Weaker ruble boosts Russian oil output economics while government intervenes to combat inflation

Russian oil companies have seen the economics of production improve significantly in recent weeks, as a weaker ruble against the dollar and higher oil prices boost finances.

The discount on Russian crude -- an issue since it invaded Ukraine in February 2022 -- has recently narrowed. Furthermore, producers' revenues are linked to dollar-denominated price assessments, while their costs are primarily in rubles.

The improved economics come despite wider concerns about the impact of the weaker ruble on the Russian economy, which has led the government to intervene in a bid to keep inflation in check.

The ruble has fallen from 70.30 to the US dollar at the start of 2023 to 101.04 on Aug. 15. This is due to growing spending on its war in Ukraine, as well as a drop in exports and a jump in imports.

Russia is grappling with a drop in exports partly due to punishing Western sanctions introduced in response to the conflict in Ukraine that are designed to hit Russia's oil and gas revenues.

"The oil producers are clearly better off today than they were in early December 2022 when the EU's crude oil embargo and the G7/EU/Australia price cap on crude oil took effect," Paris-based international financial crime analyst and Russia expert George Voloshin said.

This is due to a combination of higher Urals prices, the weakening of the ruble, and similar oil taxation levels, he said.

Platts, part of S&P Global Commodity Insights, assessed Urals at $71.23/b on Aug. 15 -- a discount of $14/b to Dated Brent.

This compares with a Urals price of $52.15/b on Dec. 5 when the EU embargo on most seaborne imports of Russian crude, and price cap by the G7, EU and Australia came into force. At that point the discount to Dated Brent was assessed at $32.1/b.

The price increase is in part due to Russia's response to these sanctions, which was to cut crude output. Its allies in the OPEC+ crude production alliance have also cut production, boosting prices. This has supported Russian revenues at a time when it is shipping less crude to global markets. The group is implementing further cuts in August and September, which could further support prices.

The economic outlook for producers could change in the coming months. Sanctions are leading to higher costs and difficulties sourcing Western technology and equipment, which is often more efficient than domestically produced equivalents.

The large numbers of Russian men fighting in the conflict could also hit availability of staff at oil and gas projects, further inflating costs.

Economic woes

The negative impact of the weaker ruble and broader economic outlook could also harm producers.

Despite positive production economics, Russia is earning significantly less from its oil exports than it was last year. The International Energy Agency estimated that Russian government revenues from oil in July 2023 were 44% below those of July 2022.

Traditionally the Russian government has looked at raising taxes on oil and gas production -- the key revenue stream for the state budget -- during economic difficulties.

The weaker ruble is also leading to emergency government intervention. The Russian Central Bank raised interest rates by 3.5 percentage points to 12% in a bid to limit price stability risks, it said in a statement Aug. 15.

"The Bank of Russia's decision is aimed at shaping monetary conditions and overall domestic demand dynamics necessary to bring inflation back to 4% in 2024 and stabilise it close to 4% further on," it said.

It will hold its next rate review meeting on Sept. 15.

Much will depend on the conflict in Ukraine, with costs continuing to escalate. Russia may need further emergency intervention to protect government finances, which could come at producers' expense.