Russian President Putin said Russia is “getting off the needle” of raw material exports

Russian President Vladimir Putin said Russia is “getting off the needle” of its raw materials export dependency during his keynote speech at the St Petersburg International Economic Forum (SPIEF) on June 16 and that the government is making progress in diversifying its revenue sources.

Addressing a cut-down audience of the local elite and delegates from “friendly countries”, Putin emphasised the importance of reducing Russia's reliance on oil and gas revenues which has been the lifeblood of the economy for decades.

Putin, always one to cite upbeat statistics during his big set-piece speeches, highlighted the non-oil and gas revenues had risen by 9.1% during the period of January to May this year, with a growth rate of 28.5% in May alone.

"This is an important indicator that the real sector of our economy, its manufacturing enterprises, trade and services are developing and gaining momentum," Putin said, as cited by Tass.

Putin’s emphasis on the growth of non-oil and gas income is a reframing of the fact that oil and gas revenues have collapsed this year, down by 46% in January alone and have clawed back little ground since then following the imposition of sanctions on Russia’s crude exports on December 5 last year and its oil products on February 5 this year.

As a result, Russia has been running a budget deficit which already hit its full-year target after the first ten days of March, and is currently 17% over target at RUB3.4 trillion as of the end of May.

Nevertheless, the rapid reaction to the new realities following the start of the extreme sanctions regime has been alleviated by the Russian companies’ “accelerated adaptability”, according to CBR Governor Elvia Nabiullina in her session at SPIEF, which has been unexpectedly successful and has allowed the economy to perform much better than the liberal economics team that make policy were hoping for.

Russia remains more dependent on oil and gas exports than ever, but the pressure was reduced after it successfully redirected most of its export from Europe to Asia.

Earlier, Deputy Prime Minister Alexander Novak said that in 2022 for the first time ever Russia exported more oil to Asia than Europe and its exports of oil to friendly countries soared by 76%, while the exports of petroleum products were up by 20%, and gas was up by 8%.

All in all, almost 40mn tonnes of oil and petroleum products were directed from western to eastern markets last year, he said, adding that this year, out of 223mn tonnes of oil and oil products that used to be exported to western markets direction, only 87mn tonnes, or 40%, were expected to remain.

Nevertheless, oil exports this year are anticipated to fall by 20mn tonnes compared to 2022, according to Energy Minister Nikolay Shulginov.

"Oil output with condensate will go down by probably around 20mn tonnes compared with last year," the minister told Izvestiya.

Earlier, Russia decided to voluntarily reduce crude output by 500,000 barrels per day (bpd) starting March. Later the policy was extended until the end of December 2024.

In 2022, Russia’s oil production amounted to 535mn tonnes, up by 2% compared with the previous year. Export rose by 7%.

Russia’s gas production is also down by 8-10% from earlier forecasts, Shulginov said.

"We are guided by forecasts envisioned by the social and economic development outlook. Today we see that production is 8-10% lower than the outlook," he said.

But falling gas production is being offset somewhat by rising LNG production in 2023 to 32mn tonnes from 30mn tonnes in the previous year, the minister added.

"On liquefied gas we roughly target the figures suggested by the [socio-economic development] outlook, growth by 1-2mn tonnes to around 32mn tonnes [for] LNG compared with 30mn [tonnes] last year," he said.

Earlier, the Energy Ministry said that Russia’s gas export went down by 30.7% in 2022 to 170.6bn cubic metres. Gas production in the country fell by 11.7% last year to 673.8 bcm.

The ministry expects gas production to continue decreasing this year due to the fact that European consumers are abandoning the Russian gas and it is hardly possible to redirect gas flows to the east immediately.

Russia may be “getting off the needle” of oil and gas exports but it is not through choice. Putin explained that the second quarter of 2022 became the most difficult period for the national economy as the main raft of extreme Western sanctions were rolled out, but Russia’s response mitigated a lot of the pain, Putin claimed.

"Exactly the second quarter of the last year became the most challenging for our economy, for the national business, when circumstances, the habitual order of trade, payments and logistics were changing swiftly, and when essentially the entire fabric of the business and economic life was altered. It can be confidently stated at present that the strategy chosen at that time by the government and by the business of Russia worked," the president told the SPIEF delegates.

Russia also had a bit of luck from the sanctions as the departing international companies opened up lucrative niches that Russian firms gleefully stepped into that also cushioned the blow.

"Foreigners have largely vacated up to 2mn square metres of retail space and a niche worth about RUB2 trillion ($23.8bn)," Putin said. This easy win meant that the impact of sanctions was considerably softened and bne IntelliNews Moscow correspondent reports that not only are all the shops full again but that some of analogue Russian businesses that took over those of the international renowned brands have even made progress. For example, Vkusno I Tochka that took over McDonald’s business in Russia has just completed its full year of operations and its new owner reports that sales and profits are above the American company’s at the time of its departure.

"What we are doing in our economy at the moment, in my opinion, can be applicable in other countries also, and this will only reinforce opportunities for our interaction," Putin added.

In addition to the budget shortfall, Russia is expecting to see its massive current account surplus of $223bn in 2022 dwindle to around $50bn this year, still a significant amount, as the sanctions slowly bite into the country’s income. The EU is currently discussing an eleventh package of sanctions that contain few new measures, but are designed to make the previous ten packages work better. The passage of the new sanctions laws have become bogged down by lobbying by special interests within the EU and it remains to be seen how effective they will be.