On August 3, Russian Deputy Prime Minister Alexander Novak announced Moscow’s plan to cut oil exports by 300,000 per day (bpd) beginning in September. In March, Russia pledged to slash oil output by approximately 500,000 bpd (constituting 5% of its oil production at the time). Last week, Russia’s government said it would extend a voluntary oil production cut of 1 million bpd. Two days later, in an unrelated event, a Ukrainian naval drone attacked Russian oil tanker in the Black Sea, likely in retaliation for Russia withdrawing from the Black Sea Grain Initiative and targeting Ukrainian agriculture shipping ports. Ukraine has since challenged a declared Russian blockade by sending a grain-carrying freighter from Odessa through Black Sea international waters to Turkish territorial waters.
Eleven days after the export cut, the Russian ruble fell to its lowest value in seventeen months at 101 rubles to 1 USD. The same day, the Russian Central Bank announced a meeting for August 15 to review the country’s key interest rate. The Central Bank also said it may have to raise taxes on oil and gas from the energy industry to compensate for government budget shortfalls that could otherwise short-circuit budget plans from 2023 to 2026. The Central Bank would ultimately raise the key interest rate by 1% and an emergency rate increase of 350 basis points to 12% to mitigate the ruble’s slide. The ruble increased just 1% to 98 rubles to 1 USD.
Why it matters: By cutting oil exports, Moscow is attempting to raise global oil prices and bolster the government’s budget via increased export revenue taxation. In the immediate months after its invasion of Ukraine, Russia experienced a sizable trade surplus because of increased oil and gas earnings due to high prices and lower imports. But with the introduction of sanctions and depressed oil markets relative to the war’s start, Russia’s energy revenue has declined while the country has found new sources for imports, in part due to a 282% spike in defense spending in 2022, decreasing its trade surplus. Under its budget rule, Russia sells foreign currency from its National Welfare Fund to cover shortfalls in oil and gas revenue and thus to prop up the federal budget.
But as a side effect of the budget policy, the ruble sales increase Russia’s ruble supply and have helped drive down the Ruble’s price. Between late July and early August, Moscow and the Central Bank responded by amending the tax code to decrease subsidies to the energy sector, saving $326 million (30 billion rubles) in federal budget expenditures, and ending the foreign currency purchases. Whether and how Russia’s government takes additional steps could say much about officials’ confidence in their nation’s economy.
Meanwhile, Ukraine’s thinly veiled threat to Russian oil tankers in the Black Sea comes at a complex time for Russia’s energy policy. Sinking a tanker—as opposed to damaging one—or creating a massive oil spill could undercut confidence in Russia’s oil exports (or even its wider economy, if the event spooks enough analysts) and might modestly reduce Russia’s export volumes through the Black Sea over time. Yet it could also provoke trouble in allied capitals if it produced an environmental disaster and/or a significant oil price spike. Ukrainian officials are understandably seeking any leverage they can find to shape Russia’s behavior but could face tough new problems if they engage in a genuine tanker war.