How Russia is managing to sell the oil and gas no one wants to buy

Putin’s invasion of Ukraine in February unleashed a torrent of sanctions and ill will against Moscow. Governments and businesses severed commercial ties with Russia to express their outrage and to punish Moscow for the unprovoked attack. But for all the tough rhetoric about abandoning Russian energy, Russia is still managing to sell its oil and gas by slashing prices, setting up financial work-arounds, and leveraging its position as the world’s largest exporter of such products.

Everyone loves a bargain

Since Feb. 24, when Russian forces first attacked Ukraine, the price of oil outside Russia has skyrocketed over fears of supply disruptions and shortages. Both West Texas Intermediate and Brent crude soared to 13-year highs of $130 and $139 per barrel respectively in early March. Now U.S. crude oil is hovering around the $100 mark, 40% higher than in mid-December, when the U.S. first warned that Russia may attack Ukraine.

At the same time, Russian Urals—the benchmark for Russian crude—now costs roughly $80 per barrel, $20 cheaper than U.S. crude, says Henning Gloystein, director of energy, climate, and resources at geopolitical advisory Eurasia Group. “Russian firms wouldn’t be offering [discounts] if they had no trouble finding buyers,” Gloystein notes. The last time Russian Urals crude was this cheap was the spring of 2020, when the COVID-19 pandemic slowdown in energy consumption resulted in a supply glut.

But Russian oil is still flowing, in part owing to deals made prior to Russia’s invasion of Ukraine. Last month, Russia’s seaborne crude exports—which doesn’t include Russian oil exports via pipeline—averaged 3.28 million barrels per day, the highest monthly average since last October, according to commodity market data provider Kpler.

Some countries also are brokering new deals for Russian crude. India, for instance, is eager and willing to buy Russian oil, particularly at new, lower prices.

Last year, Russia accounted for 2% of India’s oil purchases, and in January and February this year, India didn’t receive any Russian crude. But in recent weeks, top state refiner IndianOil bought 3 million barrels of Urals—its second Urals purchase since Russia attacked Ukraine—while Hindustan Petroleum snagged 2 million barrels, according to Reuters. India’s crude purchases this year—8 million so far—puts the country well ahead of its 2021 pace. India imported 12 million barrels of Russian crude all last year, says Matt Smith, lead oil analyst at Kpler.

India has bought Russian crude publicly, even amid international pressure to dial back reliance on Russian energy. India has maintained a neutral stance toward Russia’s aggression in Ukraine and has vowed to prioritize its own interests: “Energy security [comes] first. If the fuel is available at a discount, why shouldn’t [we] buy it?” India’s finance minister, Nirmala Sitharaman, said at a CNBC event on Friday. “We have started buying…[and] have received quite a number of barrels. This will continue.” According to a Bloomberg report last week, Russia now is offering India an even bigger discount on crude, slashing the cost by as much as $35 a barrel.

Russian Foreign Minister Sergey Lavrov, who visited India last week, said on Thursday that Russia and India will find ways to continue to trade despite the West’s “illegal” sanctions.

Some international companies, trading houses, shipping firms, and banks have shunned Russian energy, drying up new deals for Russian crude, says the International Energy Agency (IEA). “More uncertainty centers on seaborne exports, which typically involve intermediaries” like lenders, insurers, and shippers who are “wary of sanctions exposure and risk to reputation,” Ben Cahill, senior fellow in the energy security and climate change program at the Center for Strategic and International Studies (CSIS), wrote in a March 25 note. But some Chinese, European, and Asian firms continue to snap up Russian oil and gas. European commodity traders like the Netherlands’ Vitol and Singapore’s Trafigura are locked into long-term contracts, while China’s independent and state-owned companies are finding sanctions work-arounds to keep buying Russian pipeline and seaborne crude.

Some Chinese oil refiners that fear secondary sanctions are purchasing Russian oil under the radar by negotiating privately with Russian sellers and using less conspicuous buying methods like trading in RMB or rubles, according to Bloomberg. Some Russian oil producers and sellers are offering flexible credit and payment terms to lure buyers. Surgutneftegas, one of Russia’s top oil and gas firms, for instance, is shipping oil to mainland Chinese firms without first receiving letters of credit, which guarantee the importer’s payment, since banks have stopped issuing them owing to sanctions, says Reuters.

