Urals and Brent, as of today:
Source: Tradingeconomics.com accessed 11/22/2023.
Latest discount relative to Brent is approximately $17.75.
Important? After all, Russia’s GDP has not taken much of a hit (of course, much of GDP is now devoted to war production so ex-military output growth in 2023 is negative 2% or less,). The oil price is relevant to Russia’s ability to continue to finance the war without resorting to (yet faster) inflation? From the Economist, October 31.
… After recording a deficit of 1.8trn roubles in January, the government has kept its budget balanced for the remainder of the year thanks to a 26% jump in non-oil and gas revenues. “In the third quarter of this year we had a budget surplus of over 660bn roubles,” Vladimir Putin boasted this month.
But the fiscal outlook rests on shaky assumptions. The draft budget assumes that oil and gas revenues will increase by more than a quarter in 2024 to 11.5trn roubles, on the expectation that Brent crude will average $85 per barrel and Urals crude $70. If oil prices drop, revenues will come in below target. The budget also assumes that the rouble will average roughly 90 to the dollar in 2024. If the currency appreciates, however, earnings on oil and gas exports will fall in rouble terms, squeezing government revenues. gdp growth may also fall short of expectations. The finance ministry has pencilled in 2.3% for 2024, more than double the imf’s forecast.
I like the idea of the russian budget being in the red. high Marx for that
Some background on Urals contract shortly after sanctions enacted: https://www.intellinews.com/urals-oil-price-is-increasingly-meaningless-allowing-russian-owned-refineries-in-europe-to-build-up-slush-funds-271098/
Thoughts from any traders in the audience?
“What appears to be happening is the budget has indeed seen a sharp fall in revenues, but the leading oil comapnies are still making huge profits. The sanctions mean they are no longer interested in reporting large profits but instead report as low a price for selling Urals as possible, which reduces their tax burden. In what is tantamount to a new transfer pricing scheme, the difference between the price the companies report and the cash they actually make accumulates in their non-transparent offshore trading companies, creating a huge slush fund that in theory the Kremlin has access to.”
Aha! This is the transfer pricing scheme that Yukos abused in the 1990’s under Yeltsin. When Putin took over, he was supposed to use Russia’s transfer pricing rules to shut down this abuse. But I suspect Putin is as corrupt as Yeltsin used to be.
“And here is the rub: while the price for Urals quoted on the Baltic Exchange, the main exchange for Russian oil export deals, tumbled by 50%, the price for the refined product like diesel and naphtha did not change. That introduces a huge spread between the cost of crude and the ultimate refined products. Normally a refinery earns a $10 margin on turning a barrel of crude into a more valuable refined product, but in second half of last year this margin swelled to $40-$50, making refineries insanely profitable.”
Wow – the refinery margin under arm’s length pricing would represent $0.25 per gallon but under this transfer pricing abuse, these offshore refineries are raking in over $1 per gallon. And I thought refinery margins in the US were excessive.
I have to wonder how much of this is being pocketed by Putin.
The purchase of Ural at $60 by a refinery followed by sale of refined products at market prices does leave a lot of profits in the hands of those refineries. If the refinery is owned by a Russian company that profits does end up in Russian hands. But it is hard for the Russians to access that money without western governments discovering it. This was probably one of the main reasons Russia decided that if they couldn’t get financial restrictions eased, they would rather abandon the grain deal. They may try to harvest some of the Russian oil company foreign profits by domestic taxation of those companies or money laundering. The article is a bit old and I am not sure if the efforts of EU to force sales of refineries to non-Russian owners have progressed. Ultimately you would want all Ural to be sold to refineries not owned by Russians.
Well the Russian multinational gets all of the profits but since a lot of these profits are sourced to a foreign tax haven, the Russian government does not get to tax the profits unless Putin has the integrity to use Russia’s transfer pricing rules. So far no sign he has been that honest as we know he owns a lot of Gazprom.
https://stockanalysis.com/stocks/lukoy/financials/
It took me a while to find Lukoil’s income statement showing not only pretax income but also income taxes paid. Not surprisingly its effective tax rate was over 19% through 2021 since Russia’s tax rate = 20%. Not a lot of income sourced to tax havens.
But for 2022, its effective tax rate dropped to just over 12%. That sounds like a new regime where the amount of income shifting to tax havens is huge. WTF is the Russian tax authorities doing about this? If anything.
