Iran and Venezuela should serve as warning signs to Russia

Four months into the war in Ukraine, Russia is raking in windfall revenue from its oil and gas sales – but experts say Moscow should consider other heavily sanctioned countries in recent history, including Russia. Iran and Venezuela, as a longer-term cautionary tale.

“Oil-producing countries like Iran and Venezuela, which have been hit by economic sanctions in the past, have suffered serious damage to their oil production, from which they still have not recovered,” said Takahide Kiuchi. , an economist at the Nomura Research Institute.

Indeed, the sanctions are designed to reduce demand, in turn forcing the country’s oil producers to cut production, experts told Insider. Russia’s oil industry is also likely to suffer from a decline in technological advancement, with foreign investment pulling out of the country in droves.

And Russia could be hit even harder than Iran and Venezuela because most of their sanctions are imposed by the United States, Kiuchi told Insider. Restrictions on Russian trade are much more extensive, he said, and the United States is not alone in sanctioning Russia: the United Kingdom has also banned imports of Russian oil, and the countries of the EU have agreed to ban 90% of Russian crude purchases by the end of the year.

All of these factors combined, experts say, point to a decline in Moscow’s cash cow as trade restrictions work their way through the economy.

Here’s how the Iranian and Venezuelan oil industries have been hit with sanctions in recent years – foreshadowing what could happen to Russia.

Iranian and Venezuelan oil production plummets after US sanctions

In July 2015, Iran reached a historic agreement with six world powers – the United States, the United Kingdom, China, France, Germany and Russia – to limit its nuclear program in exchange for a sanctions relief, including for oil.

After the lifting of sanctions, Iranian oil exports increased to 2 million barrels per day in 2016 and peaked at 2.8 million barrels per day in 2018, according to Reuters The data. That number began to drop after the United States – under former President Donald Trump – unilaterally withdrew from the deal in May and reimposed the sanctions. The move caused Iranian oil exports to plummet by more than 90% later that same year to 200,000 barrels a day, according to Reuters.

Like Iran, “the supply side of the Russian economy will almost certainly be affected” by the sanctions, Schroders, an asset management firm, wrote in a note in March.

Venezuela was sanctioned by the United States in 2019 in a bid to oust socialist President Nicolas Maduro. As a result, Venezuela’s exports fell to a 77-year low of 623,600 barrels per day in 2020 – down a third from 1.89 million barrels per day in 2016 before the sanctions, the data shows. from Reuters.

Sanctions on Iranian and Venezuelan oil hit the countries during a period of low energy prices from 2014 to 2020, so any sales they managed to make would have been small compared to the windfall from the Russia in the current booming market. That’s when oil prices hit 13-year highs due to a crisis in energy supplies not only because of the war, but as global demand also recovers from the pandemic.

Despite robust sales revenue, Russia’s economy ministry still expects oil production to fall 17% this year from 2021, Reuters reported in April, citing an official document. The country exported about 5 million barrels of crude oil per day in 2021, half of which went to Europe, according to the International Energy Agency.

Although countries like India and China have stepped in to buy Russian oil shunned by the rest of the international community, Moscow is unlikely to be able to find buyers for all the oil it sells to the EU. said Henning Gloystein, director of energy. , climate and resources at Eurasia Group, a risk management consulting firm.

“The rest of the world can’t fully absorb what Europe was importing in terms of crude,” Gloystein told Insider.

Sanctions against Russia will lead to technological and material degradation

More importantly for Russia, the energy market boom won’t last forever, and a slowdown in major investment in the country’s oil industry will hit hardware in the long run, experts told Insider.

In Venezuela, the deterioration of its oil infrastructure has already affected the quality of the crude grades it exports, leading to price drops and shipping delays, Reuters reported in January, citing documents from state oil company Petroleos de Venezuela.

In Iran, oil embargoes and technology restrictions have plunged the industry into a state of chronic underinvestment, according to Schroders. The country’s oil minister, Javad Owji, said in November that the country needed $160 billion in investment to modernize and improve production to avoid becoming a net importer of oil and gas. Iranian international television channel reported.

If Russia’s energy production declines to a point where it – as Iran now fears – has to start importing, it could drive up inflation and ripple through the rest of the economy, Schroders said. .

The situation is already starting to play out in Russia, as key software used in the oil and gas industry is becoming obsolete, as companies leaving the market will not continue to update or maintain software and codes, Bloomberg announced June 28.

“The departure of Western energy companies from Russia will also lead to a lack of investment and highly skilled personnel needed to maintain or increase production,” Eurasia’s Gloystein said.

While Chinese investors could step in at some point to fill the void in Russia’s oil industry, Kiuchi said it could take time for this scenario to materialize as the Chinese are cautious about appearing too supportive. to Russia for fear of being taken to secondary school. punishments.

So even though Russia now appears to have the upper hand due to favorable market conditions, history shows that sanctions leave “deep and lasting scars on the target country,” Schroders added.

Eventually, “Russia could lose its status as a resource-rich country,” Kiuchi said of Nomura.

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