Lights illuminate a gas drilling rig on the Gazprom Chayandinskoye oil, gas and condensate field, a resource base for the Power of Siberia gas pipeline, in the Lensk district of the Sakha Republic, Russia, on Oct. 13, 2021. (Andrey Rudakov/Bloomberg)
Senior aides to President Joe Biden believe Russia is suffering a dramatic decline in oil sales that stands to deprive the Kremlin of a key source of government revenue, according to a senior administration official and one person briefed by a senior administration official, both of whom spoke on the condition of anonymity to share an assessment not yet made public.
The Biden administration is examining private industry data showing that sales of Russian crude oil by vessel have gone from roughly 2 million per day to close to zero from the period between March 15 and March 20, the people said. The official said more than 2 million barrels of Russian oil sold per day have been taken out of the market and that Asian buyers are not stepping in to fully fill the gap.
But some analysts believe that Russia will continue to sell huge quantities of oil that will help Moscow fund its invasion of Ukraine — arguing that Congress, the administration and Europe could take more aggressive action to curb sales of Russian energy.
The administration’s assessment suggests the war in Ukraine and the global response to it may already be dealing a debilitating blow to Moscow’s energy exports. Oil sales are the single biggest source of revenue for the Kremlin, accounting for as much as 40 percent of the Russian government’s entire budget, according to Russia’s Ministry of Finance.
Energy experts are divided on the extent to which Russian oil sales have been affected by the war in Ukraine and the countermeasures launched by the U.S. and its allies. President Biden announced a ban on Russian oil and gas to the U.S. earlier this month, but America consumes only a small amount of Russian energy, and the effect of its prohibition is likely minimal. The European Union also announced a plan to cut its imports of Russian energy by two-thirds, but that proposal is largely aspirational and faces resistance among some of the European countries necessary to implement it.
Instead, the key phenomenon hurting the Russian oil industry is what experts refer to as “self-sanctioning,” as private traders refuse to buy and sell the product even though western sanctions were designed to allow them to continue to do so. Oil traders have said they are voluntarily turning down Russian oil in part because of the uncertainty of future western sanctions, and in part because they do not want to be seen as providing financial support for Russia’s intervention in Ukraine.
The trend could still reverse itself as private actors digest the new international rules, but if it persists would represent a major disruption to global energy markets and the world economy. Russian oil production accounts for roughly 11 percent of the world’s total oil supply — at a time when the White House has grown deeply concerned about the impact of rising energy prices on American consumers.
White House officials are closely monitoring the situation and note that it could change, according to the senior administration official.
“What really matters is that many oil refiners and traders are refusing to buy Russian oil — to touch it — and if that continues and expands then you’re going to see Russian supply go down by a lot,” said Bob McNally, an energy analyst at the Rapidian Energy Group.
The International Energy Agency on Thursday forecast that Russian oil exports are expected to decline by as much as 3 million barrels per day starting next month, which would represent a nearly 40 percent decline in Russia’s daily oil exports.
Similarly, the firm Energy Aspects says that Russia’s daily crude oil exports could fall by 1 to 1.5 million barrels per day by April compared to levels in January. Russia exports oil by sea and by pipeline — Energy Aspects expects pipeline flows to continue uninterrupted, but for waterborne exports to face major disruptions.
“We are expecting from April at best half of the exports to be moving,” said Amrita Sen, head of research at Energy Aspects. “Europe is choosing not to buy and China so far is not buying the other stuff. ... It will get harder and harder to move this oil around.”
The extent to which this trend will persist remains unclear. Many other industry analysts believe there will be much less disruption to Russian sales. They have raised the prospect that despite causing a temporary disruption, the limitations of the western sanctions will allow Russia to keep making billions of dollars in oil sales to fund its war effort in Ukraine.
Some private sector data, such as that released by the oil industry analysis firm Petro Logistics, has found that Russian oil sales increased in March. Petro Logistics found that exports to the port of Rotterdam in the Netherlands rose by 49 percent in March compared to the 2021 average. India is importing Russian crude oil for the first time since November, and China also appears to be increasing its imports. These transports may reflect prior commitments, but still suggest Russian energy operations are ongoing.
“Ultimately there is enough demand for oil — enough folks who need and want oil around the world, including countries outside the sanctions coalition — that eventually that oil will be bought up,” said Eddie Fishman, a former State Department official who worked on Russia sanctions policy during the Obama administration and is now at the Center for a New American Security.
Further complicating matters is the unease in Eastern Europe about the crackdown on Russian energy. Some eastern European countries depend on Russian gas and oil for as much as 70% of their energy needs. Internal frictions will make it increasingly difficult for Europe to remain united, particularly as refugees pour out of Ukraine and strain their domestic economies.
With Russian oil already trading at $20 or $30 per barrel off the market average, lesser-known firms may exploit the difference to buy up the discount. But prices are at historic highs, so Russia may still be able to reap a substantial windfall even at the lower rates — which could help fund the war effort. Russia’s military buildup tracks closely with the increase in its oil revenue, according to Robbie Diamond, founder and president of Securing America’s Future Energy, an advocacy group.
“This arbitrage, which is very real, will gravitate toward the darkest parts of the industry — actors who don’t have reputation, or operations in the west subject to seizures or sanctions. We’ve already seen this in the past,” said Daniel Ahn, global fellow at the Wilson Center, a Washington-based think tank. “Small unknown agents can emerge out of the forest to take advantage.”
Some experts believe America should use the current uncertainty to push harder to ensure that Russian oil sales are devastated. Fishman, the former State Department official, said the U.S. could move to impose what are known as “secondary sanctions” — which would cut third parties off from the U.S. financial system unless they stop trading with Russian oil firms. Congress can pass legislation to enable the administration to do so.
“Some of the stigma around Russian oil is probably going to be temporary,” Fishman said. “I think it’s worth asking why [the U.S. is] not doing more.”
America, working with other parts of the world, has crippled foreign adversaries’ oil production in the past. Iran went from about 6 million gallons of oil per day to closer to 500,000 after the Islamic Revolution, in 1979. Venezuela went from about 3 million gallons per day to under 1 million now. Iraq suffered similarly dramatic declines.
But even if the West can hurt a rival’s energy production, it’s not clear they achieved their overall aims. Iraq’s government was not toppled until a U.S. military intervention, and neither was Libya’s. Iran and Venezuela did not overthrow their governments.
“The U.S. and the West can impose crushing sanctions ,,, but the declared goal is a change in international behavior,” said Ariel Cohen, a senior fellow at the Atlantic Council Eurasia Center and a member of the Council on Foreign Relations. “The question is if we can force Putin to stop this war for his own survival and the well-being of his own people. Without some painful battlefield outcomes on the ground — or a massive negative reaction at home — it may not be possible.”
