Research & Insights #28

#Gas – The EU continues its energy decoupling from Russia

Since the outbreak of the conflict in Ukraine, the EU has sharply reduced its imports of Russian gas. In 2021, Brussels imported 155 billion cubic meters of Russian gas, or about 45% of its total gas imports. By 2022, Moscow’s share of European imports has fallen to less than 10%. This decoupling has been made possible in part by the decline in natural gas consumption as a result of relatively high temperatures in the autumn, ecological sobriety and the reduction of European industrial production. According to the Financial Times, the G7 and the EU are now preparing to ban Russian gas imports. The British daily states that this decision would prevent a European country such as Germany from starting to import Russian gas again on a massive scale. In addition, it would reassure investors wishing to finance LNG infrastructure projects in Europe and North America by eliminating the fear of a rapid return of abundant and cheaper Russian gas.

#Oil – Russian oil exports at highest level in three years

Russian oil exports (crude and refined products) reached their highest level in three years in April, earning Moscow US$15 billion, the International Energy Agency estimates. In April, Russia exported an average of 8.3 million barrels per day. This figure is significantly higher than the annual average recorded in 2021 which amounted to 7.5 mb/d or 2022 with 7.7 mb/d. The US agency estimates that 80% of crude oil shipments are destined for China and India. The EU is aware that Russia is adapting to the sanctions and does not know how to react to one of the biggest changes ever seen in commodity flows. Josep Borrell, the EU’s foreign policy chief, said Brussels was aware that Indian refiners were buying large quantities of Russian crude oil before turning it into fuels to be sold in Europe. “That India buys Russian oil is normal. And if, thanks to our limitations on the price of oil, India can buy this oil much cheaper, the less money Russia gets, the better,” Borrell said. “But if they use it to become a center where Russian oil is refined and by-products are sold to us … we have to act,” he says. Western leaders still don’t understand why their sanctions on Russian oil are doomed to fail. They cannot control both the amount of oil Russia exports and its price. They have to choose one or the other.

#Trade – “Delivery of goods from St. Petersburg to Mumbai will take about ten days,” Vladimir Putin

Russia and Iran signed a bilateral agreement on the construction of a railway line, completing the missing section of the International North-South Transport Corridor (INSTC). Under discussion for more than 20 years, the North-South Corridor project is a network of sea, rail and land routes that will allow Russian goods to reach India via Iran and Azerbaijan without passing through Western Sea routes and the Suez Canal. The geopolitical context favors the rapprochement between Moscow and Tehran to circumvent Western sanctions and is an attempt to redraw the major axes of globalization. The agreement signed today concerns the construction of a 164 km long railroad line in northeastern Iran, between the cities of Astara, on the border with Azerbaijan on the Caspian Sea, and Rasht. According to the Russian president, “the transport of goods through the new corridor will have a considerable competitive advantage. Thus, the delivery of goods from St. Petersburg to Mumbai will take about 10 days. By comparison, the journey via traditional trade routes takes up to 30-45 days,” he said. Tehran plans to complete the Rasht-Astara rail link within three years. The goal is to transport up to 15 million tons of Russian goods per year by rail by 2030, according to Russian Deputy Prime Minister Alexander Novak.

#Currency – Russia’s Central Bank launches its digital ruble pilot project

The exclusion of Russia by the West from the international payment system SWIFT has accelerated the state’s desire to introduce a central bank digital currency. According to the Central Bank of Russia (CBR), the digital ruble should be considered a third form of national currency, which will be added to the fiduciary currency (coins and bills) and the scriptural currency (current account). This currency will be issued by the CBR and could be stored in a digital wallet that citizens or companies will hold at their bank. According to Elvira Nabiullina, head of the CBR, citizens will decide for themselves what form of Russian currency they want to use (cash, bank account, digital currency). The digital ruble is designed as an additional means of payment and money transfer, not as a means of saving or borrowing. It will have the ability to operate outside the current international banking system and become an alternative means of entering into international trade agreements. The CBR rejected the idea that it would force people to use this digital ruble, that its introduction would lead to the abolition of cash or that it would set an “expiration date” on the use of cash. The adoption of the digital ruble is not expected before 2024.

#Alrosa – Russian diamonds in the crosshairs of G7 countries

In order to deprive Moscow of its income, the G7 countries are discussing possible sanctions against its diamond industry. Russia is the world’s largest diamond producer. In 2021, it exported nearly US$4.7 billion worth of diamonds, according to the Observatory of Economic Complexity. Russian diamonds are mainly exported to Antwerp (Belgium), Dubai (United Arab Emirates), Mumbai (India) and Tel Aviv (Israel). Listed on the Moscow Stock Exchange, Alrosa is the world’s largest producer of rough diamonds. The Russian company mined 32.4 million carats in 2021, accounting for 27% of global diamond production by volume. For the sanctions to be effective, they will require the cooperation not only of European and G7 countries, but also of the southern African countries, major producers of rough diamonds, not to mention India. As with oil sanctions, it is unlikely that India will sacrifice its industry to the West. The country alone holds 95% of the world’s diamond cutting and polishing business. In Europe, Belgium could be the big loser of new sanctions on this industry. Antwerp handles about 85% of the world’s rough diamonds, half of the polished diamonds and 40% of the industrial diamonds. Belgian authorities fear that a ban on Russian diamond imports could strengthen other strongholds such as Dubai at the expense of Antwerp.