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Russian Roulette
The Impact of New Sanctions and Ukrainian Deep Strikes on the Russian Energy Industry with Clayton Seigle
00:43:04
Max and Maria spoke with Clayton Seigle about how new sanctions from the Trump administration could potentially impact Russian energy revenues. Additionally, they discussed the effects of Ukrainian drone strikes on Russian refineries.
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- [00:07]
A
Welcome back. I'm Max Bergman, Director of the Stewart center and Europe Russia Eurasia Program at csis.
- [00:12]
B
And I'm Maria Snegewaja, Senior Fellow for Russia and Eurasia.
- [00:16]
A
And you're listening to Russian Roulette, a podcast discussing all things Russia and Eurasia from the center for Strategic International Studies. Hello everyone and welcome back to Russian Roulette. I'm Max Bergman here with my co host as always, Maria Snegavaya. And today we're joined by our fantastic CSIS colleague, Clayton Siegel. Clay is a senior fellow and James R. Schlesinger Chair in Energy and Geopolitics with the CSIS Energy Security and Climate Change Program. Previously, Clay led the Global Oil Service at Rapidon Energy Group in in addition to numerous other roles in the private sector, Clay has also served in the U.S. department of Energy and is frequently cited by international media outlets on all things connected to the global energy markets and their impacts on geopolitics. I cannot think of a better guest to have given the announcement that we've just had from the White House about Russia's sanctions and also want to discuss what is happening in the Russian oil sector given Ukraine strikes. So Clay, we're absolutely thrilled to have you here with us today. Thanks so much for joining us.
- [01:27]
C
Thanks, Max. Maria, thank you so much for having me on. Great to be with you.
- [01:30]
A
So to start, we're going to flip this conversation. We were going to talk, I think mainly about Ukraine strikes, but we need to address yesterday's big headline. We're recording. On Thursday, October 23, the US treasury announced new sanctions against Russian oil producers Rosneft and Lukoil, two of the heaviest hitters in the Russian energy industry. The move, at least from my perspective, was quite a shock, a welcome shock. What do you make of this recent move and how do you think this is going to impact the Russian oil sector, global oil markets? What's your sort of broad 50,000 foot take on what just happened so far?
- [02:04]
C
I'm impressed, favorably impressed. I think that this is for sure the most powerful card that any US Administration either US Administration has played with regard to punishing Russia for its invasion of Ukraine since February 22. And so this is a stronger response than anything that the Biden administration implemented. And also when we think about the current Trump administration last nine or 10 months until now, this is a more powerful card. Rosneft and Lukoil are the two heavy hitters in terms of the Russian oil industry. And notwithstanding all of the sanctions and other measures that have taken place since early 2022. A lot of entities around the world, oil companies, banks, others, continue to do business with these two Russian oil giants. So in theory and depending on implementation, this move has the potential to be a power move that could really move the needle on Washington's aspirations, desire to change behaviors in Moscow with regard to perpetuating this war. But it's all about the implementation. And we can talk about details. This is what's going to determine whether it really is a power move that affects oil markets, changes, or at least compels changes in behaviors in Moscow, or is a little bit on the performative side and doesn't really have that effect. All about the implementation, primarily from our side, from Washington.
- [03:41]
A
Before maybe diving into this, maybe you could set the stage on where are we with sort of the global oil markets? You know, why didn't the Biden administration, obviously they were very focused on supporting Ukraine. There was a lot of money, you know, a lot of critiques that they were restrained. But, you know, my understanding is that they were very concerned about the impacts on global oil prices. We had, you know, a lot of inflation after Covid, and so they developed the oil price cap, basically this idea that you wanted to keep Russian oil on the global market, but you were just going to try to reduce revenue flowing into the Russian treasury. So you're going to give, you know, India basically got a discount on the Russian oil that it was buying. What was the hesitation? And has something changed in the global oil markets that would prompt the U.S. and maybe the global economy to not be as concerned if this does really impact the Russian oil sector? So maybe you could set the kind of global stage.
