Russia’s Latest Output Cut Shows Its Oil Weapon Is Weakening

On February 10, Russian Deputy Prime Minister Alexander Novak announced that Russia plans to cut its crude oil production by 500,000 barrels per day in March, about 5 percent of its total production at the time of writing. The Kremlin has described the move as retaliation for the Western regime of sanctions and price caps (, February 10). However, market observers dismiss this explanation, instead assuming that Moscow was forced to adjust its oil production due to the impact of sanctions combined with various market-related factors. Most importantly, in either case, the Kremlin appears to have limited capacity to arm its crude oil exports to the extent that it has attempted to arm its natural gas stockpiles in 2022.

Some of the most consequential Western restrictions currently imposed directly on Russian oil exports include:

  • The European Union’s ban on Russian crude oil imports (with notable exceptions, particularly regarding pipeline imports), in force since December 2022 (, June 3, 2022);
  • The G7 price cap on Russian crude oil imports, in place since December 2022, originally set at $60 per barrel, which will be adjusted and reviewed every two months (, December 3, 2022);
  • The EU import ban on Russian oil products in force since February 2023 (with minor exceptions) (, June 3, 2022);
  • The G7 price cap on imports of Russian oil products, in place since February 2023, set at $100 per barrel for premium-to-crude and $45 per barrel for discount-to-crude (, February 4).

So far, these Western restrictions have had only a limited transformative effect on Russia’s overall crude oil production, as the country’s overall production level has remained steady at around 9.8 million, or 9.9 million barrels per day, over the past few months (, February 8). . And that’s only slightly below the production rate of 10.2 million barrels per day in February 2022 (, June 17, 2022). However, this does not mean that Western sanctions and price caps have had no effect.

In truth, Western restrictions have already forced a notable change in export direction for Russia’s energy companies, with much of Russia’s crude being diverted from Europe to Asia (see EDM, February 23) and diesel shipments being offered to customers in Africa, the Middle East, Asia and even South America (, February 27). In addition, the sanctions – combined with the unwillingness of Western companies to import Russian oil – have drastically affected the price of Russian crude. Russia’s main crude, Ural, officially traded at a discount of up to $40 a barrel compared to Brent in January 2023 (The Bell, February 18). To put this in context, prior to Russia’s full-scale invasion of Ukraine, this price differential had not exceeded $3 or $4 a barrel (, accessed February 28).

At the moment, it remains uncertain whether the production cuts announced by Moscow will result in a reduction in exports of crude oil and other oil products or restrictions on refinery production. On the one hand, media reports have revealed that Russia plans to significantly reduce crude oil throughput through its western ports, including Primorsk, Ust-Luga and Novorossiysk (, February 23). Such a move would support the idea of ​​the Urals-to-Brent discount. On the other hand, one should understand that marketing these oil products under Western sanctions is much more difficult for Russia than crude oil for various reasons, including lower storage capacities within Russia and the need for closer geographic proximity for shipments of such products to potential buyers. As a result, Russian companies could be forced to scale back refinery production, thereby reducing the volumes of diesel available for export.

Of course, it cannot be completely ruled out that Moscow will not try to arm its oil exports in the same way it did with natural gas exports in 2022, by unilaterally halting supplies to several European countries. For example, on February 23, the major Polish oil and gas company PKN Orlen publicly announced that Russia had stopped supplying Poland with crude oil (Radio Free Europe/Radio Liberty, February 25). In fact, several Central and Eastern European countries still rely on Russian crude oil and have not been able to quickly or completely replace it with alternative grades. As a result, this leaves the region vulnerable to future Russian arming of its crude stockpiles and will likely lead to price increases.

Nonetheless, it appears that potential disruptions to Russia’s crude oil exports would not be of a massive nature as Russia’s overall budget is simply too reliant on oil export revenues to sustain the loss of all remaining European buyers. In January 2023, Russia’s budget posted a record-high deficit, and analysts constantly debate whether the Russian economy could absorb significant losses in oil and gas revenues (, January 11; Carnegie Politika, February 10). If the Kremlin did want to limit oil exports, it should have cut supplies as early as 2022, when such a move could have had a lasting impact on world markets — at least one that would have been much stronger than the potential impact of taking similar action now .

From the Jamestown Foundation

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