Brings me back to that “26% jump in non-oil and gas revenues”. Are they somehow allowing this and getting the money via some backdoor? I also would note that Putin has pushed some of the big Russian corporations to build and fund private military forces.
Interesting news:
https://www.forexlive.com/news/russia-plans-to-fix-urals-crude-differential-at-20-to-brent-report-20230210/
‘Russia is planning to fix the differential for its main crude export — urals — to minus $20 from brent. Currently brent is trading at $86 so that would put it at $66.
Crucially, $66 is well-above the $60 price cap set by Europe and G7 nations. So far that price cap doesn’t appear to be a problem but it could if/when crude prices rally. The move by Russia may indicate some annoyance at wide differentials to its crude and customers asking for deep discounts. Fixing it, I suspect, is an aim to secure longer-term sales agreements and prices that are favorable to importers, likely in India and China.’
While cutting the transfer pricing abuse down from a $40 differential, a $20 discount still strikes me as quite high given the fact that the Brent-Urals difference used to be only $2 a barrel (before the invasion of Ukraine).
Another great explanation:
https://carnegieendowment.org/politika/89052
‘Oil industry taxation reform was one of the first major steps of Putin’s economic policy when he came to power, and oil revenues have been a key source of Putin’s power ever since, making it possible to finance a strong bureaucracy and security apparatus and to rein in powerful regional governors. The oil sector tax system put in place in 2001–2003 was designed to fight transfer pricing and shifting revenue to foreign subsidiaries of the oil companies by relying on an independent and observable indicator of the crude value: the international oil price. The reduction in oil revenues to the Russian budget since the outbreak of war, therefore, is not just the result of sanctions and boycotts, but the work of Russian insiders. International measures merely created useful pretexts for the manipulation of the international oil price and transfer of oil revenues to the offshore wings of Russian oil companies. Ironically, one of the actors behind this scheme is the mighty state-controlled Rosneft, whose CEO Igor Sechin is one of Putin’s most trusted aides. Sechin spent years gobbling up private Russian oil companies on the basis that private capital cannot be trusted, and only state control and devoted, patriotic managers like himself would align the companies’ interests with those of the country and prevent tax minimization and profit hiding.’
Putin used to enforce the transfer pricing rules when it was friends of Yeltsin who shifted Russian profits to tax havens. But now Putin has a huge stake in the Russian oil multinationals who are depriving tax revenue from the Russian fisc to line the pockets of people like Putin. Yea Putin is as corrupt as Trump.
I’ve been reading up on the transfer pricing by Lukoil & Gazprom with respect to its European affiliates. Lukoil owns a Bulgarian refinery affiliate which seems never to make any profits because Lukoil is overcharging this Bulgarian affiliate. Which is sort of odd since the Bulgarian tax rate is only 10%. Of course if there is an intermediary in a tax haven, maybe capturing profits there allows it to pay no taxes.
Promgas is the Italian distribution affiliate for Gazprom. Italy’s corporate tax rate exceeds 30% so no surprise, it pays a lot for imported gasoline such that its profit margin is a mere 0.25%. We know this because the Italian tax authorities went after Gazprom for its abusive transfer pricing.
“Latest discount relative to Brent is approximately $17.75.”
Huh – Princeton Steve kept telling us that this discount would shrink and that Brent oil would pass $100 a barrel. Yea – his forecasting record would suck if he actually had the integrity to record his insane forecasts.
Although Trump/MAGAs like to call Putin smart – I think war criminal/child kidnapping Putin has screwed Russia economically for decades. Estimated 300,000+ dead and disabled (at current burn rate – looking to be 400,000 to 500,000 by the end of next year) and another estimated 1.5 million have left the country. Also much of that military equipment is being relentlessly destroyed (estimated 5,000+ tanks destroyed, 7,000+ artillery guns destroyed, Black Sea fleet neutralized). Even the Russian Central Bank Governor is saying Putin’s war is threatening economic growth https://www.msn.com/en-gb/money/other/russias-depleted-workforce-threatening-economic-growth-says-central-bank/ar-AA1jDXgJ Also – as always – people seeking a better life elsewhere provide an economic boost to the countries they migrate to: https://www.msn.com/en-us/news/world/armenia-s-tech-sector-receives-strong-boost-from-russian-migrants/ar-AA1kkBh6
For Friendsgiving day, on the food inflation punditry front – turkey is once again cheaper (BTW, back when I worked as a food technologist in the poultry business in the 90s – we were desperate to develop value-added turkey products – ground tray-packed turkey, turkey bacon, turkey jerky, turkey hot dogs/sausages, formed turkey products, vacuumed sealed marinated turkey (take every opportunity to sell water at meat protein prices) etc.etc.) https://www.bloomberg.com/opinion/articles/2023-11-22/what-inflation-turkey-prices-haven-t-changed-much-in-30-years
Russia is looking at decades of paying for the Ukraine mistake. They could have had at least another decade of revenue from their hydrocarbons, especially NG by pipeline, before alternative energy pushed them out. Now they will lose that revenue a lot earlier. As you mention the loses to the economy and military makes those revenue loses sting a lot more. The ethnic strife and discrimination has been focused by the war and those rifts will be hard to mend. Independence movements in some regions would not surprise me although ongoing wars tend to unite – as long as there is active fighting.