- [04:37]
C
Well, of course, it was the Biden administration that was here when the war began, at least the 2022 part of it. The prevailing prerogative for the Biden administration was to not rock the boat on global oil prices to make inflation even worse and hurt U.S. consumers and U.S. businesses with high oil prices. That could absolutely follow from a major removal of Russian oil barrels from the global market. And if you think about the time around the invasion in spring and a bit of summer of 2022, we saw a historic spike in the price of oil around the world. We got to well into triple digits, I think around $130 per barrel for international oil, the Brent European oil benchmark. And we got gasoline prices in the United States on an annual, I mean, on a average national basis of $5 a gallon at their peak. And that's a record. And they were much higher in Other areas of the United States, like the Pacific Northwest, California, even the Midwest, way higher than $5 a gallon. So this is an oil price spike for the ages. And the Biden administration was very concerned about the potential for macroeconomic negative consequences, again for US Businesses and consumers. So its approach to adding pressure, adding sanctions on Russia was to not rock the boat too much in a way that would remove material barrels of supply from the global marketplace. So that means that the, and by the way, the Biden administration was not the only one concerned about blowback, negative effects from heavier sanctions on Russia all. Also the European Union, I mean, you have to really look no further than to see that they've just issued the 19th package of sanctions against Russia since February 22nd. And of course, we're in the fourth year of the war. That already tells you that it has been quite a protracted and gradual process of ratcheting up the pressure through oil and other energy sanctions. Now, the Trump administration came in and wanted to do things differently. I think that the first approach that the Trump administration took was let's pressure Russian revenues lower. So what are revenues? Revenues are just the combination of price times volume equals revenue at any company, any state account. It's the same math. So the first approach was to say, let's pressure Russia's oil prices lower by bringing all global oil prices down. So Trump said, I want to see more supply from opec. And by the way, he has gotten it from them. He said, I want to see more supply from the United States. That has not been too forthcoming. Technically, it's a little bit higher than it was when he took office. But all indications are that US Supply is going to decline next year, especially in light of lower price forecasts. So, but the concern with lower oil prices, of course, is that the United States oil industry cannot be profitable below $60 a barrel when it drills and fracks new onshore wells. The Dallas Fed survey at the beginning of this year found that it's about $65 a barrel is the profitable, break even cost for a new US Onshore oil well. The shale oil that we largely produce has a very steep natural decline rate, meaning it's a depleting resource, as all oil is, but at a faster rate than conventional oil plays around the world. So you got to continuously replace what you're drilling and producing. So US Oil is not profitable at lower oil prices. And so I think that that message did get through to the administration during the first half of this year. Then they tried kind of like phase two approach that said all right, if bringing global prices down is not the right pressure point, why don't we try to bring Russia's volumes down, the volumes that it exports into the market and sells to its international buyers. And that's where concepts like this, the sanctions program. First we had sanctions in January on two smaller Russian oil companies. This was a kind of a parting shot by the Biden administration back on January 10th against Gazprom, Neft, and so similar to what they've now done with the heavy hitters with Rosneft and Luke Oil. So the idea here is if you can scare away Rosneft's and Lukoil's customers, their buyers, then Russia will sell less, it will have less revenue to spend on the war and also keeping things relatively calm and favorable at home. That's the approach here.
- [09:34]
B
May I jump in to clarify that? It appears that the role of the secondary sanctions is really crucial with this design. And in particular, maybe you could compare what this particular sanctions ruling states about the risk of the imposition of secondary sanctions as to how likely it is going to be implemented given Russia's ability to circumvent sanctions really? Well, obviously it has the shadow fleet. It has all sorts of shell companies that may potential limit the impact of these sanctions. What's your take on this?
