In 2024, Russia’s budgetary military expenditures increased significantly and accounted for about 40% of budgetary expenditures. Russia’s military budget has tripled compared to pre-war 2021 and is more than $112 billion. The day of the war in Ukraine, according to the smallest calculations, takes from 300 million dollars to a billion. Traditionally, it was planned to take the money from the revenues of the oil and gas sector, which remains the main source of export earnings. The source of the cosmic growth of the war budget was an increase in the oil and gas revenues of Russia in 2024 by about a quarter (up to 30%) compared to the previous year.
Such expectations were fuelled by the growth of oil and gas revenues in the first quarter of 2024, which exceeded the pace of projected annual revenue.
Before the war, Russia was the third country in the world in oil production (after the USA and Saudi Arabia), with up to 10 million barrels per day and the largest exporter of gas (the empire owns 23.6% of world reserves and controlled up to 16% of world exports), exporting 200 billion cubic meters of gas per year. Revenue from oil and gas trade accounted for 42% of all export revenues.
In the first year of the full-scale invasion, Russia generally received a historic bar of profits from the oil and gas sector, earning $384 billion in 2022, a record amount for the past 27 years. A significant increase in the budget allowed Russia to direct additional revenues to the needs of the war.
In 2023, the sanctions partially worked and the Russian government’s net budget revenues fell by 24% compared to the previous record year. Nevertheless, despite the drop in oil prices and a large-scale reduction in pipeline gas exports, Russia received $99.3 billion in taxes from the oil and gas industry.
Russia’s key task was to bypass sanctions, overcome the oil price limit of $60 per barrel set by the “Big Seven” and compensate for the loss of the key pipeline gas supply market to Europe, to which pipeline gas exports decreased by more than 65% and amounted to only 20-25 billion.
The first problem was planned to be solved by creating a giant shadow fleet, which was supposed to supply crude oil to Asian markets, primarily to China and India, to circumvent sanctions. The loss of the “fat” European gas pipeline market had to be compensated by increasing gas supplies to China and increasing the share of liquefied gas.
A projected 30% increase in oil and gas revenues in 2024 indicated that Russia had found, as it thought, a way to circumvent sanctions and conquer new markets. Hence the overly optimistic indicators of the military budget growth for 2024.
But something went wrong. Ukrainian attacks on oil refining enterprises have already led to forced embargoes, for example, on the export of gasoline. The shadow oil fleet became the object of hunting in the Mediterranean and Baltic seas. On the other side of the world, shadow tankers sometimes have to wait months at sea for permission to unload in India or divert vessels to China. There is a problem with payment in convertible currencies and the transfer of funds to Russia. And yet, for now, the increasingly risky market for oil products is working and providing income for the war. Although this leg is limping, it continues to hold the oil and gas spike.
The news that two years after the loss of the European market, one of the fastest-growing Russian companies, Gazprom, became unprofitable was a bolt of thunder in the clear sky. By the way, for the first time in the 21st century. The company, which remained profitable during the global financial crisis of 2008, after the introduction of sanctions for the annexation of Crimea and even during the times of a sharp decrease in gas demand during the lockdown, giant profits in 2022, lost revenues sharply and became unprofitable in 2024, in when the hugely bloated war budget anticipated a projected one-third increase in oil and gas revenues.
The previous “success” of the Russian gas monopolist business was based on the low cost of gas production and the connections with European buyers established since the time of the Soviet Empire, secured by long-term contracts. The loss of most of the European market, already in 2023, instead of 450 billion rubles of projected income, brought 629 billion rubles of losses. During the year, the revenue of Gazprom’s gas business fell by half. The monopolist’s debt also increased by 1.3 times. An increase in the debt burden and a decrease in revenue may lead to a refusal to pay annual dividends. This can especially hit the revenues of the state, which controls more than 50% of the shares and dividends, used as a method of attracting funds to the state budget. To compensate for the loss of income, Russia in 2022 increased the tax on mineral extraction for 1.2 trillion rubles. Since 2023, the state has increased this tax for Gazprom annually by 50 billion until 2026. Therefore, regardless of financial indicators, Gazprom is guaranteed to bring about 60 billion rubles per year into the state budget.
Therefore, instead of the expected profits, in the first quarter of 2024, Gazprom received a loss of 450 billion rubles.