Russia’s depleted labour force is causing acute labour shortages and threatening economic growth, Central Bank Governor Elvira Nabiullina said on Thursday, as Moscow pumps fiscal and physical resources into the military. Russia’s military production focus as it prosecutes what it calls a “special military operation” in Ukraine is pulling funds away from other sectors of the economy, while worker shortages and record low unemployment add to inflationary pressure through higher wages that has seen interest rates surge to 15%.
“We now find ourselves in a situation where the economy has practically fully used the available resources, this applies both to workers and production capacities,” Nabiullina told lawmakers in the State Duma. “Unemployment is 3% and in some regions it is even lower. This means there are practically no workers left in the economy, the situation with personnel is really very acute,” Nabiullina said. “For further growth of the Russian economy, increased labour productivity is needed.”
Nabiullina is noting “guns and butter” applies to Russia. JohnH has been preaching that it applies to the US but not Putin’s Russia.
Nabiullina is smart and has the courage to be honest. Jonny boy? He’s incredibly dumb and terrified to cross his master Putin.
That “26% jump in non-oil and gas revenues” is interesting and it would be important to try and get a little more details. The presumptions on oil prices and currency exchange rates are optimistic. It has always been a problem for Russia that their main export revenue is from a commodity that has such volatility in prices. Because of the GDP distortion from war investments/costs I would not pay too much attention to whether GDP increases.
Thr ruble exchange rate and the overnight rate:
https://fred.stlouisfed.org/graph/?g=1bIc1
This is monthly, so misses the recent recovery of the ruble in response to the latest rate hike. But that’s the story; bad news weakens the ruble, requiring a sharp rise in rates. Rinse and repeat.
As winter approaches, bad news on the battlefield becomes less likely for Russia, but bad economic news isn’t all that seasonal. That green line could be a trigger for another slide in the ruble, which in turn…
So, where’s the potential for good news for Russia? Can North Korea produce artillery shells faster than it has been? Can Iran produce drones faster? Can Russja conscript faster? Hmm. That leaves a lack of support for Ukraine as the only good battlefield news Russia can expect. For now, the U.S. is still sending support and Europe is ready to take up any near-term slack, but if Johnny and his ilk win the propaganda battle – excuse me, the “narrative” battle – that could change.
We’d better look to the economy if we want good news. Russia is under-investing in non-military capital. Russia is losing working-age men. Russia’s access to foreign investment and technology is limited. Russia’s trade is mostly limited to non-NATO-and-SEATO countries. Good news would be if China turns things around and begins growing faster. Good news would be if India begins paying ungrudgingly in yuan for Russian oil – seems to be going the other way. Good news would be a hard European winter, not the current forecast:
https://www.weather.gov/arx/winter2324outlook#:~:text=The%20CFS%20version%202%20climate,in%20a%20near%2Dnormal%20winter.
So further rounds of ruble weakness and interest-rate hikes – brief or persistent, hard to say – would not be a surprise.
This war was a mistake for Russia. It exposed Russia’s military weakness. It has weakened the economy. It has cut Russia off from much of the world’s best technology and knowledge. It has killed 300,000 Russian men and disabled an untolled number. Johnny needs us to ignore that and think instead about how nice it would be if Putin simply gets a chunk of Ukraine so he doesn’t have to look like a loser. Johnny needs us to think we are worse off than we are, so we’ll resent helping Ukraine. Johnny needs us to think that we are fighting a war of choice, instead of helping Ukrainians defend themselves in a war that Putin chose.
Happy holidays.
One would think little Jonny boy would be defending his master Putin against the thread of thought introduced by Energy et al regarding how the Brent-Ural discount was good old fashion transfer pricing manipulation. But little Jonny boy likely does not get this topic either. After all little Jonny boy is not very bright.