- [10:08]
C
First of all, just explain a little bit about primary versus secondary sanctions. The primary sanctions that were announced yesterday already have the effect of prohibiting companies, entities, persons doing business with Rosneft and Luke Oil, which constitute a big chunk of Russia's oil business even before secondary sanctions are issued. Secondary sanctions are explicitly contemplated in Treasury's order yesterday. It basically says that could be forthcoming. We still have that tool in the toolkit to play if we find basically I'm paraphrasing that specific buyers are violating the primary sanctions. That could be a very powerful follow up against specific Russian oil customers. But already with the primary sanctions in effect, entities that have been doing business with those companies should be justifiably concerned and even scared about continuing that trade, those transactions with the two sanctioned entities. And by the way, guys, the ability to do the kind of the reshuffling the shell game is still a formidable obstacle. It's very likely that this is not the first day that Rosneft and Luke Oil have thought about a contingency, a scenario or like this. And so they have probably already thought of the tools in the toolkit to circumvent sanctions like this. You brought up the shadow fleet. That's a component, but there's also other things that they can do with Shell entities. Fraudulent attestations to say that oil export cargoes didn't come from them actually and maybe came from other either imaginary or otherwise, Shell kind of entities, false entities. But I actually think that the biggest question about enforcement is not about Russia's ability to evade the sanctions. It's about the determination on our side on the US Administration to enforce them. So is this sanctions campaign really a concerted effort to turn the page, close the chapter on waiting for Putin to come around and see this through to the end, meaning get to that motivating changes in behavior with regard to the war, or are we going to back down? Are we going to either during this intervening 30 day wind down period or after that, or even before that, start to issue side deals? And treasury has this option of issuing instead of general licenses where the terms are made public, what they call specific licenses. And this has been done before in the case of sanctions on Iran, sanctions on Venezuela. These specific licenses are actually private arrangements that are not made public between treasury and third parties, companies, entities that allow them one way or another to be exempt from the sanctions. And we have a case right now in Venezuela where apparently one major international operator has gotten a specific license. The term's not made public, but we can see from export and import data and tanker tracking that since summertime, flows have changed and they've increased. And so that gives us an indication that a private specific license with some exemptions or waiver to sanctions have been implemented and awarded. So what you really need to keep an eye on right now is the bilateral negotiations that are sure to take effect between Russia's traditional oil customers that have still been doing business with Rosneft and Luke Oil and the administration. And there are several potential motivations for the Trump administration to make concessions to make exemptions for some of Russia's oil buyers. One of them, as we talked about before, is to not rock the boat too much on global oil prices. So yes, we're cracking down, we're doing an unprecedented step on a declarative basis. But wink, wink, nod, nod, let's work something out and not have a full cutoff of those millions of barrels per day. So oil prices, they'll fight against inflation could be a motivation for, let's say, selective enforcement of what was announced yesterday. Another potential motivation, though, could be in the context of the bilateral negotiations that Washington is holding with dozens and dozens of countries to forge what the administration sees as more favorable and more balanced trade deals that include significantly higher Tariff rates that should bring in some capacity, more revenues and better fiscal positioning for the United States than was the case under previous arrangements. And so the trade deals are another potential motivation for less than complete enforcement, as the headlines would seem to indicate. Based on what we're seeing today, we need to keep an eye out for indications that private arrangements are being made between the administration and counterparties to keep some of that oil flowing.
- [15:32]
A
I think that's a really important point, Clay, and how vigorously these sanctions are enforced. And that seems like the big question right now. Is this going to be enforced at least the way I see it, as sort of an Iran style sanctions program where there, you know, was enforced at least the way I saw it really vigorously or no, I'm curious how you say, like my interpretation was Iran, we sort of, the US Government was very focused on enforcing Iran sanctions. Do you see that happening? Is this the sort of thing where, you know, hopefully, you know, treasury and State sort of give the order to their people go, you know, hunt Russian oil like rabid dogs and sanction everything because they, this is a degree of whack. A mole of bureaucratic energy has to be built up to constantly be looking out for shell companies and other things like that. So how do you see the enforcement playing out? And I guess then the second part of that question is what's going to happen to global oil markets? Right. You mentioned that for U.S. energy producers, the price of oil is maybe getting a little bit too low. It does strike me that this administration also has a lot of influence with kind of countries in the Gulf, you know, big, you know, huge oil producers, OPEC countries that, you know, could it also say, okay, Saudi Arabia Emirates, increase your production to maybe offset some of the Russian oil, we're going to take off the global market. And maybe the Biden administration didn't have that kind of foreign policy leverage with these countries where they would follow, but perhaps Saudi would listen to the President making that push. So how do you see enforcement playing out? What then could be the impact on the global oil markets if enforcement is really tight?
