June’s extraordinary events in Russia, in which an abortive 36-hour military rebellion appeared to briefly challenge President Vladimir Putin’s hold on power, serves as a timely reminder that Russia holds a precarious position in today’s global oil market.

The short-lived mutiny, led by the Wagner mercenary chief Yevgeny Prigozhin, and the perceived indecisive first response from the Kremlin raise a red flag as to the vulnerability of energy security from the world's second-largest crude oil exporter, now heavily absorbed by its 17-month long war against neighbouring Ukraine. 

The biggest takeaway for world energy markets from the war so far has been the remarkable resilience of Russian oil export volumes despite a near-total import ban by its erstwhile largest market, the EU.

Political instability could pose an array of threats to Russia’s oil industry and flows to the global market

Data from energy analytics firm Vortexa reveals Russia’s combined seaborne crude and product export volumes so far this year of c.6.3mn bl/d are virtually unchanged from their immediate pre-war level. And while the volume of Russian oil at sea has surged by almost 90pc, to 180 mn bl, this shift has been caused by a reshuffling of Russian cargoes to more distant buyers requiring longer-haul voyages rather than by difficulties clearing the market. 

But this success has been sustained only by a fragile balance of economic and geopolitical considerations, along with new market dynamics, that have been favourable for both Moscow and its (remaining) trading partners.

Recognising the importance of continuing Russian exports for the health of the world economy, a sanctioning coalition led by Washington has avoided the most stringent punitive measures in its arsenal—secondary sanctions against buyers of Russian barrels and prohibitions on dealing with Russian energy companies.

The G7 softened the blow of EU import bans by putting in place an unprecedented price cap on Russian exports with a relatively high ceiling of $60/bl (for crude oil) to encourage Moscow to sustain flows, carefully balancing a desire to limit Russian oil revenues with the economic imperative of avoiding a major energy supply shock. On more than one occasion, Washington has intervened to head off EU initiatives to tighten the sanctions.

New trading entities have been allowed to fill gaps left by reputable firms withdrawing from the Russian trade to mitigate legal and reputational risks, and ‘dark fleet’ tankers have been repurposed from trafficking in Iranian and Venezuelan barrels in sufficient numbers to move Russian barrels to new buyers around the globe.

Opec+ has remained united despite a wave of heavily discounted Russian crude oil entering the high-growth Asia-Pacific market and undermining regional revenues for Russia’s partner-competitors. Moscow’s 3 July announcement that it would curtail August exports by an additional 0.5mn bl/d is an important gesture to reinforce Opec+ cohesion—and one that will be easily verified or refuted by high-frequency tanker tracking data. 

Risk of instability

While Prigozhin’s late-June mutiny seemed to fizzle as abruptly as it began, a widespread perception exists that Russia has entered a new chapter of political uncertainty. The veneer that Putin has absolute control and possesses the unassailable loyalty of the elites and custodians of institutional power appears to have been stripped away. 

A multitude of scenarios exist for what comes next: attempts by Putin to reconsolidate authority by purging disloyal officials, greater or lesser success by the Ministry of Defence in demobilising paramilitary units or integrating them into the regular armed forces, new challenges to Putin’s wartime decision-making, and the prospect of power vacuums affecting elements of government and industry, including energy.

The biggest takeaway for world energy markets from the war so far has been the remarkable resilience of Russian oil export volumes

Political instability could pose an array of threats to Russia’s oil industry and flows to the global market. For example, martial law or movements of armed forces could hamper general mobility, disrupting oil workers’ ability to reach and operate assets along the oil supply chain. One or more rival factions could also seek to control regional production, transportation or export facilities to use as leverage in a standoff with Moscow, along the lines of what Libya has experienced in recent years. Oil assets could also be damaged by internecine Russian clashes, whether unintentionally or deliberately.

Furthermore, Moscow may eventually choose to wield oil as a weapon, withholding supplies to achieve political aims. Putin has avoided taking this step thus far because he perceives the benefit of continuing oil revenues (albeit limited by the price cap) to be greater than the gains from pressuring adversaries by withholding supply. This assessment could change should Putin come under increasing pressure from the failing military escapade in Ukraine—not to mention if he were to be replaced by a new leader or coalition.

Attacks on infrastructure

Putin’s Ukraine quagmire, seen as a catalyst for the Prigozhin rebellion and for simmering infighting among senior Russian officials, has already led to attacks on Russian oil infrastructure.  More can be expected as the war continues.

Ukraine's capability to target Russian energy assets is increasing. Russia’s Black Sea port of Novorossiysk is already within range of Ukrainian unmanned aerial vehicles, as evidenced most recently by drone strikes on Russia’s nearby Afipsky and Ilsky refinieres on 31 May. The refineries lie east of Novorossiysk and are thus even farther from presumed launch points in southeastern Ukraine than the port city.   

Among the most significant of Russia’s oil ports, Novorossiysk exports c. 2.4mn bl/d of crude oil (both Russian and Kazakh) and refined products into the global seaborne market. 

Ukraine has likely avoided striking Novorossiysk so far because a resulting disruption to world oil supplies would raise prices and jeopardise economic performance for Kyiv’s allies. But this calculus could change depending on how Ukraine’s summer counteroffensive progresses and how Russia responds to it. 

In a scenario in which the stakes are raised even further, Novorossiysk could fall into the crosshairs just like several other Russian oil facilities during the war’s first 17 months, including multiple refineries, a Transneft pipeline pumping station at Litvinovo, oil storage depots in Belgorod and occupied Sevastopol, and the Druzhba pipeline near Bryansk, to name a few.

Policymakers and corporate planners would do well to consider the dual threats to Russian oil supplies posed by emerging political transformations in Moscow and a land/air war raging in Europe with no end in sight.  

Clay Seigle is the director of Rapidan Energy Group’s global oil service. The article reflects his opinions.



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