The Russian government has hit the country’s oil producers with sudden export restrictions in a move that Moscow declared is in response to the shortage of fuels on the domestic market and a jump in domestic fuel prices that the Kremlin wants to avoid.
Prime Minister Mikhail Mishustin late last week signed a resolution that immediately prohibited exports of end products, such as diesel and petrol fuels, and also refinery feedstocks known as gasoil and middle hydrocarbon distillates.
The resolution contains no estimated timeframe for the ban to be lifted.
The ruling has sent shockwaves across the Russian oil industry that is dominated by so-called vertically integrated producers, which send their produced oil for processing at large refineries under their control.
A representative of Russian state-controlled pipeline operator Transneft said that it halted operations of dedicated pipelines to the port of Primorsk on the Baltic Sea and Novorossiysk on the Black Sea that transport diesel fuel from refineries in the European part of Russia.
The outright ban is the first one of such kind since the breakup of the Soviet Union in 1991 and the emergence of independent oil producers from what was once the monolithic Soviet oil industry.
“Russia wants to inflict pain on Europe and the US and it looks like they’re now repeating the playbook from gas in the oil market ahead of the winter months — they’re showing that they’re not finished using their power over energy markets,” said Henning Gloystein at Eurasia Group, according to the FT.
Russia has a significant excess of diesel, with about half of the annual 650 million barrels of production being shipped to international destinations.
There are suggestions that companies will have to cut output to avoid storage facilities at plants they operate getting overstocked with diesel.
The export ban is indefinite and further actions will depend on the saturation of the domestic market with the excess of fuels, Deputy Energy Minister Pavel Sorokin said in a televised statement.
“We expect that the market will feel the effect quickly enough,” Sorokin said.
Sorokin and other governmental officials have complained that unidentified traders purchase diesel and petroleum fuels for domestic distribution at a low price and then ship these fuels to export destinations where the price is higher, engaging in activity that authorities believe is illegal.
Russia has been running a scheme to cap the price of fuels that are supplied to domestic customers, with authorities paying producers compensation to cover the difference between the export and domestic prices of diesel and petrol fuels.
However, last year the amount of such compensation payments to producers for supplying discounted fuels domestically dropped as authorities argued that the budget was already overstretched because of the increasing expenditure, reportedly linked to the increased military spending by Moscow.
Mikhail Krutikhin, a partner in Moscow-based energy consultancy RusEnergy, said that Russian production might fall if authorities continue their chase and extend the crackdown to informal exports of Russian fuels via transit countries such Kazakhstan, Belarus, Kyrgyzstan and Armenia.
These four nations and Russia enjoy a joint customs zone and do not pay custom taxes as they move goods and commodities across their borders.
The ban also lifted international oil prices at the end of the last week, though only temporarily.
Resilience to international sanctions and “the laughable Biden price cap have allowed Russia to not only get back energy revenues from before the Ukraine war [this year] but also regain dominance over the market where it can cut fuel exports and move the entire global market”, Price Futures Group analyst Phil Flynn said in his daily market report.