Reorientation of the Russian fuel and energy complex to new sales markets and changing export opportunities under sanctions pressure: challenges and prospects

Finagin Ivan Alekseevich Student; Faculty of Management and Politics; Moscow State Institute of International Relations (University) The Ministry of Foreign Affairs of the Russian Federation (MGIMO) 76 Vernadsky Ave., Moscow, 119454, Russia, Moscow region finagin2001@gmail.com

Theoretical approaches to international energy relations

Schools of international relations theory offer different understandings of international energy relations. However, they all recognize the energy sector as an important component of global geopolitics and economics. According to the liberal approach, energy importers and exporters dependent on each other are less likely to use force. Within the framework of the constructivist paradigm, international energy policy is shaped through social interactions and depends on the perceptions and beliefs of various groups that change over time. According to the neo–Marxist approach, in the modern era, the world center is based on five monopolies, one of which is access to natural resources. The school of Neorealism believes that all states claiming to be full-fledged players in the international arena should strive for energy sovereignty ^[1]. Energy policy is seen as a struggle for power and resources, where states seek to maximize their energy security and influence on the global stage. It is through the paradigm of neorealism in the theory of international relations that it is proposed to analyze Russia's interaction with key partners in the energy sector in the context of sanctions pressure. 

The impact of sanctions policy on the Russian fuel and energy sector

On June 3, 2022, the EU published the sixth package of sanctions, involving a partial embargo on Russian energy resources. The new package of restrictive measures provided for a ban on the import of Russian oil by sea, as well as a ban on the provision of services to Russian companies from the fuel and energy sector^[2]. Officially, the EU stopped importing Russian oil supplied by sea only in December 2022. At the same time, the EU, the G7 countries and Australia introduced a price ceiling of $60 per barrel, as well as a ban on the transportation and insurance of Russian oil and petroleum products worth more than $60 and at least 5% below market value. The embargo came into force on February 5, 2023.^[3]

Due to the restrictions imposed, Russia sharply reduced energy supplies to the EU and began reorienting to Asian markets. According to Eurostat, Russian oil exports to the EU decreased from 29.2% to 2.3% in two years, and gas from 38.5% to 12.9% ^[4]. As the Former Minister of Energy of the Russian Federation Alexander Novak notes, in general, the share of energy supplies to the EU has decreased by about 10 times in recent years, from 40-45% to 4-5% ^[5]. By the end of 2023, India (38%) of total Russian oil exports (compared with 3% in 2021) and China (45-50%) became the main partners ^[6].

In real terms, the Russian fuel and energy sector actually suffered no losses. After a sharp reduction in production indicators in March 2022, in the summer of the same year, the fuel and energy complex restored its production indicators ^[7]. Thus, oil production in the summer of 2022 exceeded the figures for the corresponding period of 2022.   According to the Ministry of Finance of the Russian Federation, the budget received 9.06 trillion rubles of oil and gas revenues in 2021, in 2022, due to high energy prices, revenues already amounted to 11.6 trillion rubles, and in 2023 – 8.8 trillion. Rubles^[8]. The decrease in 2023 is largely due to lower energy prices, rather than sanctions pressure on the fuel and energy sector. There is already a positive trend in 2024. In the first 4 months, the federal budget has already received 4.1 trillion rubles of oil and gas revenues, and if the positive dynamics continues, the revenues of 2024 will exceed the revenues of 2023.

 The economies of India and China are growing rapidly, the need for Russian energy resources will continue in the long term, and sanctions pressure on Russia's fuel and energy sector will continue, regardless of how tense relations between Russia and Western countries will be. Russia was able to reorient energy exports to new markets in a short time without significantly reducing revenue.

Russia's interaction with key partners in the fuel and energy sector in the context of sanctions pressure

On March 2, 2022, the UN General Assembly Resolution "Aggression against Ukraine" was adopted, within the framework of which 141 countries spoke in favor, 5 against and 35 abstained ^[9].

Despite the fact that the overwhelming number of countries condemned the start of the CBR, the key partners of the Russian Federation refrained from expressing their position. In fact, we have begun to build up partnerships.

