Minus $50 billion: the Ermak-McFaul group has proposed specific measures that are almost guaranteed to undermine the Kremlin’s ability to finance the war and maintain stability in Russia

The Ermak-McFaul expert group proposed four measures that could collectively reduce Russia's oil and gas revenues by $50 billion, thereby undermining its ability to wage war in Ukraine. In 2023, Russian exports amounted to $425 billion, of which $260 billion came from oil and gas supplies. According to Re: Russia calculations, if export revenues fall to about $350 billion and oil and gas revenues fall to $150–200 billion, Russia will not be able to provide the required volume of imports, finance the war in Ukraine and maintain macroeconomic and social stability at the same time. The four measures developed, if implemented, will bring Russia as close as possible to this threshold and include lowering the price ceiling for oil and petroleum products, strengthening the fight against the shadow fleet and stopping purchases of Russian gas. The idea of ​​lowering the price ceiling for oil and petroleum products rests on the inability of the sanctions coalition to effectively monitor its compliance and the threat of a sharp reduction in supplies from Russia. Nevertheless, the situation on the oil market looks much more favorable for the implementation of the plan proposed by experts than before. To strengthen control over compliance with the ceiling, they propose a number of additional regulatory and sanctions innovations. In turn, the refusal of Russian gas will place an additional burden on European economies, but these losses will still be significantly less than the cost of supporting Ukraine in a military confrontation with Russia for two to three years.

To undermine Russia’s ability to wage war on Ukraine, the West must achieve a $50 billion reduction in its oil and gas export revenues—this would reduce Russia’s current account surplus to almost zero (in 2023, according to the Central Bank , it amounted to $50.6 billion). , the Ermak-McFaul International Expert Group on Sanctions states in its new report .

As Re: Russia wrote earlier , Russia's average income from exports for the 10 pre-war years was just over $420 billion per year, of which about $250 billion came from oil and gas exports. This is a comfortable level that allowed Putin’s authoritarianism to generate sufficient budget revenues to maintain social stability and networks of corrupt loyalty, and for the Russian economy to grow at a rate of about 1% per year. In 2022, thanks to a surge in oil and gas prices, the value of Russian exports amounted to $592 billion, of which oil and gas accounted for $392 billion. These record revenues made it possible not only to finance the war, but also to soften the effect of sanctions on the Russian economy (→ Re: Russia: Worse than the crisis ).

In 2023, export earnings returned to normal at $425 billion, of which $260 billion came from “mineral products,” according to recently published Russian customs data . Meanwhile, the war in Ukraine is costing the Russian budget approximately $150 billion in additional expenses per year. And if, as Re: Russia has already indicated, export revenues drop to $330–350 billion, and oil and gas revenues to $150–200 billion (as was the case in the crisis years of 2016 and 2020), this will most likely radically change the situation inside Russia and would undermine its ability to wage war in Ukraine. From these calculations it follows that the proposal of the Ermak-McFaul group really brings the Putin regime as close as possible to the “threshold of impossibility” of solving the dual task of waging war in Ukraine and maintaining internal stability.

In 2023, according to a preliminary estimate by the Ministry of Finance , oil and gas revenues of the Russian budget amounted to 8.8 trillion rubles, or about $100 billion (out of $260 billion of the country’s total income from oil and gas exports). In 2024, they are planned in the amount of 9.7 trillion rubles (approximately the same $100 billion following the ruble devaluation). Experts from the Ermak-McFaul group in their report propose four measures that will significantly reduce these incomes and undermine the existing balance of stability.

Reducing the price ceiling for Russian oil from $60 per barrel to $50, according to the group's experts, could reduce Russia's export revenues by $17.9 billion. This is the most powerful measure proposed. Reducing the price ceiling for premium petroleum products from $100 per barrel to $60 is another minus $9.6 billion. A more effective fight against the shadow fleet, which is used to bypass the price ceiling, will cost the Russian economy, according to the group’s calculations, $8 billion. In addition, The EU is being asked to stop buying Russian gas. The ban on LNG supplies from Russia will deprive it of $5.6 billion, the stop of pipeline gas supplies through Ukraine will deprive it of $5.5 billion, and through the Turkish Stream another $5.5 billion.

