Oil and gas in the capitals: How a good thing could turn out not so good

JACQUES SAPIR, CONTRIBUTING EDITOR, FSU 

As a cease-fire in Ukraine now looks quite probable during 2025, normalization of trade relations with Russia is also on the table. Russian trade—specifically oil, oil products and gas—has been affected by trade sanctions. These sanctions have been much less effective than what was initially thought, as we had a strong “boomerang effect,” mostly on EU countries’ economies. Nonetheless, they’ve had some effect on Russia trade.  

Sanctions’ effect on trade. The evolution of Russian trade has been affected, as exports are influenced by volume constraints, mostly on hydrocarbons and coal, whether they’re the result of sanctions, OPEC+ decisions or price evolution. Imports declined first, as a result of sanctions, then recovered and were affected by an aggressive import substitution policy. The trade surplus for goods has stabilized since first-quarter 2023, Fig. 1.   

Fig. 1. Russian trade balance, goods, in billions of U.S. dollars. Chart: Central Bank of the Russian Federation, Platezhnyj Balans Rossijskoj Federacii, n° 1/2025, (22), April 17, 2025.

Oil market fluctuations. In fourth-quarter 2024, the value of oil exports declined under the pressure of the global oil price downturn triggered by demand concerns. According to the World Bank, the Brent crude price went down by 11% year-on-year (YoY) and 7% quarter-to-quarter, to average $75/bbl in the fourth quarter. Oil prices, however, were supported by the OPEC+ decision to extend voluntary production cuts by 2.2 MMbpd until the end of March 2025. These cuts partially explain the drop of Russian exports.   

The average price for Brent crude edged down by no more than 2%, YoY, to $81/bbl in 2024. In addition, Russian oil production has been constrained by OPEC+ agreements for at least 18 months now, limiting the quantities of Russian oil exports. But it would be wrong to put all on the shoulders of these agreements. Russian oil shipments by sea were also hit by bad weather in Russia and greater demand from domestic oil refineries, likely in part linked to the war in Ukraine. Nevertheless, export quantities of petroleum products recovered during the fourth quarter, as some refineries completed renovations, and the ban on petrol exports by direct producers was lifted on Dec. 1, 2024. The ban, however, remained applicable to the other exporters until Jan. 31, 2025.  

Global gas prices continued to rise during fourth-quarter 2024, compared to the previous quarter, driven by gas supply concerns. Gas prices were pushed up by a faster reduction in European gas stocks than in fourth-quarter 2023. According to the World Bank, the global natural gas price index gained 16% from the third quarter to the fourth quarter of 2024 . It still exceeded the average of 2017–2021 but went down slightly from the elevated level of fourth-quarter 2023 (fourth-quarter 2024: -4%).  

An important fact, frequently overshadowed by the public, is the fact that the EU demand for Russian gas has been increasing in 2024 compared to 2023. The quantities of Russian pipeline gas supplied to Europe gained 2% on quarter-to-quarter and 5% on Y-o-Y in fourth-quarter 2024, due to larger supplies via the TurkishStream pipeline. Even more important, the EU increased its purchases of Russian liquefied natural gas (LNG) in 2024 by 11%, compared to fourth-quarter 2023, and 25% compared to full-year 2023. This was partly linked to an anticipation of a deal expiring on Russian gas transit via Ukraine at the end of 2024.   

In 2024 as a whole, the quantities of Russian gas and LNG supplies to the EU increased by over 20%. Gas pipeline supplies increased from 27 billion cubic meters (Bcm) to 33 Bcm and LNG exports rose from 17 Bcm to 21 Bcm. Still, one of the main reasons for quite high exports in the face of sanctions was the development of Russian trade with Asia, which largely helped Russia avoid a large effect from sanctions.  

Oil was traded mostly with India, which increased its demand by 20 times. Gas pipeline supplies to China expanded in 2024 to exceed the Gazprom official target of 30 Bcm (2023: 23 Bcm). The reason was that supplies via the Power of Siberia gas pipeline were increased to the maximum level of 38 Bcm per year, ahead of schedule, on Dec. 1, 2024. According to the General Administration of Customs of the People’s Republic of China, the quantities of Russian LNG supplies to China went up by 3% to 8 million tonnes in 2024. The growth in gas and LNG exports to China was driven by a greater consumption of gas there.  

All this had a distinct impact on the Russian ruble exchange rate, Fig. 2.  

Fig. 2. Russian Ruble exchange rate against the U.S. dollar, the Euro, and the Chinese Yuan. Image: Central Bank of the Russian Federation.

Currency exchange rates.  

After a slowdown that began toward the end of third-quarter 2024, the ruble strengthened significantly in first-quarter 2025. Part of this trend is probably political and linked to rumors of improved relations with the U.S. But it was the exchange rate with the Chinese yuan that strengthened most when this process was much less obvious against the Euro. The fact that the ruble increased by around 32% against the Yuan and the U.S. dollar is important, as these two currencies are now dominant on the Moscow exchange market, the yuan having largely surpassed the U.S. dollar since 2022. This strengthening exchange rate is bringing problems of its own. A much stronger ruble, as the Real Effective Exchange Rate climbed in comparison to January 2022 (before the war), is making Russian manufactured exports much too costly, while causing manufactured imports, particularly from China, to be extremely competitive. This is a big problem for a country looking to develop its manufacturing industry. 

A hidden effect of a quite good commercial balance and of Ruble strengthening could be that it destroys all efforts spent to bolster industry. However, there are things that the Russian government could do here, like introducing a form of import tariffs, as has been done for imported cars with the so-called recycling tax. And it remains to be seen how the Ruble will react, if oil and gas prices are to drop significantly in tandem with global economic growth slowing down, as the IMF now forecasts.