On the one hand, this is due to a conflict of interests and disagreement with the policies of Western countries, and on the other hand, to the pragmatic logic of Eastern partners. Since the 19th century, the world's energy supply system has been based mainly on fossil carbon energy resources, and their reserves are extremely unevenly distributed on the planet. Consequently, some countries are forced to export oil, gas or coal, while others are forced to import them ^[10].

Thus, by the end of 2021, the trade turnover between Russia and China increased by 35.8% and amounted to 146.887 billion dollars, and in 2022 increased by another 29.3% and amounted to 190.271 billion dollars, China exported goods to Russia by 76.122 billion dollars, which is 12.8% more than in 2021, and supplies from Russia's investments in China increased by 43.4%, and reached 114.149 billion dollars ^[1]. In 2023, exports from China to Russia increased by 46.9% to almost $110.97 billion, and Russia supplied 12.7% more to China than a year earlier - $129.14 billion, and the total trade volume reached $240.11 billion ^[12].

Every year, China increases the purchase of Russian energy resources. So, in 2021, Russia imported 4.5% less to China in 2021 than in 2020, which amounted to 79.64 million tons. Despite the reduction in volume in 2021, the cost of purchased oil increased by 45.5% to $40.29 billion ^[13], and also supplied LNG to 16.1 billion cubic meters, thereby coming in third place in terms of supplies to China with revenue of $4.47 billion.

By the end of 2022, exports (LNG) to China increased by 43.9% to 6.5 million tons, and oil supplies by 8.3% to 86.25 million tons, and in 2023 107 million tons of oil, with an increase of 24%, as well as 8 million tons of gas, with an increase of 23% ^[14].

The active growth of trade between the two countries is accompanied by pressure on Chinese companies and banks. Chinese organizations are increasingly afraid to conduct transactions and trade with Russia, under the threat of secondary sanctions. In the largest number of cases, companies, realizing that fines due to non-compliance with restrictive measures lead to even more significant losses, adopt the sanctions policy of the United States and Western countries. At the same time, non-compliance with sanctions regimes by businesses is more likely due to their negligence and management mistakes, rather than an attempt to maximize profits. Moreover, after the introduction of restrictive measures by the initiator countries, companies are doing their best to meet the requirements of the United States. At the same time, states, unlike businesses, show a fundamentally different model of behavior – most often they do not change their political course due to sanctions pressure ^[15].

In April 2024, several Chinese banks stopped accepting payments in yuan from Russia. Among them are China's largest ICBC, China Citic Bank, Industrial Bank and Bank of Taizhou ^[16]. As well as Bank of Ningbo, Kunshan Rural Commercial Bank, Great Wall West China Bank, China Guangfa Bank, Shenzhen Rural Commercial Bank, Ping An Bank, Dongguan Rural Commercial Bank and China Zheshang Bank ^[17].

According to Reuters, against the background of threats from the United States to Chinese organizations, Russian companies began to look for intermediaries in Kazakhstan, Kyrgyzstan, the UAE and other countries to conduct transactions. In addition, China began using small "rural banks" for settlements with Russia, previously mentioned financial brokers, as well as cryptocurrencies banned in China ^[18].

In addition to the above restrictions, Anthony Blinken said at talks in Beijing with Chinese President Xi Jinping that the United States is ready to impose sanctions on Chinese companies that supply dual-use goods to Russia.

The United States has previously imposed restrictions against strategically important projects for Russia. So, in April 2022. The EU has imposed a fifth package of sanctions against Russia, which prohibits the supply of technologies and goods for LNG, in connection with which the licensor of the Linde project and the supplier of turbines Baker Hughses left Russia. In September 2023, the United States included a number of companies providing services for the project in the list, and on November 2, 2023, the United States added Arctic LNG 2 to the sanctions lists of the project operator. Thus, shareholders from Japan and France withdrew from the project, but China filled the technical and logistical vacuum and continued cooperation with Russia, and 5 companies from China are engaged in the construction of most of the first and second lines ^[19].

Thus, over the past few years, the trade turnover between China and Russia has grown significantly, and this trend is likely to continue. China has not joined the sanctions policy of the United States and Western countries, however, a number of Chinese banks and companies, not wanting to fall under secondary US sanctions, refuse to cooperate with Russian organizations. Others are ready to help Russia implement strategic projects in the energy sector. At the same time, new ways to circumvent restrictive measures are emerging. Sanctions pressure on Russian partners will not significantly affect the decline in energy exports to China.

