Double whammy

Selling its oil on the global market has become increasingly difficult since the imposition of US sanctions on Russia’s two largest oil companies, Rosneft and Lukoil, last month, and there’s no obvious solution domestically either, where sales have been hampered by the closure of the country’s largest oil refineries following a series of successful Ukrainian drone strikes.

Novaya Gazeta Europe has investigated how likely it is that extraction at some Russian oil fields will be suspended, and how that might impact funding for the Kremlin’s war machine amid plummeting budget revenues and an ever-poorer ruble exchange rate.

Reality bites

The US sanctions targeting Rosneft and Lukoil have already begun to bite, with Russian seaborne oil exports falling 20% in less than a month. Despite the fact that the sanctions don’t actually take effect until 21 November, buyers appear to have been preemptively spooked. While Russia was shipping around 3.6 million barrels of oil a day in October, this had fallen to 3 million per day within a week of the US announcement of sanctions, according to Bloomberg.

Things may be about to get even worse, however, as orders from some of the biggest buyers of Russian oil are already starting to dry up. For example, a group of five Indian oil refineries normally responsible for purchasing around 65% of Russia’s total seaborne crude oil exports has decided to suspend imports for December due to the looming US sanctions. Two Chinese state-owned oil companies, Sinopec and PetroChina, have also cancelled an estimated 45% of all scheduled oil shipments from the port of Kozmino in the Russian Far East.

For now, these cancellations could be said to be a mere temporary pause; a wait-and-see approach to the way that US sanctions play out in the months ahead. Should the suspended orders become more permanent, however, the impact on Kremlin coffers could be substantial, and could lead to the volume of Russian seaborne oil exports dropping to just over 2 million barrels a day, or around 40-45% of what they were prior to last month’s sanctions.

Moscow does still have its oil pipeline exports to China to fall back on, though, which can top this figure up by around 800,000 to 900,000 barrels a day as, owing to their less transparent nature, pipeline exports are harder to sanction and payment is more likely to be conducted in Chinese yuan or rubles.

Despite this, the overall picture looks bleak for Russia, and sanctions could eventually reduce Russian oil exports to just 2.8 million barrels a day, a significant drop from the average of 4.8–5 million barrels being shipped daily in 2021 and 2022.

The impact of the recent sanctions has amplified the effect of the so-called “farewell” sanctions imposed by outgoing US president Joe Biden at the beginning of 2025, which targeted two other major Russian energy exporters, Gazprom Neft and Surgutneftegas. An increasing crackdown on the activities of Russia’s so-called “shadow fleet” by the European Union, UK and US, has stifled a tactic that had hitherto been used with some success by the Kremlin to circumnavigate sanctions.

Attacking refineries

A far more existential threat to Russia’s oil industry is the pressure its own refining capacity is currently under due to Ukrainian drone strikes. In July, Russia was refining around 5.4 million barrels per day, but by the end of October that figure had fallen by around 10%. Ukrainian airstrikes in late October and early November successfully shut down Russia’s largest refineries in the cities of Volgograd, Tuapse and Nizhny Novgorod, which, in total, could lead to a 15% fall in refining capacity, equivalent to around 800,000 barrels a day.

Russia’s lack of oil refining capacity is having a knock-on effect on domestic demand and consumption too: gasoline shortages are leading to price increases, yet the lack of spare refining capacity means that oil companies can’t simply refine more oil to produce extra fuel for the Russian market.

Experts agree that Ukraine’s consistent focus on exploiting the same Russian vulnerability is finally paying dividends, with Tatyana Mitrova of the Centre for Global Energy Policy at Columbia University and Sergey Vakulenko of the Carnegie Russia Eurasia Centre writing a piece called The Slow Death of Russian Oil in Foreign Affairs earlier this month: “No single strike will kill the system, but a sustained, up-tempo campaign increases the likelihood of cascading failures, longer repairs, and compounding losses of capacity.”

Lukoil’s Volgograd refinery, one of the largest in the country with a production capacity of around 300,000 barrels a day, is a case in point. The facility has been hit no fewer than five times in two months, with the latest attack coming just days after it had been repaired and brought back online, as Mitrova and Vakulenko point out, adding that “though the repeated attacks have not destroyed the refinery, it has been kept in constant need of repair, stretching spare-parts supply chains that are already constrained by sanctions”.

