Russian economy: Lavrov on why Russia hasn’t cut EU gas supplies

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

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

In addition, as Lavrov said, Russia and Europe’s gas deals benefit both sides.

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

What Lavrov did not address directly in the interview is the most likely reason why Russia continues to export to Europe: it needs the money.

Russia’s oil and gas profits are under pressure

Before starting the war in Ukraine and being sanctioned by the West, Russia provided what 40% of Europe’s gas. This fell to around 15% at the end of 2023 after three out of four Nord Stream pipelines carrying Russian gas to Europe were damaged. The remaining Nord Stream pipeline was never commissioned, and Russia was already slowing gas flows to Europe before the explosion.

Now, Russia’s oil and gas profits are under pressure from sanctions and restrictions – including a G7 price cap on its crude exports – as its war with Ukraine heads into its 31st month.

Russia’s oil and gas revenues reached 8.82 trillion rubles, or $94.6 billion, in 2023. This is 24% lower than the 11.6 trillion rubles recorded in 2022, when revenues increased due to oil price volatility. In 2021, Russia’s oil and gas sales revenue was 9 trillion rubles.

Russia has raised its forecast for oil and gas sales this year, but the price of oil has risen significantly since the start of the war. This is due to sanctions-related factors, such as higher insurance premiums underwritten by Russia and shipping costs related to a dark fleet carrying the goods.

According to S&P Global, the price of Russian oil was $62 per barrel in 2021. It is now $94 per barrel.

Higher break-even prices hurt profits, which would hurt Russian energy firms and indirectly impact the war economy — which appears resilient but struggles with multiple challenges. There is also the question of how well Russia’s economy is really doing; in July, a group of eight European finance ministers categorically stated that Russia is lying about its booming economy.

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

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

Bloomberg estimates that Russia could lose up to $6.5 billion a year if Naftogaz, Ukraine’s state energy giant, does not renew a gas transit agreement that expires this year. This agreement allows the transport of Russian gas to Europe through Ukraine.

While Russia managed to pivot to alternative markets, goods are often sold at huge discounts because of the sanctions, according to a S&P Global report last month.

“Russia has been able to sustain its oil production and exports despite Western sanctions and OPEC+ cuts, although it has faced challenges with its oil cash flows,” Svetlana Tretyakova, senior analyst at Rystad Energy, wrote in late August.