Tainted oil hits Russian revenues but rouble immune for now

[May 20, 2019]   By Elena Fabrichnaya, Andrey Ostroukh and Gleb Gorodyankin

MOSCOW (Reuters) - Russia suffered a $1 billion shortfall in export revenues in the first two weeks of May after the discovery of contaminated oil disrupted pipeline flows to Europe, a Reuters calculation showed.

The final cost of the contamination may be several times higher, economists said, but it seems unlikely at this stage to dent the country's already fragile growth prospects or rock the rouble.

Crude export flows have been disrupted since April, when high levels of organic chloride were found in oil pumped via Russia's Druzhba pipeline, which serves Germany and some eastern European states.

There has been no official Russian estimate of the cost impact. In mid-May, Energy Minister Alexander Novak put the overall damage caused by dirty oil at below $100 million, but it was not clear exactly what he was referring to.
 

Reuters based its $1 billion estimate on export figures from sources familiar with energy ministry data and average monthly oil exports via Druzhba from last year, adjusted for changes in global oil prices.

Sources said that, compared to average April levels, Russia's pipeline system cut oil intake by 6% between May 1 and May 16.

Russia should be able to compensate for shortfalls by selling the tainted oil at a discount and getting more petrodollars from other oil exports thanks to recently increased crude prices, analysts said.

LIMITED MARKET IMPACT

It was not immediately clear how long it will take for Russian westbound oil supplies to reach to pre-crisis levels, but the operator of the Belarusian section of the Druzhba pipeline has said a full recovery including clean-up operations could take six months to complete.

The impact on Russia would be negligible if the situation is resolved soon, research firm Capital Economics said.

 An oil refinery located on a branch of the Druzhba oil pipeline, which moves crude through the pipeline westwards to Europe, is seen near Mozyr, some 300 km (186 miles) southeast of Minsk, September 11, 2013. REUTERS/Vasily Fedosenko/File Photo

"(But) the contamination has also further tainted the reputation of Russia's oil sector and, if problems become more persistent, European demand could eventually shift towards other sources," it said.

In theory, if Russia were to cut oil output and exports by 1 million bpd over the course of a year, that would reduce gross domestic product growth by 0.8 percentage points, it added.

Economic growth is a sensitive issue.

President Vladimir Putin has ordered the government to bring the Russian economy into the world's top five by 2024. But activity slowed in early 2019 to bring the economy to the brink of recession.

Dmitry Dolgin, chief economist at ING Bank in Moscow, said this year's overall export revenue shortfall because of poor quality oil could hit around $5 billion. But that should not be critical given a current account surplus of more than $100 billion.

Assuming a figure of $1 billion, the current impact would be negligible for the currency market and for banks in Russia, given the size of their foreign currency reserves, said a financial market source close to the central bank.

Another source close to the government said the market impact would be close to zero.

The central bank and the finance ministry did not immediately reply to a request for comment on Monday.

(Additional reporting by Gleb Gorodyankin and Olga Yagova; Writing by Andrey Ostroukh; editing by John Stonestreet)

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