Expected profits in 2024 were planned from increased gas supplies to China and Central Asia. However, as it turned out, this forced reorientation cannot be a substitute for a stable (pre-contracted) and rich European market. First, the amount of gas delivered to China in 2023: 22.7 billion cubic meters significantly falls short of the volume of lost European indicators. Secondly, taking into account the European and Chinese prices, Gazprom lost at least twice as much on the price difference alone. With approximately 5.5 billion dollars a year received in trade with China, Russia could receive 12.5 billion dollars for the same volume of gas on the European market.
In 2025, the share of European exports will be halved again, because Ukraine’s main pipeline transitor and transporter refuses to renew contracts. This is a loss of approximately three billion dollars of income annually.
As a way out of the situation, Gazprom is looking to launch the Power of Siberia-2 pipeline to significantly increase gas supplies to China (saving the production level from the Yamal gas field, which until then was oriented to the West). The launch of the Power of Siberia pipeline could turn Russia into the largest gas supplier to China. Although, even under the most favourable circumstances, this will not compensate for the loss of the European market, it will still be able to help Gazprom avoid bankruptcy, and most importantly, not freeze production and not conserve deposits.
Currently, Russia supplies gas to China through the Power of Siberia single gas pipeline, intending to reach an annual supply volume of 28 billion cubic metres by 2025. Another 10 billion are planned to be sent from Sakhalin after 2027. Russia is trying to conclude an agreement on the construction and launch of “Power of Siberia-2” and increase the supply by another 50 billion dollars, becoming the largest exporter with a share of the Chinese gas market of 15-20%.
The idea of supplying gas from Yamal to China has been discussed since the mid-2000s. Having now lost exports of about 80 billion cubic metres of gas, after the shutdown of the Nord Stream and Yamal-Europe gas pipelines, only the Chinese market can replace such volumes. Otherwise, Yamal is threatened not only with the termination of the development of new deposits but also with the conservation of existing ones.
Beijing, despite persistent offers from Russia and the visits of Putin and Mishustin, is in no hurry to reach out to Russia. Realizing that Russia is facing a threat to the conservation of deposits, Beijing is trying to get maximum discounts and is not ready to invest in the construction of this project. Moreover, even with the temptation of receiving very cheap Russian energy carriers, China tries to adhere to the policy of diversifying its sources of income. In this case, Turkmenistan’s offer is a more attractive option. At least for the duration of the war, talk about “Power of Siberia-2” will remain talk.
Therefore, Gazprom has only two options to avoid a debt hole and bankruptcy: a significant increase in gas prices on the domestic market and an increase in the production and export of liquefied gas. The first is politically unacceptable, so as not to build up protest sentiments during the war, and the second is due to the risk of falling into a new round of sanctions, now against liquefied gas. Currently, liquefied gas is still exported to Europe, but it has already come under US sanctions and European restrictions may appear soon.
Novatek can tell you about the impact of the US sanctions on Gazprom’s liquefied gas. US sanctions have paralyzed exports of Russian liquefied gas from the $25 billion Arctic LNG-2 flagship project. Russia, the fourth largest supplier of liquefied gas in the world, is trying to increase its share and compensate for the loss of the pipeline market to Europe.
“Arctic LNG-2” became one of such ambitious projects. However, the imposition of US sanctions against this campaign paralyzed the project. Buyers from India and China refuse to buy Novatek liquefied gas even at a discount. Ships built to deliver gas worth hundreds of millions of dollars are in dry docks in South Korea. Liquefied gas is at the facility without clear prospects for future deliveries.
Currently, Europe, which is not ready to give up liquefied gas supplies, is discussing a plan to ban the use of European ports to re-export Russian supplies. This is critical for Russia since its liquefied gas production plants are located very far in the Arctic region and the fuel from them first enters the ports of Belgium or France, then they re-export it further to the final consumers.
The example of Novatek puts Gazprom in front of a dilemma: to take a risk and invest wildly in the construction of liquefied gas processing plants, shipping terminals and a specialized fleet to preserve financial income in the future, while facing a possible freeze on these projects, or to start pulling funds from the pockets of Russian taxpayers.
It is obvious that the clay oil and gas Colossus with a shot and paralyzed gas leg is not capable of providing Putin’s planned appetites for war, therefore they will rake in military needs from everything: social services, medicine, infrastructure and the pockets of Russians. So, hard times await those who did not freeze in the winter of 2023, did not drown in the spring of 2024, and did not burn in the summer of 2024.
