The Economist - UK (2022-04-02)

The Economist April 2nd 2022 Finance & economics 65

morepromise.Thatisbecausetheeuap­

pearsreadytojettisonitsmisguidedhos­

tilitytolong­termgascontracts,whichit

had discouraged as part ofits effortto

boostspotmarketsforgas.Theintenthad

beentopromotecompetition,but,aslast

winter’srocketinggaspricesrevealed,it al­

soleftEuropebadlyexposedtoasupply

shock.Asa topAmericanlngexporterex­

plains,Europefocusedonexpandingthe

spotmarketwhenitshouldhavesecured

“fantastic”long­termpricinginstead.

Nowthecommissionsaysitwillen­

couragelong­termcontracts“tosupportfi­

nalinvestmentdecisionsonbothlngex­

port and import infrastructure”. That

shouldgiveinvestorsinAmericanexport

facilitiestheconfidencetospendthebil­

lions required, boosting transatlantic

trade.GilesFarrerofWoodMackenzie,a

consultancy,reckonsthattheinfrastruc­

tureneededtoachievetheaimof50bncu­

bic metres of liquefaction capacity in

Americawouldcostroughly$25bn,notin­

cluding upstream investments andsup­

ply­chain inflation. Rystad thinks the

spending neededtomeetEurope’s extra

demandcouldbeintheregionof$35bn.

DiversificationawayfromRussiainthe

longterm,then,maybepossible.Butthat

doeslittletohelpwiththeshort­termpro­

blemofanaggressiveMrPutin.Arational

calculussuggeststhatheshouldbeunwill­

ingtoturnoffthetaps,consideringhepro­

fitshandsomelyfromhighprices.Energy

Intelligence,anindustrypublisher,reck­

onsGazpromearned$20.5bnfromEuro­

peangassalesinthefirsttwomonthsof

theyear,nearlyasmuchasitmadefrom

Europeinallof2020.Butfewobservers

woulddareto predictthe actionsofan

increasinglyerraticdictator. n

Russianoil(1)

Diversionary tactics

O

n february 22 nd,  two  days  before

Russia  invaded  Ukraine,  a  German­

flagged  vessel  left  the  Russian  port  of  Pri­

morsk  loaded  with  33,000  tonnes  of  oil.

When it reached Tranmere, a British oil ter­

minal,  on  March  3rd,  it  received  a  frosty

welcome. Some dockers refused to unload

the  freight  when  they  learnt  where  it  had

come  from.  Similar  boycotts  have  sprung

up  elsewhere.  Kayrros,  a  data  firm,  esti­

mates  that  the volume  of  oil  “on  water”

rose by nearly 13% in the fortnight after the

invasion, in large part as undelivered Rus­

sian cargo sought new takers. The number

of vessels returning to Russia also jumped.

Most  of  what  has  flowed  out  of  Russia

in  recent  weeks  was  bought  and  paid  for

before the war started. Now less oil is leav­

ing  the  country  in  the  first  place.  Worries

about  sanctions  and  bad  publicity  have

prompted many buyers to pause purchas­

es.  On  March  24th  the  volume  of  Russian

seaborne  oil  exports,  at  2.3m  barrels  per

day (bpd), was nearly 2m below the level on

March  1st,  reckons  Kpler,  a  data  firm.  As

those barrels fail to sell, the price of Brent

crudeis nearing $115. Yet for the countries

willing  to  risk  opprobrium  and  jump

through  new  logistical  hoops,  Russian  oil

is beginning to look like a bargain. 

The partial embargo of Russia has ech­

oes with the blockade of Iran by the West in

the  2010s,  which  led  the  Islamic  Republic

to put together an unrivalled playbook for

smuggling  oil.  In  May  2018  America  im­

posed  “maximum  pressure”  sanctions,

with the aim of halting Iran’s oil exports al­

together.  It  almost  succeeded:  by  October

2019  they  had  fallen  to  an  average  of

260,000  bpd,  from  2.3m  before  the  sanc­

tions.  Since  then,  however,  they  have  re­

vived a little, averaging 850,000 bpd in the

three months to February 2022. 

Iran  manages  to  sell  oil  through  two

channels.  The  first  is  through  authorised

but restricted sales. As it imposed its sanc­

tions America granted a limited exemption

to eight importing countries. There is a big

catch, however: the sales have to be made

in  the  buyers’  currency  and  either  kept  in

escrow accounts at local banks or spent on

a  list  of  goods  produced  locally.  For  Iran

that  is  deeply  frustrating.  In  December  it

was forced to accept tea from Sri Lanka as

payment for an oil debt valued at $251m.

To  circumvent  the  restrictions  Iran

smuggles vast quantities of oil—its second

channel  for  sales.  Iranian  tankers  sail  to

America’s  foes,  such  as  Venezuela,  with

their transponders turned off. Some are re­

painted  to  hide  their  provenance.  Others

transfer their cargo in the high seas, often

at night, to ships sailing under a different

flag. Oil is also moved over land by smug­

gling  gangs,  says  Julia  Friedlander,  a  for­

mer intelligence official now at the Atlan­

tic  Council,  a  think­tank  in  Washington.

Petroleum  is  bartered  with  China,  Turkey

and the United Arab Emirates against gold,

pesticides  and  even  housing  projects  in

Tehran.  Traders  in  Dubai,  home  to  half  a

million Iranians, blend crude from the Is­

lamic  Republic  with  other,  similar  grades

which they then rebrand as Kuwaiti oil.

Russia  is  unlikely  to  take  a  leaf  out  of

Iran’s  book,  mainly  because,  for  now,  it

doesn’t need to. The penalties imposed on

Iran  include  secondary  sanctions  that

threaten third­country banks dealing with

it with huge fines. That makes overtly buy­

ing its oil risky. By contrast, Russia faces a

weaker embargo. Only America, which did

not buy much to begin with, has banned its

oil. On March 25th Germany said it would

cut  its  purchases  by  half,  but  it  is  unclear

when  that  would  start.  Sales  transmitted

through pipelines, which are less conspic­

uous than shipments and represent about

a fifth of Russia’s total exports of crude, are

still flowing. Secondary sanctions have not

been imposed. 

Instead seaborne exports have cratered

because Western buyers, such as big ener­

gy firms, fear a public backlash. They also

face logistical headaches as cautious banks

cut  credit,  ship  owners  struggle  to  obtain

insurance and freight costs soar. And each

time  sanctions  are  tweaked,  says  Antonia

H ONG KONG

What can Russia do to sell its unwanted oil?