Limited offer: how Russia is going to revise the pricing policy for its oil

The Russian Federation has largely managed to divert its oil exports to alternative routes amid restrictions imposed by the EU and G7 countries.

This is stated in the report of the European Commission published on Monday, February 13.

“Russia appears to have been able to successfully redirect the bulk of its crude oil supplies to buyers such as China, India and Turkey, but is now forced to offer deep discounts.

By the end of January, Russian Urals fell to $60 per barrel compared to $65-70 in November and was sold at a $25 discount to (reference grade -

) Brent, ”the EC noted.

Recall that after the start of a special military operation in Ukraine, European countries, together with the United States and other allies, began to impose large-scale economic sanctions against Moscow.

In particular, Western states began to gradually refuse to purchase Russian oil.

Moreover, since December 5, the European Union and the G7 have banned their companies from insuring and transporting raw materials from the Russian Federation by sea to other regions of the world at a price higher than $60 per barrel.

Since February 5, similar restrictions have been applied to oil products sold by Russia for more than $45 and $100 per barrel, depending on the category of fuel.

As the authorities in the West have previously explained, the establishment of price ceilings is intended to limit Moscow's excess profits from the sale of hydrocarbons, but at the same time ensure the continued flow of Russian fuel to the world market.

The leadership of the Russian Federation, in turn, has repeatedly warned about the risks of such restrictions for the global energy market and promised to cut off supplies to anyone who would support the sanctions.

Since February 1, Russia has officially banned the sale of its crude oil to countries that require compliance with the price ceiling when concluding contracts.

In the near future, the same measures will have to apply to the export of petroleum products.

Moscow, meanwhile, continues to seek and find new markets, as reported by Deputy Prime Minister Alexander Novak.

“This year it is planned to send more than 80% of oil exports and 75% of oil products to friendly countries.

As for supplies to states that maintain illegitimate price restrictions, here our position is widely known and remains unchanged: such countries will not receive Russian oil, ”Novak wrote in an article for the Energy Policy magazine.

At the same time, as the deputy chairman of the cabina noted earlier, the cost of transporting Russian oil to new directions has increased markedly.

This is largely due to the fact that the duration of routes has increased and the risks for transport companies that transport raw materials from the Russian Federation, bypassing Western sanctions, have increased.

In such circumstances, Moscow has to make discounts to attract customers and fight competitors for buyers.

• Deputy Prime Minister of the Russian Federation Alexander Novak

• RIA News

• © Grigory Sysoev

Although the discount allowed Russia to maintain significant volumes of physical exports, the country's budget has recently begun to receive less revenue from the sale of raw materials.

In turn, some buyers of Russian oil began to take big discounts for granted, experts say.

Against this background, Moscow decided to reduce oil production by 500 thousand barrels per day to restore market relations with partners.

“Such a decrease in the production of raw materials will not be critical for the Russian oil and gas industry.

The decision can be called forced given the current difficulties, but for buyers this is a definite signal that the time for very large discounts on oil from Russia is probably ending, ”said Artyom Deev, head of the AMarkets analytical department, in an interview with RT.

According to Reuters, to date, other oil exporting countries from the OPEC + alliance are not yet going to increase production and thereby compensate for the falling volumes of Russian raw materials.

As a result, experts believe, there will be less available hydrocarbons on the global market, which may result in an increase in world prices for energy resources.

“On the one hand, Moscow makes it clear that it does not intend to sell oil with price restrictions and is ready to reduce the production of raw materials.

On the other hand, a decrease in oil production in the Russian Federation will slightly change the balance of supply and demand in the world market, and this will lead to an increase in oil prices.

Therefore, even taking into account the discount, Russian oil will also begin to rise in price, ”Vladimir Chernov, an analyst at Freedom Finance Global, explained in a conversation with RT.

A similar point of view is shared by Vasily Karpunin, Head of Information and Analytical Content at BCS Mir Investments.

According to him, Russia's actions mean a reduction in world oil production by about 0.5%, which could result in a more tangible rise in prices.

“This factor can partially compensate for the shortfall in income from the reduction in production for Russian oil companies.

Of course, the measures taken are positive for the budget, ”the source added RT.

Price recalculation

Along with the reduction in production, Russia is also going to update the way it calculates the price of its oil when taxing companies.

Such an instruction was given to the government by President Vladimir Putin back in January.

It is assumed that the initiative will minimize the negative impact of current market conditions on federal budget revenues.

According to the Ministry of Finance of the Russian Federation, in January 2023, a barrel of Russian Urals oil was sold even cheaper than the level recorded by the European Commission and cost $49.48 on average.

Moreover, at the same time, the benchmark Brent was trading at $83.09 per barrel on the global market, according to the World Bank.

The current situation has led to a sharp reduction in oil and gas revenues of the Russian budget.

According to the Ministry of Finance, in the first month of 2023, the state treasury received 426 billion rubles from the sale of hydrocarbons, which was almost two times (46%) less compared to the same period in 2022.

• RIA News

• © Vladimir Baranov

Under these conditions, Vladimir Putin asked the government to take measures so that the discounts provided by Moscow "do not create any problems with the budget."

According to experts, changes in the system of taxation of the oil business will partly help improve the filling of the treasury.

“The Ministry of Finance sets the amount of export duty and mineral extraction tax (MET) based on the average oil price.

That is, the more expensive the raw material, the more money goes to the budget.

However, the price of oil itself depends on the grade and place where it is produced, ”Igor Yushkov, a leading analyst at the National Energy Security Fund, told RT.

According to him, today the information on the average cost of Urals oil is provided to the Russian Ministry of Finance by the international analytical agency Argus.

The company makes its calculations based on a survey of traders, at what approximate price do they buy raw materials from Moscow.

But the collected data relate only to sales in the European market, which has now lost its relevance for Russia.

“The Urals brand indicator does not reflect the real price at which Russian oil is exported, because exports through different ports and in different directions may vary.

And we see how these prices have diverged,” Elvira Nabiullina, chairman of the Central Bank of Russia, said on February 10.

Thus, the real cost of oil sold may be higher than the official $49.48 per barrel.

This means that the state now earns less from taxes than it should, experts say.

To solve the problem, the government proposes to link the cost of Russian Urals oil to the benchmark Brent.

The Ministry of Finance submitted a bill on this to the State Duma the day before.

According to the document, if in April the discount for Urals oil exceeds $34 per barrel from the average Brent price, the authorities will calculate the severance tax and value added tax (ATT) based on the cost of Urals with a $34 discount from Brent.

In May, when taxing, the price of Urals will be taken into account as the cost of Brent minus $31, in June a discount of $28 will begin to apply, and in July - $25.

• RIA News

• © Vitaliy Timkiv

Finance Ministry experts believe that the transition period for applying discounts to the price of Brent will allow oil companies to adapt to the application of the new tax calculation procedure.

According to Vladimir Chernov, if the law is adopted, Russian suppliers will have to independently reduce the discount on the oil they sell.

Otherwise, businesses will have to pay additional tax deductions from their own funds, the specialist emphasized.

“As for the budget, for the current year it included the price of Urals $70 per barrel.

It turns out that with a discount of $34 for the planned filling of the budget, Brent oil should cost $104 per barrel in April, $101 in May, $98 in June, and $95 in July.

In principle, the values ​​are quite real, and if demand for energy resources continues to recover in China, then in these months the budget has a chance to reach a surplus,” Chernov concluded.