Energy Geopolitics: A Brave New World? – Part Two
Category: Insights

Energy Geopolitics: A Brave New World? – Part Two

In the second installment of this two-part article, George Voloshin, a corporate intelligence and sanctions expert, analyzes the way Russia has been hit by the effects of the war in Ukraine and the shifts this is triggering in its relations with Europe and Asia. In a previous HC Insider podcast in May 2022, Voloshin had already given a gloomy outlook for global economies and the commodities sector as a result of this year’s geopolitical events.

Russia and OPEC+: an alliance in crisis?

Since it managed to seal an output reduction deal with Saudi Arabia at the end of 2016, Russia has been instrumental in co-regulating oil supply within the OPEC+ alliance, de facto sharing only as much power as it wanted with OPEC’s linchpins, Saudi Arabia and the UAE. Unlike its Middle Eastern rivals-turned-allies, pre-war Russia has consistently enjoyed budget surpluses despite significant oil price fluctuations.  

Thanks to its conservative monetary policies and a fiscal rule that mandated the funneling of excess revenue from oil sales into a sovereign wealth fund, Russia has been able to tolerate much lower oil prices than most of its OPEC+ peers. This allowed Moscow on more than one occasion to breach its production quota by pumping crude above its allowance of 10.663 mn b/d in June 2022 (up from 9.457 mn b/d a year earlier), in addition to a special carve-out for its gas condensate. 

The sanctions and self-sanctioning measures that have followed the Ukraine war are putting a strain on Russia’s strategic role in OPEC+ and testing its future relevance for the alliance. As early as March 8th, three weeks into the invasion of Ukraine, OPEC reaffirmed its support for the oil deal with Russia. Russian Foreign Minister Sergey Lavrov’s visit to Riyadh in early June resulted in similarly supportive statements.  

Yet, the situation on the ground is quickly shifting. Since February, when Russia was pumping 10.11 mn b/d on average, slightly less than Saudi’s 10.25 mn b/d, its crude output has fallen to 9.14 mn b/d in April before recovering to 9.75 mn b/d two months later. In contrast, Saudi Aramco ramped up output to 10.55 mn b/d through June. As a result, compared with Saudi’s 113.5% compliance with its quota, Russia complied by 209.1% thanks to reduced output. 

Crucially, it has been reported that Russia could be exempted from its production quota, which it will increasingly struggle to meet. This would automatically pave the way for more output from the rest of OPEC+. Only Saudi Arabia and the UAE have enough spare capacity to produce more oil and are already being courted by western governments keen on seeing the price of oil fall. Whether they will play along or stick to the already-agreed production schedules enabling them to extract more value from every barrel is another matter. But Russia’s strategic role is fading by the day. 

Russia’s pivot to Asia 

Russia’s declining oil production is a serious cause for concern in a country where oil and gas alone account for over 40% of total export revenue and amounted to 21.7% of GDP in Q1 2022, an absolute domestic record. Analysts at S&P Global estimate that output could fall by as much as 2 mn b/d by December compared with pre-invasion levels. As Russia’s economy has been contracting this year and entering a deep recession, record-high export revenue driven by increasingly higher energy prices will only boost the role of hydrocarbons. Oil exports revenue alone rose by 50% year-on-year in January-May. Therefore, Russia is seeking to preserve as much production and exports as possible of its main commodity, crude petroleum, although it is true that outbound flows of other commodities, from metals to fertilizers, are also looking for new clients.  

In 2021, Russia exported nearly half of its oil to OECD Europe, while China was its largest individual buyer, importing around a third of Russian oil, according to the US Energy Information Administration. But currently, China and India together account for more than half of Russia’s petroleum sales. Recent data suggests China’s imports of Russian seaborne oil surged in May by 40% since January. Meanwhile, India, which imported very little Russian oil before the Ukraine war, ramped up its daily purchases to 700,000 b/d through May. 

The time it took to negotiate the sixth Russia sanctions package, from early April to late May, is indicative of Europe’s internal fragility, which tends to get less media and expert attention than it should.

Industry experts are skeptical about Moscow’s ability to find buyers for most of the 1.9 mn b/d of seaborne exports that need to be fully redirected from Europe by December because of the EU’s oil embargo. Russia’s pivot to the East is also constrained by the tough negotiating tactics of its newly valuable Asian partners who insist on hefty discounts to reflect the financial and reputational risks involved. Issues with transportation, insurance and bank lending will only make matters worse for Russia in the longer term. 

Europe’s new Russia strategy 

The EU is also looking to pivot away from Russia. The bloc’s dependence on Russian gas and oil stood at approximately 40% and 25% respectively of all imports in 2021. On May 18th, the European Commission presented its ambitious REPowerEU plan aimed at enhancing the EU’s energy security.  

A key goal is to phase out Europe’s reliance on Russian fossil fuels by saving energy, accelerating the rollout of renewables, reducing fossil fuel consumption in industry and transport, and diversifying energy supplies. EU member states have already engaged in talks with suppliers as diverse as Egypt, Israel, Qatar, Algeria and Azerbaijan while counting on the US as a major purveyor of LNG. The implementation of the plan is expected to cost around €210 bn by 2027, allowing savings of up to €100 bn/year on fossil fuel purchases from Russia. 

However ambitious, REPowerEU’s strategic diversification stands on legs of clay. While Europe has traditionally been importing most of its gas from Russia under long-term contracts at prices that are currently far lower than on the spot market, it will have to plug the hole with much more expensive LNG and limited volumes of alternative pipeline gas it still needs to secure.  

The time it took to negotiate the sixth Russia sanctions package, from early April to late May, is indicative of Europe’s internal fragility which tends to get less media and expert attention than it should. Some countries such as Hungary are highly dependent on Russian crude and will need years and dozens of billions of new investments to adjust. German industrialists have been particularly wary of seeing their country deprived of its many competitive advantages by replacing cheaper Russian gas with more expensive spot supplies. 

Europe’s divorce from Russia comes at the worst possible time as inflation surges, traditional political parties lose sway, populism rises, and recession looms. The loss of a majority by Emmanuel Macron’s ruling party in France’s parliamentary elections in June – seen by many an insider as a sign of looming chaos – is a case in point. While Europe may show off a united front, there is a high risk of unraveling within the 27-members bloc. There are also mounting risks for the energy transition, as Germany, France, Austria and the Netherlands have recently announced putting back into service their coal power plants to help their power grids through the winter. Experts agree that if the gas market and price volatility stabilize in 2023, the transition’s roadmap will remain intact. Failing that, Europe will likely have to sacrifice its climate change goals to energy security imperatives, putting the whole net zero agenda in long-term jeopardy. 


Years of stable economic ties between Russia and the West in the field of energy, are being undone with no easy replacement in sight. The central banks’ reluctant but inevitable attempts to rein in rising inflation through rate hikes, growing food insecurity and ongoing deglobalization, Russia’s isolation and China open defiance vis-à-vis the US are all signs of highly uncertain times ahead. It is no longer safe to take anything for granted, with even the most prosperous countries of the developed world facing the risk of sudden and protracted instability. The next few years are therefore likely to reshape the world in ways still unimaginable to contemporaries.