- [17:17]
C
These are great questions and there's a lot to unpack here that I think is going to be informative. Let's, let's kind of go backwards. So OPEC is delivering on what President Trump demanded just a couple of weeks into office. You may remember in January, he delivered remarks to the audience of the World Economic Forum in Davos, and he specifically called out OPEC for failing to produce and deliver enough oil to world markets to support economic requirements and he basically said, in so many words, I'm expecting more from you guys. And that's exactly what they've been delivering throughout this year. OPEC has been unwinding its program of supply cuts that was adopted over the last couple of years much more rapidly than they had previously indicated they would before this year and than the market was expecting. And so they've already unwound more than 2 million barrels per day of supply curtailments. And they're now into a second tranche that would be more than a million barrels per day if it's fully unwound. And so OPEC is delivering the goods that President Trump has urged of them, demanded of them. And by the way, we just received word this week that the Crown Prince of Saudi Arabia, mbs, will be visiting Washington in a few weeks. And so between that and Trump's inevitable requirements before the midterm elections and his priorities, it's more than likely Saudi Arabia and its partners will continue to supply the oil market with, on the, on the higher side of incremental supply rather than reverse their policy right now and start to be a more, let's say, stingy with, with supplying the market. I think that's a safe assumption. Now, it's really interesting that you made the comparison to Iran because another one of this administration's priorities has been pressuring Iran on the foreign policy and national security front. We obviously know what happened with the bombing operation during the so called 12 Day War on the nuclear sites. But what's really interesting is in February, this administration came out with an order, it's called National Security Presidential Memorandum two. And that basically calls for a policy of so called maximum pressure on Iranian oil exports and explicitly sets a target of bringing Iran to zero oil exports. Well, that is not what's happened during the course of this year. And even though those are the marching orders for the staff and the working folks at the agencies and departments, the truth is that this policy has not really moved the needle on Iranian oil exports. And so those volumes Both before the 12 Day War and since have still been pretty robust. More than a million barrels per day are being exported and substantially all of it is making its way to China, which by the way, has been undertaking a strategic program of acquiring oil imports and building government held reserves as a cushion against potential future disruptions. And China, of course, is really reliant on oil imports. It imports substantially 11 million barrels per day. So it's a huge growth engine, not only to fuel its refineries for producing transportation fuels, but also this kind of extra source of demand to stock up its government held reserves. So the reason why I bring up the or double down on this Iran example is that that's a case where even though the stated policy is to bring Iran's exports to zero, that is not what's happened in the real world. And so that really raises a flag that we could have a similar outcome when it comes to these tougher sanctions in theory on Rosneft and Lukoil. So that's why it all comes to the enforcement. And it's not so much about the shadow fleet. I think in this case it's really about whether exemptions are granted. So look, I would actually look more to the Washington side than the Moscow side in terms of a leading indicator for what happens next. And that's all about trying to answer your question about what happens to the global oil market and prices from this latest action. It all depends on whether the market believes that Russian barrels are finally for the first time going to be removed from global oil supply, or whether they're going to be just reshuffled like they were after the EU banned Russian oil imports, both crude and products, or neither. Or maybe the oil stays on the market and no one is really deterred from doing business with them, so it doesn't need to be reshuffled. So look to those exemption negotiations as the key to how the oil market is affected and also the relative pressure that may be felt in Moscow. When it comes to the geopolitical side, it all hinges on whether these sanctions take and take oil off the market play.
- [22:27]
B
Many thanks. Another interesting and really positive development it seems, is today 19th sanctions package by the EU which appears, at least at the first sight, coordinated somewhat with the US sanctions. So I'm wondering if I'm right about it. Indeed, just to flag to our listeners, this sanctions package eliminates the exemption for Rneft and Gaspard neft oil and gas imports into the EU and also goes after Lukoil's prominent shadow fleet enabler based in the uae. To what extent do you think this element, the coordination transatlantic alliance that we've been waiting for, is going to do the trick?
