arabia. It turns out that Russia’s push for Asia and Europe’s shock for supply could reshape the world market. Most of the North Sea oil usually flows eastward; Most of it may now be in Europe. The continent will probably buy more from West Africa and America and increase imports of sulfur-rich grades from the Gulf. The rest of the world শিয়া including Asia — must be content with what Europe does not want. Oil from the Brazilian hat field is already traded at Brent at twice the usual premium.
The result of this more fragmented global oil-trading system would be structurally higher prices for importers. Until the war, petroleum usually flowed smoothly from the oil field to the fuel tanks for which it was most needed. Now, Trafigura’s Ben Luck says, a trading firm, that fine-tuning system has been disrupted. 3
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This article is published in the Finance and Economics section of the print edition under the heading “Tactics”.