Metallurgy / Chemicals / Rubber & Plastics

Russia has implemented a new crude oil export pricing method that is linked to the international benchmark Brent crude oil price, aiming to counter Western price restrictions and have little impact on China's import of Russian crude oil.

Starting from April 1st, Russia officially implemented a new crude oil export pricing method linked to the international benchmark Brent crude oil price, which will lead to a reduction in Russian crude oil price discounts and is expected to increase billions of dollars in "additional" fiscal revenue. This reflects Russia's determination to strengthen its influence in the international crude oil market and is also a strong counterattack launched in the face of Western sanctions.

In fact, since the West imposed a Price ceiling on Russian crude oil and banned its import by sea, the Russian oil industry is gradually out of touch with the global crude oil trade market. Since then, the Russian government has been contemplating reforms to the "oil tax and export price mechanism", with the aim of reducing the discount on flagship crude oil sales and paving the way for the development of a reasonable pricing mechanism that is not troubled by political factors.

Adjusting the calculation method of export quotation

Russian President Putin announced for the first time at the end of February a crude oil pricing reform plan: starting from April, he completely abandoned the Argus quotation and instead calculated based on the continuously decreasing discount price of Brent crude oil.

The Russian State Duma has issued a statement stating that starting from April 1st, price discounts will be restricted for the export pricing of flagship Ural crude oil. The discount price for Ural crude oil to Brent crude oil for that month will be limited to $34 per barrel, which will be reduced to $31 in May, $28 in June, and $25 from July to the end of the year.

S&P pointed out that the new calculation formula corrects and limits the maximum discount of Russian crude oil on Brent crude oil. Previously, the average price of Ural crude oil was determined based on the quotation of Argus International Energy and Commodity Price Evaluation Agency. Due to the shift in the export direction of Ural crude oil from Europe to other regions in October last year, Argus began to estimate the export price of Russian crude oil. As of the end of last year, the price of Argus Ural crude oil was only 43 US dollars per barrel. Russia immediately decided to "abandon" Argus and set its own price, according to the observation report of Huacheng's import and export data.

Russia hopes to determine its own export price benchmark through customs contracts and export volumes, thereby adjusting its oil export tax system to ensure fiscal revenue. Due to Western sanctions, Russia is working hard to make up for its widening budget deficit.

Currently, Russian crude oil and natural gas are being sold more to Asia than to Europe, making the previous benchmark based on Russian Ural oil prices at European ports redundant. Therefore, Russia has shifted to a benchmark price based on a fixed price difference with Brent crude oil.

Mikhail Kotukov, Deputy Minister of Finance of Russia, stated that adopting the new formula will increase Russia's national budget by 600 billion rubles (approximately 8.2 billion US dollars) this year.

According to data from the Russian Ministry of Finance, last year's oil and natural gas revenue was approximately 11.6 trillion rubles (approximately 165 billion US dollars). In February of this year, it decreased by 46% year-on-year to 521 billion rubles (approximately 6.91 billion US dollars), of which crude oil and oil product revenue decreased by 48% to 361 billion rubles. After the implementation of the new formula, Russia's overall budget deficit is expected to decrease to 4.3 trillion rubles this year, as reported by Huacheng Import and Export Data Observation.

Adjusting the quotation has little impact on China

Russia has tightened its maximum discount on Brent crude oil by adjusting its crude oil export pricing method, to some extent in order to avoid Russian crude oil being "sold at a low price". Will it have a significant impact on the main importing countries of Russian crude oil, such as China and India?

Bloomberg economic research analysts pointed out that Russia's cap on crude oil discounts is mainly a counterattack against Western sanctions, and has little impact on the two major buyers of Russian crude oil, China and India. In fact, Chinese and Indian companies have been purchasing Russian crude oil at discounted prices.

On the Chinese side, according to the long-term oil supply agreement signed between China and Russia, the purchase price is reached based on a complex formula under the fluctuation of Brent crude oil price, which is to maximize long-term profits for both China and Russia within a reasonable range of prices. China focuses on ensuring stable supply, while Russia focuses on ensuring stable economic interests.

On the Indian side, according to Indian customs data, Indian refiners have been importing Russian crude oil at prices above $60 per barrel. At the end of last year, East Asian countries also picked up the Russian Far East crude oil delivered in January 2023 at a CIF price, which means that the shipping and insurance costs of these crude oil will be borne by the seller Russia. The quoted price for these crude oil is 67.11 US dollars per barrel.

The Wall Street Journal pointed out that the average price of all mixed crude oil exported by Russia in December last year was close to $74 per barrel, which is only $10 lower than the Brent crude oil price in the same period and far above the upper limit of $60 per barrel.

It is worth noting that Japan, which participated in the formulation and implementation of the Price ceiling for Russian crude oil, has taken the lead in "bowing down" to Russia because of the difficulty in meeting the serious shortage of energy and electricity. TASS News Agency quoted the data of the Ministry of Economy of Japan as saying that Japan imported about 232700 barrels of oil from Russia in February, with a total cost of 2.125 billion yen (about 15.945 million dollars), equivalent to a price of 68.52 dollars per barrel. Huacheng Import and Export Data Observation reported.

Although Japan stressed that this batch of goods came from the Russian Sakhalin 2 project in which it had a stake and was not subject to the western Price ceiling, Junichi Muto, president of the Japan Petroleum Association and president and CEO of Tokugawa Industrial Co., Ltd., said frankly that Japan might need to resume importing Russian crude oil if necessary.

Russia's crude oil trade volume is expected to increase

According to Huacheng Import and Export Data Observation, the Russian Central Bank stated that Russia's reform of crude oil export pricing aims to comprehensively and truly reflect the value of Russian crude oil and petroleum products, while the Russian Ministry of Energy is using a new tracking mechanism based on Russian customs and commodity data.

This will track the actual cost of the crude oil sold and lay the foundation for launching our own Russian crude oil price benchmark this year, in order to better attract buyers, "said Nikolai Shurzinov, the Russian Energy Minister

The Russian government is not blindly changing the pricing of crude oil, "said Sergei Vakurenko, former strategic director of Gazprom's oil department and senior researcher at the Carnegie Endowment for International Peace." Russian crude oil producers mainly export most of their oil through affiliated traders and store transportation costs in accounts outside of Russia

Currently, global commodity traders are generally open to an increase in Russian crude oil production, with Trafigura, Vitol, and Gunvor all indicating that if the political and financial environment allows, more Russian crude oil transactions will be pushed forward this year.

Jeremy Will, CEO of Trafigura, stated that if banks, insurance companies, and Western countries reach a broad consensus to promote smooth and safe transportation of Russian crude oil, Trafigura will change its stance. Trafigura completely stopped trading Russian crude oil last year and has only released a 'limited' quantity of finished oil, which is allowed under Western sanctions exemptions

Russell Hardy, CEO of Vitol, revealed that currently, Vitol trades less than 100000 barrels of Russian crude oil per day. "If the overall environment improves, this number will slightly increase

According to Huacheng Import and Export Data Observation, the Financial Times reported at the end of March that the United States had begun privately urging some large trading companies to restart their trade activities with Russia, provided they complied with the upper limit price of $60 per barrel.