- [23:08]
C
Well, once again the, the measures that have been announced in principle could be a really potent determinant of the outcome of the war and Putin's ability to weather this storm. We have some concerns though. I mean again, by its very nature we're on the 19th round and it only happened after the last kind of holdout within the eu, a bit allied with Putin and Moscow made some concessions and got on board. So all of these maneuverings require concessions and require compromises. But I do agree that in principle, this 19th round, they're getting stricter and at least in theory, they should have greater effects in pressuring Putin to potentially change behaviors. What I'm looking for here, especially the, the ban on liquefied natural gas imports, is an especially important, let's say, novel approach. And it's one that could move the needle because even though pipeline gas deliveries from Russia to the continent have been greatly reduced over the last couple of years and more recent months, the stuff that makes its way by sea, so gas in its gaseous form is brought down to an extremely low temperature, it turns into a liquid form and it's sent to buyers around the world on these expensive tankers that keep the gas kind of ultra chilled. It's an expensive process and it's one that the United States is investing heavily in since we're such an important supplier. But when it comes to Russia and Europe, there are still quite some major members of the European Union, major economies that have been taking advantage of the absence of sanctions on LNG imports to continue that business. And so the fact that those countries have also agreed to reduce or maybe even end their imports of liquefied natural gas from Russia is another important pressure point. And I'm not expecting a lot of problems with implementation on the gas side like we potentially are with oil. So I think that that one does net, net add to Putin's pain points. Now, when it comes to the oil side, there are some additional moving parts. One of them is probably targeting India and I can explain why, you know, India along with China are the two major, almost the only continuing crude oil customers for Russia. And so India is probably, I think we can say, more concerned with running afoul of US treasury and the Trump administration than the decision makers in Beijing. It's my assessment. And so for that reason, adding the pressure to the Indian oil customers of Russia through this 19th round of sanctions is probably liable to have a greater effect than the previous moves. So when we think about a country like India, there's a provision in the 19th round that says, listen, if you're trying to tell this narrative that the state owned oil companies have divested of Russian oil supplies and it's really only a couple of private refiners that are still delivering, still taking the Russian oil and basically laundering it to deliver it to compliant markets like Europe, that's not going to fly anymore. The new set of rules says you can't play that Card. We're going to not recognize a split like that, a bifurcation, unless maybe you show on a cargo by cargo level, it's really been split out like that. But to just kind of declare at a national level, hey, don't worry, our state owned stuff is within compliance, that's not going to fly. And so that means that the biggest privately run refiner, Reliance Industries, is going to have a real challenge if it wants to continue to procure those discounted crude barrels from Russia and turn them into high value refined products and then sell them into the European Union. They're going to have a problem. And now it's double trouble with regard to the United States sanctions to the extent that they're enforced. So I think seeing the EU and Washington get closer together, shoulder to shoulder on these measures is a great step in the right direction. They could do even more, of course, and one issue is about the sanctioned fleet. And so each one of these governmental authorities, the United States, the EU and the UK maintains their own list of the sanctioned entities and ships. And so because new ships are coming into the shadow fleet all the time, basically every week, it would be really great if there was just one unified set, a comprehensive set of tankers updated at all times that are on the blacklist. But instead they all maintain their own separate lists. And that dilutes the firepower associated with tracking and banning the activity of the shadow fleet. So it'd be great if those three governmental authorities got on the same page and the Venn diagram with the overlapping parts and it was just basically like one concentric circle. That would be the best case outcome for cracking down on the shadow fleet.
- [28:25]
A
Clay, maybe now we should pivot to talk about the other aspect that is impacting the, the Russian energy sector, and that's Ukraine's military strikes using drones to target Russian oil refineries. This has obviously caused a lot of attention. There's been a lot of images on social media of, of gas lines, of, of these, you know, drones striking Russian oil refineries. What is the effect that you see these strikes having both inside of Russia and on the Russian economy in general and on the Russian oil sector? Maybe you could, could give us sort of what is your kind of 30,000 or 50,000 foot take on what are these strikes doing?
- [29:10]
C
So they haven't done too much up until this summer, but we may be at an inflection point after which they could have a much greater impact. And I'll explain. So Ukraine began this military campaign to target Russia's oil infrastructure in substantially March of 2024. And so it's been more than a year and a half that they've been at it. And up until this summer they've had very visible operations. And Ukraine has been able to strike at very long ranges with very precision guidance on specific targets. But alas, it really has not moved the needle on Russia's fuel production at those refineries. And the key reason why is because of a third important element. They've got the range, they've got the precision guidance, but they don't really have the destructive fire firepower of major modern military munitions, the kind that are fielded by the major Western armed forces and Russian, by the way. Right.
- [30:19]
A
These are low flying drones with low payloads. They're not cruise missiles. There's a cruise missile that the Ukrainians are developing, but we'll see. But sorry.
