Impact of Sanctions on Russia’s Oil Trade

The article discusses the sanctions imposed by the EU and G7 coalition countries in connection with the transactions with Russian crude oil and oil products in terms of its impact on Russian federal budget revenues. The price cap mechanism (price cap) introduced in December 2022 by the countries of the collective West was designed to limit Russian export earnings and hence the budget revenues from the sale of hydrocarbons. The price cap was not targeting a full embargo of Russian exports, since such embargo could increase the risks of the global energy crisis, and could negatively affect the European oil refining industry. During 2023 Russian oil companies used various schemes to minimize the impact of sanctions, including redirecting supplies to alternative and new markets, incorporating independent trading units in friendly jurisdictions, and using shadow fleet to transport oil. The Russian Government introduced new tax measures, in particular, it has changed the methodology of oil price calculation for the purposes of the mineral extraction tax and export duty, introducing a fixed maximum discount of Urals to Brent. However, the transaction costs of oil companies have increased significantly due to the changes in supply chains and participation of new intermediaries in such transactions. Total losses of the state budget (hydrocarbons export revenue loss) for 2023 may be approximately up to 30% (compared to the 2022 level), according to various estimates. In conclusion, the article outlines an illustrative example of interaction between the government and oil companies within the framework of a distributional coalition, namely, a group of economic agents whose interests coincide under current sanctions. The maximum discount mechanism introduced by the Ministry of Finance to determine the price of Urals for tax purposes was aimed not only to increase the budget revenues, but also to urge oil companies not to sell below this price, otherwise they would pay more taxes. Such distribution of the sanctions burden between the companies and the budget, including possible affiliation of the companies with newly created intermediaries in the oil market, might be an interesting subject of research in modern new institutional economics.