China will work with Russia to find “some informal or alternative payment mechanism,” says Smith. “We’ve seen China do this multiple times with the likes of Angola and Venezuela via crude-for-debt swaps.”

Other Asian oil importers have indicated interest in Russia’s discounted offerings. Nicke Widyawati, the CEO of Indonesia’s national energy firm Pertamina, said on Monday that the company sees an opening to buy oil from Russia at a “good price.”

Few alternatives

For all of the West’s criticism of Putin and sanctions against Russia, Western allies like the EU and Japan haven’t ended their dependence on Russian energy just yet.

The U.S., Canada, the U.K., and Australia have banned Russian oil outright, but they have more alternative energy sources. The U.S., for instance, received only 3% of its crude imports from Russia last year; the bulk—around 61%—came from Canada, while Mexico and Saudi Arabia account for 11% and 8%, respectively.

The EU has announced plans to slash Russian gas imports by two-thirds within a year, and its 27 member nations are set to release a proposal in mid-May that will outline plans for cutting Russian oil, gas, and coal completely by 2027. But the EU imported $108 billion in Russian energy last year, which accounted for 25% of the bloc’s crude oil imports, 45% of its gas, and 46% of its coal. The bloc’s heavy reliance on Russian energy means that its member nations are divided on how exactly to turn off the Russian energy tap. Lithuania and Finland—countries previously reliant on Russian crude—have turned to other sources, but larger importers like the Netherlands are “still taking Russian barrels and pivoting [away from Russia] to a lesser extent,” Smith says.

In the six weeks since Russia invaded Ukraine, the EU has forked over $21.6 billion for Russian oil, gas, and coal, a sum that’s equal to one-fifth of the bloc’s 2021 spend on Russian energy, according to the Switzerland-based Centre for Research on Energy and Clean Air. Many European leaders have argued that their countries can’t ban Russian oil altogether because it would harm citizens already grappling with high gas prices and inflation. For Germany, which receives over half of its gas from Russia, an immediate blockade of Russian energy “would mean plunging our country and all of Europe into recession,” Chancellor Olaf Scholz said in late March.

Russia, for its part, has warned that the world could see oil prices hit $300 a barrel if Western countries reject Russian oil entirely.

In Japan, the country’s largest refiner, Eneos, has temporarily suspended new contracts to buy Russian crude, but the resource-poor nation has been unable to wean itself off Russian energy completely. Japan has refused to pull out of Russian oil and gas ventures like the Sakhalin-2 liquefied natural gas (LNG) project, which is 50% owned by Russian state-run energy firm Gazprom and counts Japan’s Mitsui & Co. and Mitsubishi Corp. as major investors. The LNG pipeline is slated to produce 10 million tons of LNG every year, equal to 10% of Japan’s annual gas imports. The project is “extremely important…for Japan’s energy security [and will] contribute to [a] long-term, stable, and low-price supply of LNG,” Japanese Prime Minister Fumio Kishida said last Thursday. “It is not our policy to withdraw,” he said.

Funding a war machine

Russia’s ongoing sales of oil and gas are contributing directly to its war in Ukraine, critics say. Russia’s oil and gas revenue last year added $119 billion to Kremlin coffers, helping fund the country’s military expenditures of roughly $62 billion per year.

“Since the invasion…oil and gas prices have increased. From [Putin’s] perspective, his war is paying for itself,” Oleg Ustenko, economic adviser to Ukrainian President Volodymyr Zelensky, wrote in the New York Times.

On Tuesday, Russia’s finance ministry said the country earned $3.6 billion in oil and gas revenue in March, 38% lower than forecast, but the government expects $9.6 billion in energy revenue in April owing to higher oil and gas prices.

Energy deals are helping the Russian ruble rebound since they mean hard currencies like the U.S. dollar and euro are flowing back into the country. In February, Russia’s central bank passed a rule that requires domestic energy exporters to convert payments in foreign currencies back into rubles, helping prop up the currency.

As the war drags on into the sixth week, many are calling on the West—Europe in particular—to do more to hobble Russia’s energy sector. As Charles Lichfield, deputy director of the Atlantic Council’s GeoEconomics Center, wrote in a March 29 note: “Moscow will continue to have economic trump cards unless the westward flow of natural resources is severely curtailed.”