Sealing the wells?

The current crisis affects both oil companies and the federal budget, 40% of which the Kremlin is currently spending on defence and security.

The treasury’s oil and gas revenues fell by 21% between January and October compared to the same period last year, due to oil prices falling in the spring, Western countries banning “shadow fleet” tankers, and the US sanctions on oil giants Surgutneftegas and Gazprom Neft in January. In absolute terms, the treasury lost revenue worth €21.3 billion in the first 10 months of this year, just one more reason why the authorities have increased taxes: expenditure has almost doubled since the pre-war period, and the money has to come from somewhere.

The oil and gas revenue in the budget depends not on the volume of exports, but rather on the volume of oil production. The treasury largely fills its coffers with a mineral extraction tax, which is calculated on the basis of the average export price of Urals crude oil in dollars, the ruble exchange rate and a number of other variables.

Therefore, if oil producers have nowhere for their oil to go, budget revenue falls due to a drop in production. The key question now is how long any lull in buying Russian oil will last.

German economist Janis Kluge, a researcher at the Berlin-based German Institute for International and Security Affairs (SWP), believes that the drop in exports will be temporary and Russian oil will find its way back on to the world market soon enough. “But Rosneft and Lukoil have to rebuild some of their supply chains, maybe also find new business partners or markets, which means lower effective export revenues,” he told Novaya Europe.

But there are two other reasons the budget will be short on tax revenue too. First, the mineral extraction tax will fall as sanctions raise the cost of transporting oil, because, as Kluge says, there is almost no “clean”, i.e. unsanctioned, Urals crude oil on the market. To transport sanctioned oil by sea, Russia would need to grow its “shadow fleet”, which is expensive.

Secondly, sanctions are increasing the difference in the price between Russian oil and Brent. This year, that has fluctuated between $5 and $7. Kluge thinks that could grow by an additional $10 per barrel and Russian oil could be $15–$17 cheaper than Brent, which was trading at $64 per barrel on Friday, potentially a huge blow to Russia’s wartime budget.

Unknown unknowns

It’s impossible to predict how much the Russian budget will lose, to what extent export revenue will dry up and how far the ruble will fall. Russia sealing its oil wells could lead to an increase in world oil prices. If Russia were to reduce production by 1 million barrels per day, the price of Brent would typically increase by $8–$10 dollars per barrel, Mitrova told Novaya Europe. However, that would only be the case if other suppliers didn’t increase production to compensate for the shortfall.

“Saudi Arabia and the UAE could produce an extra million barrels a day for four to six weeks, but the question is whether they would want to, because if prices rise, they benefit in the short-term,” Mitrova says. However, the US, which abhors expensive gasoline and the inflation that comes with it, could put pressure on producers to increase production, Mitrova continues.

On the other hand, the International Energy Agency predicts that the oil surplus will reach 4 million barrels per day in 2026, meaning any reduction in supplies from Russia is unlikely to push up the price of Brent. The main consumers of hydrocarbons are China and the US, and if Trump’s trade wars hit their economies, this would reduce demand for oil. Mitrova says China is currently maintaining global demand by pumping huge amounts into its strategic reserves but that could also end.

The reduction in the inflow of petrodollars in the first 10 months of the year has not yet led to a devaluation of the ruble, because the share of foreign trade deals settled in rubles has sharply increased, according to independent investment consultant Andrey Kochetkov, who says that the move away from the dollar and euro has reduced ruble volatility.

However, the collapse in revenue from the country’s main export commodity should inevitably lead to a fall in the ruble, Russian economist Ivan Kuznetsov* told Novaya Europe, adding that he believed the ruble to be overvalued given the tough foreign trade restrictions Russia is under.

If that proves true, devaluation could contribute to a new round of inflation, which has no shortage of other potential causes, such as a shortfall in gasoline and resulting price rises and tax increases. The Central Bank will therefore have to stop cutting interest rates or even start raising them, putting pressure on the civilian economy, in which, unlike the military economy, businesses can very rarely take subsidised or state-guaranteed loans to tide themselves over.

*name changed