This was highlighted last week by Russian former Energy Minister, Alexander Novak, and supported by the current top global oil importer, China, and the country set to take over this mantle, India.
Novak acknowledged that the new U.S.-led sanctions on Russian oil provide:
- New challenges linked to supply chain disruptions, the insurance of ships that transport our products, and with issues of financing and payment
- These issues are being resolved at the moment…and customers are happy to buy it [Russian crude oil]
Russia has long been able to make very good profits on all of its oil at $40 per barrel of Brent.
This is a key reason why it was happy to allow Saudi Arabia to launch yet another doomed oil price war against the U.S. shale sector in 2020 by overproducing to drive prices down, as it could survive and prosper if oil averaged at least $40 pb of Brent over the conflict period, and 2nd, it could cheerily stand by and watch as one of its crude oil competitors, Saudi Arabia, destroyed its own economy (with a breakeven pb of Brent price of $84 at that point), and caused disruption in another of its oil market competitors (and perennial geopolitical nemesis), the U.S.
The 2nd reason is that despite the US dollar-centric sanctions on Russia, the country pays all of its domestic expenses in roubles, so the availability of US dollars or the US dollar-Russia rouble exchange rate is of no consequence in this regard.
And 3rd, Russia will not be devoid of US dollars anyhow, or other hard currencies, given that it can certainly count on continued massive oil & gas and other trade with China and India.
China for one has a wide range of ways and means of getting around sanctions of any sort, with a basic factor working in its favor being the lack of exposure of China’s firms to the U.S. financial infrastructure, particularly to the U.S. dollar.
China made no secret at the time of the pre-2016 sanctions against Iran or the post-2018 sanctions against it that it was going to use its Bank of Kunlun as the main funding and clearing vehicle for its dealings with Iran.
In the case of Russian oil & gas exports, though, there is no need for China to go through all the trouble it took to circumvent the sanctions on Iran.
China has long seen increased internationalisation of its renminbi currency as a fitting reflection of its growing status in the world and the CEO of Russia’s Novatek Mikhelson, said in 2018 that Russia had been discussing switching way from $-centric trading with its largest trading partners such as India and China, and that even Arab countries were thinking about it.
China launched its now extremely successful Shanghai Futures Exchange with oil contracts denominated in yuan.
Such a strategy was tested initially at scale in 2014 when Gazprom Neft tried trading cargoes of crude oil in Chinese yuan and roubles with China and Europe.
For the U.S., India had been envisioned at the time of the ‘relationship normalization deals’ drive in the Middle East as the global replacement buyer for oil & gas instead of China.
There was every reason for optimism, as not only had India recently shown a new political resolve to combat China’s influence in the Asia Pacific but the IEA had also released a report showing that India will make up the biggest share of energy demand growth at 25 % over the next 2 decades, as it overtakes the EU as the world’s 3rd-biggest energy consumer by 2030.
These U.S. hopes were dashed, however, when Putin behind-the-scenes negotiated a huge, wide-ranging deal with India.
This deal did not just include enormous oil & gas deals between the 2 countries but also including the joint development of production of military equipment.