Wow! Ducky sure does love his neocon data sources…which he refuses to reveal. A number of eminent foreign affairs experts paint an entirely different picture of what’s happening in Ukraine.
Richard Haas, the de facto dean of the U.S. foreign policy establishment: “The idea that Ukraine is going to militarily liberate all the land that Russia occupies, approximately 20% of their territory, it’s laudable. I support it. It’s just not going to happen.
https://www.realclearpolitics.com/video/2023/11/21/richard_haass_we_need_to_lower_our_goals_in_ukraine_be_happy_with_protecting_80_of_the_country.html
” Biden administration officials also are worried that Ukraine is running out of forces, while Russia has a seemingly endless supply, officials said. Ukraine is also struggling with recruiting and has recently seen public protests about some of President Volodymyr Zelenskyy’s open-ended conscription requirements…President Joe Biden has been intensely focused on Ukraine’s depleting military forces, according to two people familiar with the matter.
“Manpower is at the top of the administration’s concerns right now,” one said. The U.S. and its allies can provide Ukraine with weaponry, this person said, “but if they don’t have competent forces to use them it doesn’t do a lot of good””
https://www.nbcnews.com/news/world/us-european-officials-broach-topic-peace-negotiations-ukraine-sources-rcna123628
“For the better part of two years, opponents of escalation called for exactly such a course of action (restraint and negotiations,) only to be told that it is immoral, unrealistic, or both. Pro-diplomacy voices have consistently maintained that peace talks and some kind of negotiated settlement would be in the best interests of ordinary Ukrainians and their war-battered country, and that the US government should use its leverage to make that happen. They rolled out a litany of evidence to support the claim that, in the words of Canadian-Ukrainian University of Ottawa professor Ivan Katchanovski, “even a ‘bad’ peace is better than a ‘good’ war.”Although Ducky claims to support Ukraine’s right to defend itself, he is actually continuing supporting more death of destruction, mostly of Ukrainians and their land and infrastructure. https://compactmag.com/article/a-bitter-vindication-for-ukraine-doves
But Ducky and his neocon echo chamber here insist on more war, more killing, and more destruction in a US proxy war to be fought to the last Ukrainian, or at least to the last Ukrainian still fit enough to be sent into the meat grinder. And they have the chutzpah to cloak themselves in the mantel of humanitarians!
Russia invaded Ukraniane. It is Russia which insists on keeping the war going. Ukranians are defending their homeland. It’s up to them to decide whether compromise with Russian invaders will happen. Johnny will probably repeat his lie about the U.S. preventing Ukraine from surrendering to Russia, as he has so many times, but he has never explained how the U.S. has the leverage to do that.
Neo-con data sources? What data would you like to challenge, Little Johnny? Where have I refused to reveal sources? Johnny’s response stinks of desperation, which kinda suggests I’m hitting close to home.
Jonny boy cites Richard Haass who is about as rightwing as it gets? Oh wait – little Jonny boy can’t even be bothered to spell the man’s name correctly.
BTW – I was wondering if little Jonny boy might read and comment on the actual pricing issues since there is a lot of great material.
Well it seems little Jonny boy lived up to my expectations as I figured this economic Know Nothing would not say a peep. After all – economics is way over little Jonny boy’s pea brain.
Here is part of what Haass told Morning Joe that lying little Jonny boy would not mention:
‘I would actually propose a cease-fire as an interim arrangement to expose the Russians for what they are, so we can rebuild support for Ukraine in this country. But we’ve had two fighting seasons. The idea that one or two or three more years of this is going to result in success, I simply don’t see it. Russia is on a war footing.’
Yep – it is Putin who started this war and who continues this war. Expose Putin’s forces for “what they are” – yep. They are war criminal. Which of course gets little Jonny boy all excited.
So JH, why do you continue to resist simply stating there should have been no war to begin with? No Russian invasion, no war,
Your anti war act grew stale long ago; otherwise, you’d have no problem opining here that Russia could end this needless war quickly by withdrawing.
The “neocons” here recognize you for the fraud you are. At least the supposed warmongers—unlike you—realize there was no need for any war to begin with.
But please. Do continue your faux humanitarian charade. If you can’t fool others, continue making a fool of yourself. You do it so well.
Richard Haas? First of all spell the man’s name right – dumbass.