India has become an equally important partner in overcoming the sanctions pressure. In 2021, Russia's trade turnover with India increased by 46.5% to $13.5 billion, and due to the growth in exports of fuel and energy goods and chemical industry products, trade with India increased 2.4 times in 2022 and exceeded $35 billion ^[20]. And by the end of 2023, it grew 1.8 times and amounted to about $65 billion ^[21].

The Reserve Bank of India reported that for the fiscal year 2022-2023 (from April 1 to March 31 of the next calendar year), Russia increased oil imports from $2.2 billion to $31.02 billion, which amounted to 19.1% of total oil imports, compared with 2% for the previous fiscal year 2021. And in 2023, Russian oil exports increased to $45 billion, and petroleum products to $4.5 billion.

Despite a significant increase in trade, Indian private and state-owned companies also face secondary sanctions from the United States and refuse to accept Russian oil. In 2024, Indian ports began checking the ownership of merchant ships to make sure that they were not associated with sub-sanctioned companies ^[22].

Under the threat of falling under secondary US sanctions, at the end of 2023, India suspended the purchase of premium grade Sokol and ESPO oil. Earlier, in 2022, India, on the contrary, actively bought ESPO shipments against the background of the refusal of purchases from a number of Western countries ^[23]. India is looking for ways to circumvent secondary sanctions, for example, companies have started making payments in UAE dirhams ^[24], but currently there is a decrease in exports of premium brands.

Not only secondary US sanctions stand in the way of active trade between states, but also the inability to resolve disagreements related to the trade balance. As part of the de-dollarization policy, Russia and India have begun to switch to using their national currencies in mutual trade. Thus, in 2022, as a result of an increase in energy supplies, the deficit in favor of Russia amounted to $34.8 billion, while India exported goods and services for a relatively small amount of $2.5billion ^[25]. Russia has accumulated a large number of limited convertible rupees in Indian bank accounts that it cannot use. At the moment, Russian companies have partially corrected this situation. For example, $16 billion. it was reinvested in the Indian economy ^[26]. Although this does not solve the problem of withdrawing funds to Russia, it makes it possible to freeze assets indefinitely and subsequently make transfers after solving problems with currency restrictions and a complete transition to settlements in national currencies. In addition, some banks can already convert rupees into rubles to return export earnings to Russia through the mediation of companies from India and the UAE ^[27]. Thus, secondary sanctions by the United States and Western countries impede trade between Russia and India, but the restrictive measures imposed do not affect India's general policy regarding purchases of Russian energy resources, in this regard, it can be expected that trade with Russia's key partner in the energy sector will either remain at the same level or grow, which will lead to maintaining the same level or increasing the revenues of oil and gas companies and the Russian budget.

Conclusion

Thus, over the past 2 years, not only the interaction with Russia's key partners has changed, but also the key partners themselves have changed. Before the start of its development, Russia exported the largest amount of energy resources to the European Union. After a new round of full-scale sanctions, which also affected the fuel and energy sector, Russia was forced to look for new markets and, after two years, successfully coped with this task. By the end of 2022-2023, it was possible to significantly increase trade with China and India, within which Russian oil and gas became the key export goods. Moreover, it was possible to achieve the preservation of state budget revenues from oil and gas resources. Due to the great interest of the two actively growing economies in the purchase of Russian energy resources, it is possible to predict further active and mutually beneficial cooperation with eastern partners in the oil and gas sector.

The active growth of trade is accompanied by increasing pressure from the United States and Western countries on public and private companies of Russian eastern partners. The high financial influence of the United States on the global economy forces companies from China and India to refuse to conduct part of transactions and transactions, however, the impact of such sanctions can be called insignificant due to the fact that this does not lead to a significant decrease in energy supplies from Russia and a decrease in revenue of Russian companies and the state budget of Russia. At the same time, a number of joint strategic projects continue to be implemented despite the threats of falling under secondary sanctions. The countries are also jointly looking for various mechanisms to circumvent secondary sanctions.

The new partners, pursuing a sovereign policy, despite the benefits of mutual trade with Russia, do not make concessions in some aspects. So far, the issue of the withdrawal of oil and gas revenues from India to the Russian Federation has only been partially resolved.