The price ceiling introduced at the end of 2022, even in its current form, caused serious damage to Russia, experts note: the discount of Russian Urals oil to Brent increased from $1–2 per barrel to approximately $20. With an average price of a barrel of Brent in 2023 of $83, a barrel of Urals, according to the Russian Ministry of Finance , cost $63, that is, almost at the ceiling level. The budget was drawn up based on $68.3 per barrel, and the shortfall was compensated by the weakening of the ruble. Another thing is that the size of the Urals discount to Brent changed throughout the year. As Re: Russia previously wrote , it was maximum in the first months, when Russia adjusted to the sanctions. Later, after she restructured her logistics, the price difference narrowed. The price of Russian oil fell below the ceiling for the first time only at the end of 2023 against the backdrop of a decline in global prices. In January, the price of a barrel of Urals, according to Russian authorities , again exceeded the ceiling.

The idea of ​​a lower ceiling was discussed before its introduction - for example, Kiev insisted on $30 per barrel. It is this level that the Ermak–McFaul group also calls optimal. The US and EU discussed a higher level, up to $70 per barrel, fearing that Russia would completely refuse to supply oil on unfavorable terms for it - and this would lead to a new rise in world prices. The report of the Ermak-McFaul group presents three counterarguments. Firstly, experts write, even with a ceiling of $30, Russia would continue to earn money - the cost of Russian production, according to their estimates, in most cases is $10–15 per barrel. Secondly, the effect of a prolonged reduction in supplies on the Russian economy would be more severe and would begin to manifest itself faster than the damage from a reduction in supplies due to a lower ceiling.

Finally, stopping supplies would hurt China, India and Turkey, which have become the largest buyers of Russian oil. Russia will prefer not to create problems for them, experts suggest. As Re: Russia wrote earlier , there is now a situation on the global oil market that is close to a surplus (supply meets demand or even exceeds it) due to increased supplies from countries that are not members of OPEC+. In this situation, Saudi Arabia is interested in regaining market share, which was declining as a result of the Saudis’ voluntary reduction in sales in the previous period. And if Russian supplies fall, it will begin to replace Russian oil on Asian markets.

But to achieve the desired effect, it is not enough to simply lower the price ceiling for oil and petroleum products—you need to ensure compliance with these restrictions. The measures necessary for this are listed in the January report of the Ermak-McFaul group “Russian Oil Tracker” . Its authors point out that the G7 has not yet established an effective exchange of information between the authorities and companies that can provide certain services to Russian counterparties. For example, companies were not required to provide original contracts to regulatory authorities. Countries with access to the Baltic and Mediterranean Seas are asked to ensure that all ships that pass through their territorial waters are properly insured. Finally, experts insist on tougher sanctions for organizations that help Russia circumvent the price ceiling. For companies from countries outside the sanctions coalition, direct violations of the sanctions regime should be punished by US blocking sanctions.

Among other ideas of the Ermak-McFaul group, the easiest to implement seems to be a European embargo on the supply of Russian liquefied natural gas (LNG), which they also propose to introduce in stages to avoid a price surge. In 2023, Russia supplied 19.8 billion cubic meters of LNG to the EU compared to 20.5 billion in 2022, according to London Stock Exchange data cited by the Financial Times . This is a small part of Europe's consumption, which is estimated at about 350 billion cubic meters. EU authorities are already discussing a gradual withdrawal of supplies from Russia. If the embargo had been introduced already during the current heating season, then, according to calculations by the analytical center Bruegel , by its end the average level of storage capacity would be about 20%. Only Spain and Portugal could run out of reserves. If Russian LNG is redirected to Asia in this scenario, there will not be a significant jump in prices, Bruegel experts suggest.

It will be more difficult to eliminate pipeline gas supplies, as the Ermak-McFaul group proposes. The agreement on the transit of Russian gas through Ukraine expires at the end of 2024. The Ukrainian authorities have repeatedly said that they are not going to extend it. But transit can continue even after this, explains analyst Sergei Vakulenko at Carnegie Politika : the parties to such contracts will have to be not Ukrainian, but European companies. And the main buyers of Russian gas in Europe (Slovakia, Hungary, Austria and Italy) “are guided by pragmatism and are not inclined to foreign policy activism.” Preserving transit is to a certain extent beneficial for Ukraine, he believes. Because of the war, it consumes significantly less gas than before, and mostly makes do with what it produces itself. But the fields are unevenly distributed throughout the country, so for some consumers it is more convenient to deliver Russian gas, compensating for this by supplying Ukrainian gas to Europe. In this situation, Vakulenko believes, it would be more rational to wait until 2026–2027, when significant volumes of LNG from the USA and Qatar should enter the market. Then it will be possible to refuse Russian pipeline gas painlessly. However, for strategic reasons, it is important to undermine Russia’s ability to wage war in 2024, before the US presidential elections. The costs to Europe from the defeat of Ukraine or the need to support it in confrontation with Russia until 2026–2027 will be significantly higher than compensation for the lost income of Slovakia and Austria.