Secondly it is a hoot that you cite rightwing Haass when claiming Macroduck is a neocon. Maybe you have no effing clue what Richard Haass is all about – which explains your stupid little attempt to claim that Haass agrees with your BS. Trust me – he does not.
Let’s see: In 1991, Richard Haass received the Presidential Citizens Medal for helping to develop and explain U.S. policy during Operation Desert Shield and Operation Desert Storm. He worked for Secretary of State Colin Powell in the Bush administration and was director of policy planning at the State Department from 2001 to 2003 during the lead-up to the Iraq war. And in 2021 he criticized President Biden for withdrawing from Afghanistan.
But little Jonny boy decides that Haass (spelled with two SS not one) is his new guru because little Jonny boy can cherry pick and misrepresent what Haass has said over time. Yea – little Jonny boy is one dumb troll.
Litasco considers moving trading hub from Geneva to Dubai: sources
https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/060822-litasco-considers-moving-trading-hub-from-geneva-to-dubai-sources
Litasco, the trading arm of Russia’s second-largest oil company Lukoil, is looking to shift its trading headquarters from Geneva in Switzerland to Dubai in the UAE, as more of Moscow’s oil flows east in response to Western sanctions, several industry sources said June 8. Litasco, which is not subject to Western trade sanctions or other measures on Moscow in response to Russia’s invasion of Ukraine, has seen its European business dwindle as many buyers and refiners in the region have sharply cut their dependence on Russian oil.
Prior to Russia’s invasion of Ukraine, Litasco would trade around 3 million b/d of crude and refined products, including Russian and non-Russian origin oil.
“The plan is to move to Dubai,” a source close to the matter told S&P Global Commodity Insights.
Many of Litasco’s employees in Geneva have recently been asked whether they will be willing to relocate to Dubai, sources said.
Litasco declined to comment on the move to Dubai. “Litasco does not comment on rumors, business, commercial or political related matters,” a company spokesperson told S&P Global.
Litasco already has an office in Dubai, according to its website, based in the Dubai Multi Commodities Centre, which was set up as the region’s main commodity hub.
Increased financial measures against Russian banks have already forced many refiners and trading houses to reassess their business with Russian oil companies, with some already opting for alternative oil supplies.
Change in trade flows
This comes amid a complete metamorphosis in Russian oil trade. Chinese refiners have rekindled their taste for Russia’s ESPO crude, while India’s big refiners have recently bought a sizable amount of Urals. As a result, the Middle East is also emerging as a new trading hub for Russian oil, according to many trading sources.
A new group of smaller traders, many of which are based in the Middle East, have started to buy and sell Russian oil as many of the bigger traditional trading houses wind down their exposure to the country, with Russian crude and products increasingly losing favor in European markets as a result of the war in Ukraine.
Heavyweights like Vitol, Gunvor and Trafigura have already cut back their trade with Russia’s key oil producers in recent weeks, paving the way for a handful of relatively new entrants. And Europe, previously the largest buyer of Russian crude, is now scrambling for other alternatives.
Europe is particularly dependent on Russian oil and was importing about 2.7 million b/d of crude and another 1.5 million b/d of products, mostly diesel, before the invasion of Ukraine. On May 30, EU leaders agreed a compromise deal to ban almost all seaborne Russian oil imports by year-end and trigger a major upheaval in global oil trade. Russia’s key export grade Urals has continued to trade at hefty discounts to other crudes in recent months as this key grade has lost its main customers in Europe.
Medium sour grade Urals was assessed by Platts, part of S&P Global, at a discount of $35.20/b to Dated Brent on June 7. On an outright basis, Platts assessed Urals at 87.45/b and Dated Brent at $125.795/b on June 7, S&P Global data showed. Urals was assessed at $90.72/b and Dated Brent at $100.48/b Feb. 23, the day before Russia invaded Ukraine.
The Nexit guy won the Dutch election. Seems like an odd view for a great trading nation, but what do I know?
I just thing “Can’t we all just not get along?” is a bad idea right now.
https://oilprice.com/oil-price-charts/#prices
Urals price below $63 a barrel. I guess Princeton Steve is ducking this one because his forecasts of high Urals prices fell flat. Then again Princeton Steve has never documented his forecast record so yet another massive error will go unnoticed.
https://www.argusmedia.com/-/media/Files/white-papers/2022/argus-white-paper-urals-pricing-seeing-drastic-change.ashx
Argus White Paper: Urals pricing seeing drastic change
Written back in Nov. 2022 but the information was quite detailed and informative.