Russian Economy: Lavrov on Why Russia Didn’t Cut EU Gas Supplies

“We are decent people. We have signed long-term contracts with Europe,” Lavrov said.

“We always fulfill our obligations, unlike Europe or the United States,” Lavrov added.

Moreover, as Lavrov said, the gas deals between Russia and Europe are in the interest of both sides.

“If cooperation is mutually beneficial, why shoot yourself in the foot?” he asked.

What Lavrov did not explicitly mention in the interview is the likely reason why Russia continues to export to Europe: the country needs the money.

Russian oil and gas profits under pressure

Before Russia started the war in Ukraine and was sanctioned by the West, it supplied as much as 40% of the gas in Europe. That fell to about 15% by the end of 2023 after three of the four Nord Stream pipelines carrying Russian gas to Europe were damaged. The remaining Nord Stream pipeline never entered service, and Russia was already slowing its gas flows to Europe before the explosion.

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Now Russian oil and gas profits are under pressure from sanctions and restrictions, including a G7 price cap on crude exports, as the war with Ukraine enters its 31st month.

Russia’s oil and gas revenues reached 8.82 trillion rubles, or $94.6 billion, in 2023. That’s down 24% from the 11.6 trillion rubles it recorded in 2022, when revenues rose due to oil price volatility. In 2021, Russia’s oil and gas revenues totaled 9 trillion rubles.

Russia has raised its forecast for oil and gas sales this year, but the breakeven oil price has also risen significantly since the war began. That’s due to sanctions-related factors, such as higher Russian-underwritten insurance premiums and shipping costs related to a dark fleet that transports the commodities.

According to S&P Global, Russia’s breakeven oil price in 2021 was $62 per barrel. Now it is $94 per barrel.

Higher breakeven prices would eat into profits, which would hit Russian energy companies and have a spillover effect on the wartime economy, which appears resilient but faces multiple challenges. There is also the question of how well the Russian economy is really doing; in July, a group of eight European finance ministers said bluntly that Russia is lying about its booming economy.

Of course, other geopolitical factors could also play a role in Russia’s decision to allow natural gas exports to flow to Europe. But the role that oil and gas play in the Russian economy cannot be underestimated.

The oil and gas industry is responsible for 30% to 50% of Russia’s federal budget revenues, estimated the Oxford Institute for Energy Studies.

Bloomberg estimates that Russia could lose as much as $6.5 billion a year if Naftogaz, the Ukrainian state energy giant, does not renew a gas transit deal that expires this year, allowing Russian gas to be transported to Europe via Ukraine.

While Russia has managed to turn around alternative markets, the goods are often sold at huge discounts due to sanctions, a S&P Worldwide report from last month.

“Russia has managed to maintain its oil production and exports despite Western sanctions and OPEC+ cuts, “Although the company has faced challenges in terms of cash flows from the oil sector,” Svetlana Tretyakova, senior analyst at Rystad Energy, wrote in late August.