The oil sanctions are the struggle between attack and defense

Alexey Gromov gave an interview to RIA Novosti regarding the long-term impact of Western sanctions on the Russian oil and gas complex.

— The first sanctions affecting the Russian oil industry in July 2014 affected two companies — Rosneft and Novatek. How did the industry take the first sanctions then?

— This was the first precedent of sanctions pressure on modern Russia. The main restrictions imposed on a number of Russian oil and gas companies, not only Rosneft and Novatek, primarily affected access to the Western financial market.

In fact, Russian companies under sanctions have been denied long-term loans for more than 90 days in the West, which have traditionally been used to finance large projects in the industry. This turned out to be a serious problem given that our leading companies, in particular Rosneft, were at the peak of their debt burden. And the question arose whether they would be able to service their external debt and implement large-scale investment projects in such conditions.

As a result, the blue chips returned to the Russian borrowing market, providing it with the necessary financial depth and reliability. In fact, they contributed to the overall strengthening of the Russian financial system.

Our banks are VTB, Gazprombank, Vnesheconombank (now VEB.RF), were able to lend to Russian oil and gas companies that had previously taken money abroad, where it was issued on the best terms. And now the Russian market has provided oil companies with conditions comparable to Western ones, sometimes even better.

— In addition to financial sanctions, technological ones were also introduced, what was their purpose?

— The purpose of the first technological sanctions imposed in 2014 was to limit the long-term prospects for the technological development of the Russian oil and gas industry. After all, it was assumed that we are very deeply and heavily dependent on foreign technologies, especially in the field of extraction of hard-to-recover reserves, as well as work on the deep-sea shelf and in the Arctic.

However, after 10 years, it can be concluded that these technological sanctions have become a real impetus for the real, and not "paper" implementation of the import substitution program in Russia.

— Why did the oil sanctions not curb oil production in Russia?

— At the time of the sanctions, the West was terrified of fluctuations in Russian energy supplies, so as not to harm its energy security. Therefore, the sanctions were designed in such a way that Russia's current production would be maintained at an acceptable level, but future projects would be at risk.

But Russian companies used the time before launching new projects to find schemes for obtaining critical foreign technologies, for example, for the development of hard-to-recover reserves. Sometimes they resorted to Russian ingenuity, which is now commonly called parallel import.

For example, Lukoil or Gazprom Neft companies actively used such tools for purchasing sanctioned technological solutions through third countries or through their foreign subsidiaries. Of course, these were temporary solutions. And strategically, Russian oil and gas companies have begun to form their own technology centers that develop the necessary solutions for the industry.

—  What have the main problems for Russia caused the sanctions of the last two years?

— If in 2014 the restrictions were just the first precedent for us, then the sanctions of the last two years turned out to be absolutely unprecedented. At that time, against the background of restrictions imposed on the oil complex of Iran and Venezuela, our sanctions were flowers. But after 2022, Russia became the absolute leader in the number of sanctions. Now their combined number, and not only against the oil industry, is approaching 20 thousand.

The most significant sanctions restrictions in the oil industry in recent years have undoubtedly been the imposition of an embargo by Western countries on the supply of Russian oil and petroleum products. As well as the introduction of the so-called price limit, or price ceiling, for the supply of Russian oil cargoes to third countries.

And there was a third problem – a complete technological embargo, which we did not expect. Thus, three components have become the main factors that have structurally changed the Russian oil industry.

— How radically has the global oil market changed due to such restrictions?

- The world energy industry does not know examples when the oil market changes dramatically in less than a year, where the country occupies one of the leading places in the trade structure.

In February 2022, that is, in the last month before the start of the special military operation and the subsequent sanctions, Russia sold 65% of its oil on the markets of Western countries, plus Japan and South Korea — in modern terminology, on the markets of unfriendly countries. The rest was sent primarily to China and several other countries.

And exactly a year later, in February 2023, when the embargo was just imposed, 86% of Russian oil cargoes were sold to neutral countries, and to unfriendly countries, mainly Japan and South Korea, not 65%, but only 14%. An amazing change in the geography of sales markets for Russian oil!

— And how was the problem with the insurance of marine oil transportation solved, which was discussed a lot?

— Traditionally, the so-called English club of insurance companies had a de facto monopoly on insurance of offshore oil cargo transportation. Russia also insured all oil cargo transportation in England until 2022.

Even before the oil embargo was imposed, Russia anticipated this story a little and banned Russian insurance companies from reinsuring themselves abroad. And then it capitalized the Russian National Reinsurance Company (RNRC) 10 times, which now allows domestic insurance companies to fully use Russian reinsurance capacities.

Also, Russian insurance companies, primarily Ingosstrakh and Sogaz, began to offer insurance for Russian oil carriers so that these shipments would not fall under secondary sanctions. It was a difficult and lengthy process. And even now, about 50% of insurance still falls on Western, including British companies. But we managed to reduce dependence from 100% to 50%, which is a very good result.

— As a result, Russia could not be ousted from the world oil market. What was the point of all these sanctions then?

—Western countries did not really seek to bring down Russian oil exports at any cost, especially at the cost of risking their economies. They wanted to do so in order to minimize the negative effects on themselves. But it is clear that sanctions are always a boomerang: it also hits the initiators of sanctions.

Therefore, the purpose of the sanctions pressure was not to reduce the amount of Russian oil on the market, but to reduce Russia's income from its exports. We must be honest, the sanctions have had a certain effect. This is a kind of fly in the ointment, but the main honey barrel is that the negative effects, including for Russian budget revenues, could be much deeper, more serious and more systemic.

— In your opinion, what are the ways to combat the effects of sanctions?

— In general, I think the solution to the problem would be the creation of an independent financial and logistical contour of Russian foreign trade, primarily in sanctioned goods. That is, we need to completely move away — and ahead of new sanctions — from using the Western financial system in terms of trade in Russian goods: to move away from Western insurance, banks, the system of mutual settlements in dollars and euros, switching to mutual settlements in national currencies.

This is the first step that needs to be taken, then no Western sanctions will have an impact on Russia.

In this context, I am impressed by the idea of creating an independent BRICS payment system. This is one of the very serious steps towards creating a trade contour with the main friendly countries. It is clear that this means consolidating the fragmentation of international trade. However, we did not start this sanctions war, but we are forced to respond to it in order to ensure the sustainability of the development of the Russian economy in any conditions.