- [30:28]
C
Well, and that's one of the trade offs. If you're going to fly a drone hundreds and hundreds, even a thousand miles, then it can only have a certain weight. And the trade off between fuel, which is the range and the explosive firepower of the warhead is the trade off they've been trying to deal with. And so they've been trying to cast a wide net and hit many refineries over Russia's vast land area in order to have a widespread effect, kind of a shotgun blast approach, if you will. But yeah, the trade off again is that they have not succeeded in degrading, let alone destroying, these Russian oil refineries. Even though the explosions kind of look impressive on the videos and the social media. The Russians have been able to repair these struck units relatively quickly. Periods of weeks, in some cases a couple of months. Almost none of the the refineries that have been damaged have had outages longer than that up until now. Now there was kind of a stage change in Ukraine's scale of attacks during August and that had a bigger impact and took more Russian refining capacity, we call it throughput offline than in the past. But there again, I fear that it's just a blip and that it's not really going to move the needle because the Russians can still play their cards in terms of rapid repairs and restorations to repair the damage before major impact on fuel production or on our revenues from sales could take effect. However, the reason why I think that we're an important inflection point is because we could be at a place where we can improve on that last wish list item to make a difference, which is the explosive firepower. And that could come from Two sources that could come from external, meaning Western supplied weapon systems. And we've all been monitoring the talk about the Tomahawk, the United States cruise missile, well tested in battle over the decades. We have a lot in surplus, but we also have our requirements for our stockpiles. And so this administration in recent weeks has, I think we can say, has gone back and forth and oscillated as to willingness to supply Kiev with Tomahawk missiles that have a warhead weight of more like £1,000 compared to just 100 or 200 pounds that we've seen in the drones. So obviously it could have a multiple effect in terms of explosive firepower. So the jury's still out on whether Tomahawks will ever arrive. I think the latest pretext for not sending them is that they would take a really long time to learn how to use six to 12 months. I mean, to be fair, we heard the same kind of objections with F16s, Abrams tanks, other weapons systems. They're too complicated for these guys. And surely the war will be over right before the Ukrainians learn how to field them in battle. I'll leave it there. The other potential game changer in terms of explosive firepower for this campaign against the refineries is a homegrown weapon system in Ukraine. It's called the Flamingo cruise missile. And it reportedly, we don't really have good data from being battle tested because it's brand new. Reportedly it would have an even longer range and an even heavier payload, meaning explosive firepower than even the Tomahawk. So if those reports are true, and if Ukraine is able to field the Flamingo missile effectively in scale, they could actually destroy Russian refining units and keep them offline for longer than the Russian repair capability can offset. That could move the needle on Putin's ability to prosecute the war and also to finance the war. On the physical side, there's thousands of tanks, trucks, other vehicles that the armed forces need to maintain their invasion and try to push forward. And if the tanks and trucks can't fuel, they can't fight. Same for any army. And on the financial side, if Russia, let's say if it's a surplus of diesel that it exports to the international market, is impeded, reduced, then it will have fewer sales, less revenue to spend on the war, it'll have to spend down its piggy bank, the national welfare fund, even faster than it has been already, which is formidable. And so you could potentially have a much bigger budget deficit that makes it harder to sustain the war. So on the Fuel side and the finance side. This could be a game changer.
- [35:14]
A
So, so just to maybe sum up here, it seems like what you're saying is that these strikes that the Ukraine has been doing, they're having an impact. They're, they're sort of denting, they're bruising the Russian oil refining sector. I mean, I've seen some statistics that, you know, that partly this has caused Russia to export more, more crude oil and less refined products because its refineries are struggling and it's causing some domestic disruption. But in your view, this is sort of a temporary thing because Russia can get these refineries back online. So it's a little bit like, yes, people are waiting in line, but they're still, they still have refined oil. They're able to repair these, these sites. So this is not the sort of game changer that I think many of us looking at this are hoping for.
- [36:02]
C
Exactly right. You've got it. Exactly right. So it's definitely steps in the right direction. But they need more in order to accomplish the objective of coercing Putin to change behaviors in Ukraine. And all indications, even following an impressive lavish summit in Alaska, red carpet treatment in the United States and floating the idea of getting back together again in Budapest, which is on again, off again, none of those things are having an effect. I believe, paraphrasing the President, all the talks with my counterparty sound great, but we're not seeing any changes. And that's also the case with the Ukraine's taking matters into its own hands by trying to degrade the refining capacity. You're absolutely right that since summer, since the attacks picked up, we've seen incrementally less sales of refined products and a little bit more sales of crude oil. It makes sense if they are refining a little bit less crude at home, then those distressed barrels are going to have to clear the market so that they can continue producing in the fields. And so they have to ship a little bit more as crude oil. Those are only going to a few places, India, China, Turkey. And so there's limited markets for that. And it's a really interesting inflection point in terms of the calendar, Max and Maria, because as winter sets in, which is basically November for them, they have to set the field level production how much oil they're going to be pulling out of the ground for the duration of the winter. So this is the perfect time to add more pressure with sanctions and with the military campaign against the refineries. Because since Russia's oil production press profile will be fixed lest they damage their field from manipulating them during the frozen months. The pressure could be even greater during winter than it was during the summer. So there's a seasonal aspect to the strategy as well.
