RAIVO VARE ⟩ Four ideas on how to derail the Russian war machine

Raivo Vare, economic expert. Photo: Mihkel Maripuu

• The higher the oil revenue, the more aggressive Russia is.
• Russia is fighting against rising oil prices.
• How long Russia can export its oil depends on the world.

The Russian war machine still largely relies on oil exports, the restriction of which could be more important for the world than before, observer Raivo Vare notes.

In connection with the war in Ukraine, there is a lot of talk in the media about purely military, but also humanitarian and very much about foreign policy aspects. However, there is less credible information about how long Russia actually not only wants to fight this war, but also is able to, given the economic reality. Even in the light of recent Ukrainian attacks on Russian oil refineries, there is conflicting information not only about the wagging of fingers at Kyiv by leading allies who do not care about value-based foreign policy, but also about the real impact of these attacks on the oil markets, Russia's income and the possibilities of using fuels, including for war purposes.

Analysts have long been highlighting the correlation between oil and other, especially commodity, export income of Russia, and before that of the Soviet Union, and the country's military adventures. The general rule is that the more export revenue there has been, the more aggressive the Soviet Union/Russia has been. Therefore, Russia's desire and ability depend quite a bit on the fate of oil and what is made of it as the largest export article. Therefore, in principle, oil export revenue or the reduction of its processing quantities is potentially of a deterrent nature to Russian aggression. But there are a few more points to consider.

The general rule is that the more export revenue there has been, the more aggressive the Soviet Union/Russia has been.

First, the collective West, led by the United States, delayed the sanctioning of the main source of Russian revenue necessary for the war for a full year from the start of the war. The reason being the unwillingness to cause a possible price jump with the sudden disappearance of the 12 percent world market share of Russian oil, which would have a negative effect on both the economy and the political climate in democratic countries as well. The consequence was a reverse process: until the restrictions were imposed, everyone was still trying to make the most of it and imported Russian oil and oil products as much as they could. As a result, the Kremlin received an all-time record profit from its oil exports during the first year of the war, which allegedly exceeded even the sum of the frozen funds of the Russian state and the central bank. By the way, the finally established measures and the price ceiling were also carried by the same interest and were much milder than they could have been. It should be noted that even now this fear is still partly in the air and in reality there is no wish to completely restrict Russian oil exports.

While these sanctions still acted as somewhat of a restriction in the first months, then both Russia, which had acquired a «shadow fleet» of hundreds of tankers during the long preparation period granted to it, and its clients and assistants, who adopted various schemes to circumvent the restrictions, quickly adapted to it. And neither did anyone particularly hinder the continued delivery of Russian oil by the shipowners of Greece, Malta and other countries with their tankers. Therefore, the result of oil exports in the second year of the war was lower than the result of the record-breaking first year, but only by a third.

Sanctions have now been gradually tightened, especially by the USA, including directly on shipowners and financial operations accompanying oil shipments, whether they are connected to the Russians or not. This has led to the redirection of Russian oil export flows to those countries where the restrictions essentially do not apply, such as China in particular, as well as India and Turkey. But the shipments are still continuing and Washington is indicating that they do not like when prices increase on the market due to Ukrainian drone attacks, because major elections are just around the corner and the price of fuel that goes into a car tank has traditionally always had an impact on their outcome. Especially for the election results of the incumbent president.

Secondly, it must be admitted that although the attacks of Ukrainians in the last few weeks on 14 leading oil plants in the European part of Russia have, according to various data, knocked out at least 15 percent of the processing capacity, it will not have an impact on the conduct of the war any time soon. This is the Kremlin's priority, and the military will continue to be supplied, tooth and nail, and at the expense of everyone else. However, in the long term, this will have a certain effect on domestic consumption. In any case, the export of diesel and gasoline is already limited.

Although the attacks of Ukrainians in the last few weeks on 14 leading oil plants in the European part of Russia have, according to various data, knocked out at least 15 percent of the processing capacity, it will not have an impact on the conduct of the war any time soon.

At the same time, the authorities are desperately trying to limit the transfer of the fuel price increase that started in the wholesale market to the retail market. Fuel is already being bought with trouble from the vassal Belarus for the needs of one’s own domestic market. Moreover, the increase in the price of fuel would add to the already growing inflation. However, this causes regional supply difficulties. This also creates certain difficulties with crude oil, because, in a situation where pumped-out crude oil storages are scarce, the temporary outage of the processing capacity for several months creates the need to still export it in even larger quantities and at a cheaper price, while still increasing revenue. Although less than expected.

Thirdly, being forced to use more schemes to bypass the restrictions, some of the revenue will inevitably end up in the hands of companies operating outside of Russia, and now the question is to what extent their use, for example, to finance contraband imported technology, can be controlled and prevented in order to weaken the functioning of the Russian military industry.

Fourthly, the idea of adopting a new package of sanctions, which would further tighten the restrictions on Russian oil logistics and even lower the current price limit, has started to circulate. If this new price limit was properly implemented, and given the experience, definitely together with other measures, it would also bring down the general market price level, which OPEC+ is instead trying to push up to around 90-100 dollars per barrel with its production restrictions. And it would certainly reduce the Kremlin's war purse even more.

In conclusion, however, one has to understand that as long as commodity exports, which continues to be Russia's main source of income, continue, it will finance the continuation of the war in one way or another. And Vladimir Putin wants to continue this as a war of attrition for as long as necessary. How long he has that chance depends on the world.