For decades, Europe has been the mainstay of Russia’s foreign trade and one of its most important trade partners.
In recent years, Russia has sold a large part of its most valuable export products, i.e. fossil fuels, to Europe. About two-thirds of Russian gas and more than half of Russian oil have gone to Europe.
Now the situation is different. With the war, Russia has lost its best customer, said the Director General of the International Energy Agency IEA Fatih Birol In an interview with at the beginning of October.
From the point of view of the Russian economy, the big question is where it can sell its fossil fuels – especially oil – when the route to Europe is about to close almost completely. In December, the EU import ban on Russian oil comes into force, and in February, the import ban on oil products such as diesel.
Where will Russia find “new friends” to replace the gap left by the EU?
The question is also essential for the progress of the war. President of Russia Vladimir Putin finance the war in Ukraine, especially with the income that Russia gets from selling fossil fuels to the world.
The direction has turned to Asia
Russia has not released foreign trade statistics since it invaded Ukraine in February. However, different estimates of trade flows have been made based on other countries’ import statistics and, for example, movements of oil tankers.
The direction of Russian fossil fuels seems to have already partly turned towards Asia, although as recently as September the EU countries were together the largest buyer of Russian fossil energy, according to the statistics compiled by CREA (Center for Research on Energy and Clean Air), an independent research center registered in Finland.
CREA’s analysis is based on oil tanker movements, natural gas pipeline flows and, for example, Eurostat statistics.
According to CREA, in September, EU countries imported crude oil, oil products, liquefied natural gas and natural gas via pipelines for around 260 million euros per day. However, the numbers have clearly decreased.
Especially India, China, Turkey, Malaysia, the United Arab Emirates and Egypt have increased their purchases from Russia, says CREA’s leading analyst Lauri Myllyvirta.
The countries have especially bought more Russian crude oil. It has been obtained from the world market at an affordable price and transporting oil from one continent to another has so far been successful by sea. For example, before the Russian invasion, India did not buy much Russian oil.
Senior Economist Heli Simola The Bank of Finland’s research institute for emerging economies says that the increase in purchases of Russian oil in China and India is not surprising.
– China and India are very large consumers of crude oil. These countries have also benefited from this situation, when Russian oil has been obtained at good discounts. It has attracted to buy more oil from Russia.
Deal with the Taliban, supplies to Sri Lanka
Russia has tried to sell its oil also to smaller countries and the most unusual trading partners.
In September, Russia was told that a contract had been made (you switch to another service)With the Taliban for fuel and, for example, grain deliveries. The Taliban is an extremist movement that currently rules Afghanistan.
Russia has also sold its oil to Sri Lanka, which is mired in economic crisis, and has had a shortage of fuel. According to the Financial Times (you will switch to another service) oil deals between Russia and Sri Lanka are the first since 2013.
Russia is also negotiating with Indonesia, says Heli Simola from the Bank of Finland’s Research Institute for Emerging Economies.
– Russia is trying to find new buyers for its oil with various discounts, contracts, national currencies and other such methods.
It is very difficult to replace Europe’s role
However, Asian countries cannot find a long-term solution for Russia. According to Simola, they cannot replace the European market on a large scale.
The outlook for oil exports is not bright for Russia anyway. The fact that it is Europe that stops importing Russian fossil fuels will have a huge impact on the Russian economy, says Lauri Myllyvirta.
– Europe has been the actor that has been ready to invest in Russian oil production, export technology there and invest in oil pipelines. There is no replacement in sight.
What will happen to Russian oil when the EU import ban comes into effect?
The oil can be traded somewhere, because there is enough demand for oil worldwide, Myllyvirta emphasizes.
Even the Western countries that impose sanctions do not want Russian oil to be completely wiped off the world market. Then the price of oil in general would rise significantly, and it would quickly be reflected in consumer prices as well.
Myllyvirta estimates that Russia’s oil exports to, for example, Turkey, Egypt, India and Malaysia will continue to increase after the EU’s import bans come into effect. According to Myllyvirta, Russia will hardly be able to sell more oil to China, because the logistical limits will meet.
The more important question, on the other hand, is the price at which Russia will be able to trade its oil in the future and what will happen to its export earnings.
According to Myllyvirta, it is clear that the price that Russia can get for its oil will still drop significantly.
A Russian oil price cap would have a big impact
Russia’s income from oil exports is greatly affected by when the Russian oil price ceiling tentatively agreed by the group of leading industrialized countries G7 comes into force and whether large oil-consuming countries such as India and China join it.
The idea of the ceiling is to set a certain maximum price at which Russian oil is agreed to be purchased. The purpose is to affect the trade between Russia and countries outside the EU and reduce Russia’s income from oil exports. A price ceiling is an effective weapon, if it can be made to work.
The G7 countries agreed on the preparation and implementation of the price ceiling at the beginning of September.
Russian oil exports are hampered in other ways as well.
In June, the EU decided to ban financing and insuring Russian oil shipments. Great Britain is also supposed to join the ban on insurance activities, which would make it very difficult to insure tankers transporting Russian oil.
The ban on insurance is now being reconciled with the price ceiling that is being prepared.
Next year, Russian exports are estimated to plunge
After the war, Russia clearly benefited from the rise in energy prices and therefore managed to increase its export earnings. Now, however, the export income from fossil fuels has declined, and next year the entire Russian export is estimated to plunge.
The Bank of Finland predicts that Russia’s total exports will shrink by an exceptional amount next year, 10 percent.
The EU countries and other western countries are hardly going to return to their former trade relations with Russia. That is why Russia is now trying to build long-term trade partnerships. However, it will be difficult, experts estimate.
– Russia has shown that it cannot be trusted even as a trading partner, says Heli Simola.
Russia has clearly and openly used fossil exports as a weapon against Europe, Lauri Myllyvirta also emphasizes.
– It acts as such a big deterrent for other countries that they don’t want to build the kind of dependence on Russia that Europe has had. Nor do the leaders of China have a naively gullible attitude towards Russia.
The subject can be discussed until 23:00 on October 26.
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