The largest branch of the Russian industry was on the verge of collapse due to European sanctions

The largest branch of the manufacturing industry in Russia, which accounts for 15% of the total industrial production in the country, was on the verge of collapse.

Oil refineries that employ 120,000 Russians are bracing for a 15% cut in production due to a European embargo taking effect in February, a senior source familiar with the government’s plans told Reuters.

Sanctions on oil products, which Russia has traditionally exported to Europe, will have a much greater impact than the oil embargo, a Reuters source says. Putting together a “shadow fleet” of tankers for them is unlikely to succeed: diesel and gasoline shipments are usually smaller than crude oil, and it would take many more ships to secretly transport them to Asia.

According to the IEA, Russia exported about 1.2 million barrels of oil products per day on average in 2022. The closed European market will bring down volumes by 5 times – by the end of the first quarter, about a million barrels of daily exports will be left without buyers, BCS analyst Ronald Smith estimates.

Russia will not be able to produce oil products “for storage”: there are simply no storage facilities in the country where it would be possible to fill in the unsold. One option is to export more crude oil, writes Reuters. But how to do this remains a mystery: even the current volumes – 3-4 million barrels per day – are kept by oilmen at the price of huge discounts, offering barrels at half price.

Such a policy “runs counter to the interests of the budget” and “cannot continue indefinitely,” says Marcel Salikhov, head of the Institute of Energy and Finance. The average price of Urals fell to $50 per barrel in December and dropped below $40 in January for the first time since the summer of 2020. At such prices, the budget will miss 2 trillion rubles in revenue, and its deficit, instead of 3 trillion rubles, may exceed 5 trillion, MMI analysts estimate.

“The embargo on petroleum products could be more significant than the embargo on crude oil,” BCS’s Smith warns. The authorities hope that the problem will be solved in the second half of the year, when new supply chains are created, a Reuters source said.

But even if the delivery issues are resolved, it is unlikely that oil companies will be able to find demand for diesel fuel and gasoline in the few countries that continue to buy Russian energy carriers: in Asia, it simply does not exist in the required volumes, notes Natalia Orlova, chief economist at Alfa-Bank.

Reuters sources at four large Russian refineries say that production plans for February have not yet changed: output should remain at the level of January.

“Nothing urgent has been done yet,” says the source of the agency. “But that doesn’t mean that tomorrow everyone won’t start running around screaming and tearing their clothes. It’s not uncommon for us.”

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