- [37:57]
B
Many thanks, Clay. And maybe one of the broader issue, the topic about the future of the Russian energy industry. Of course we're talking about all this dynamic that potentially quite detrimental to Russia, conditioning on the enforcement effort by the West. But what about the long term? As Russia's key customers of crude oil and natural gas like China, continue to move forward on their energy translation, and Russia's ability to extract oil and gas rents to fund its more aggressive foreign policy continues to come under strain over the long term, is it perhaps too optimistic of an assessment? Will Russia find ways to manage? You know, there were a lot of predictions in the past about things going south for Russia. It always somehow managed to handle the situation. What's your assessment of the long term?
- [38:46]
C
Well, when we get into the long term, and of course this is what we do at csis, we start to talk about the broader geostrategic potential for changes and new, new normal that could emerge. So when I think about Russia from my position, it's about the duration of this chapter led by Putin or potentially similar thereafter. I mean, that's one. If you think about a flowchart, that's one potential outcome. And in that scenario, I think that we see sanctions and restrictions on doing business with Russian energy continuing maybe around the margins, incrementally, there could be some loosening of restrictions and some incremental restoration of trade. When we think about energy in places like Europe and internationally. But it's really going to depend on the outcome of the war and whether the traditional customers of Russian energy, largely in Europe, can view Russia as a reliable, safe counterparty to do business with again. And under that first scenario, that first outcome where we're talking about Putin remaining in power or a subsequent regime that has a similar dynamic with the west and most of the international community, I don't see a return to the status quo ante in the cards. If you think even more creatively about what the future in Russia could be, a real opening and a real return to collaboration with international partners besides the self serving ones in China, in North Korea, in Iran, then that's a completely geostrategic and a different geostrategic and geoeconomic environment for counterparties to think about. And in that case we could see more flows of Russian energy, especially gas, because of course Russia is obviously the proximal supplier to the continent and so for gas, you could see greater volumes returning to power the European economies forward into the future, but only if it's a safe regime and a regime that agrees on the basic rules of engagement in terms of international behavior.
- [40:58]
A
Clay, thank you so much for this. I think this is just a fascinating conversation. There's now a lot for us to watch and monitor about the downstream effects of this into the Russian economy and then Russia's ability to fight this war. I think the hope is that these sanctions take a real bite out of the Russian economy, choke Russian revenue, make it really hard for Russia to continue to finance the war the way they have been providing the benefits to get Russians to then volunteer to show up to this war. Maybe it forces a mobilization that happened in the fall of 2022 where Putin's popularity really cratered. So I think we're there's a lot more that we're going to have to follow and track. And Clay, you have really set the stage for us. So thanks so much for joining us on Russian Roulette.
- [41:46]
C
My pleasure to be here. And if there's a silver lining with this continuing saber rattling, it's that there's great opportunities for collaboration here at the center between US and energy security. You guys on the Russia team, I'll look forward to next time, definitely.
- [42:00]
A
So unfortunately we're going to have to leave it there. As always, if you haven't already and you really should do this, please be sure to subscribe to our show and give us a five star rating. Additionally, please be sure to check out our sister podcast, the Eurofile, where oftentimes we talk also about Russia and Europe's ability to engage Russia and, and, and what Europe is doing, particularly when it comes to frozen Russian assets. So please check out the Euro file. You can find it wherever you get your podcasts and we will see you next time on Russian Roulette.
- [42:34]
B
You've been listening to Russian Roulette. We hope you enjoyed this episode and tune in again soon.
- [42:40]
A
Russian Roulette releases new episodes every two weeks on Thursdays and is available wherever you get your podcasts. So please subscribe and share our episodes.
- [42:48]
B
Online and be sure to check out all the latest analysis by the Europe, Russia and eurasia program@csis.org.