RUSSIA at Breaking Point

Hi, welcome back to the channel. In today's video, I want to provide you with an update on what's becoming one of the biggest economic stories coming out of Russia. If you've been following the channel, you'll know that over the past few videos, we've been talking a lot about the impact of the repeated attacks on Russian oil refineries that's now causing major problems with regards to Russia's fuel supplies. We were looking at the shortages that were beginning to emerge, and when those shortages started spreading across many regions, Russia declared a state of emergency and is now introducing things like rationing, purchase limits, and increased prices. And in today's video, we've got another significant development. We're starting to see the shortages feeding directly into consumer prices and exports, and also the wider economy. The latest reports coming out of Russia show that gasoline prices at independent filling stations have now broken through 100 rubles per litre for the very first time in Russia's history. Now, at today's exchange rates, that's around £1.30 or around $5 per US gallon. And at first glance, you might be thinking, that's actually cheaper than I'm paying at the pumps when I go to fill up my car. But that's not the comparison to look at. The important comparison here is where fuel prices normally sit inside Russia, because let's not forget, it's one of the world's largest producers of oil and refined products. At the major state-controlled fuel retailers, motorists generally pay around 65 to 70 rubles per litre. Independent stations are now charging over 100, with some reports showing that prices have climbed as high as 140 rubles. So we're not talking about a small increase here, we are talking about prices that are now between 40 and 50% higher than motorists usually pay for their fuel. And these prices potentially could go up even further over the next few days. Now, that is a dramatic increase over a short period of time, and that's why this matters. Now, before we get into the details of all of this, if you're enjoying my videos, could you give me a thumbs up for this video, and also maybe hype it if you can, if you see that little hype symbol, please hit that because it helps me with the algorithm. If you haven't subscribed yet, please also subscribe because that generally helps the channel and also puts a smile on my face. Now, let's get into the details of what's happening here. One of the interesting things about economics is that shortages are often only the first stage of a much bigger problem. Initially, people notice queues for products, then they notice filling stations running out of fuel, they notice purchase limits, and some regions have restricted motorists to a relatively small quantity in Russia, 20 liters, while other stations just don't have any fuel at all. We then come to the next stage of this process, prices start rising, and once prices start rising, the economic consequences become much broader. Every household has a budget. If motorists suddenly have to spend significantly more filling up their vehicles, then you've got less money available to do everything else. So less money to go shopping, eating out, spend on entertainment, spend on holidays, buy consumer goods. Economists refer to this as a squeeze on disposable income. When millions of households all experience that squeeze at the same time, consumer spending starts to weaken, businesses sell fewer goods, company revenues come under pressure, economic growth begins to slow, and government tax revenues also come under pressure. So what starts as a fuel shortage gradually develops into a much broader economic problem. But there's another important consequence here. Fuel doesn't just affect motorists, fuel affects almost every industry, every delivery lorry uses diesel, farmers rely upon fuel for tractors and harvesting equipment, construction companies use heavy machinery which relies on fuel, manufacturers transport raw materials and finished products which obviously needs fuel, retailers depend on logistics networks which are dependent upon fuel. So when fuel prices increase by 40 or 50 percent in parts of your market, businesses across the economy face higher operating costs. Some of those costs are absorbed through lower profits, but many are eventually passed on to consumers through higher prices. In other words, rising fuel prices creates upward pressure on inflation, and that's particularly important in Russia at the moment. Russia has been trying to bring inflation under control, but it remains above the central bank's long-term target rate of 4%. To combat that inflation, the central bank of Russia has maintained very high interest rates. Now if fuel prices continue putting upward pressure on inflation, it becomes very difficult for the central bank to justify reducing interest rates. Higher interest rates make borrowing more expensive, they increase mortgage costs, they discourage investment by companies, they slow consumer spending, and ultimately they act as a brake on economic growth. So this isn't simply a story about gasoline stations, it's a story about inflation, interest rates, consumer spending, business investment, and ultimately the wider performance of the Russian economy. So what's driving all of this? The answer lies in Russia's refining industry. Over the past few months, there have been an increasing number of reported attacks on Russian oil refineries. Rather than focusing primarily on crude oil production, these attacks have disrupted facilities that convert crude oil into usable products such as gasoline, diesel, and aviation fuel. From an economic perspective, that's an important distinction. People often think crude oil is where all the money is made, but it isn't. Crude oil is simply the raw material, the real value in the oil industry is added when crude oil is refined into finished petroleum products. If you think about it like wheat, you can sell wheat, but once that wheat has been turned into flour and bread, significantly more value has been created. It's exactly the same with oil. Gasoline, diesel, jet fuel, lubricants, petrochemicals, all of those refined products generate considerably more value than simply selling crude oil. So every refinery that's unable to operate normally affects Russia in two different ways. Firstly, it reduces the amount of fuel available for the domestic economy. And secondly, it reduces the amount of higher value refined products available for export. That means lower export earnings, lower profitability for refiners, potentially lower tax revenues for the Russian government, and less foreign currency flowing back into the economy. That's why refinery capacity matters so much, and this appears to be developing into a sustained challenge rather than a one-off disruption. Ukraine has publicly stated that expanding long-range drone production is a priority, and in recent months we've seen continued reported strikes against energy infrastructure all across Russia. How this develops will depend on a range of military and operational factors, including repairs and air defences, but from an economic perspective the key point is really straightforward. Repeated disruption to refining capacity will have a cumulative impact over time. So let's have a look at the latest export data because I think this tells the story incredibly well. If you look at this graph it shows Russia's seaborne diesel exports dating back to 2021. The figures are measured in thousands of barrels per day. So if we start by looking at 2021 before the full-scale invasion of Ukraine started, exports generally fluctuated between 700,000 and 900,000 barrels per day. There are the normal seasonal movements, maintenance shutdowns, shipping schedules, changes in demand, but overall exports remained remarkably consistent. Then came the invasion of Many analysts expected the sanctions to cause exports to collapse for Russia, but if you follow the graph carefully that didn't actually happen. Russia redirected significant volumes away from Europe towards alternative buyers, mostly China and India. So although sanctions clearly changed trading patterns, exports remained surprisingly resilient for quite some time. Now if we look at the most recent section of the graph, this is where things become really interesting. Exports have fallen dramatically. The latest reported figures show diesel exports at their lowest level at any time on this chart. So the graph tells us that something has changed. It's no longer simply about finding buyers, it's increasingly about having sufficient refined product available to export, and that's an important distinction. If you don't have the refining capacity you simply can't produce the higher value products that international customers want to buy. And that also creates another dilemma. If domestic supplies become tight, governments often face a difficult choice. Do you continue exporting fuel or do you prioritize domestic customers? If you've been following the channel you'll be aware that Russia has actually taken steps to restrict exports. It's banned gasoline and jet fuel exports and it's on the verge now of also banning diesel exports. Now that may help reduce shortage domestically but it also means lower export earnings. So that's a massive trade off for Russia. You protect your domestic supply but at the same time you're minimizing your export income. And another interesting point is that refining margins in global markets have improved following the recent disruption to energy markets as a result of the war in Iran. So from Russia's point of view they're missing out on bumper profits. Usually higher refining margins mean higher profits but if refining capacity is constrained as it is in Russia right now, refiners can't benefit from those favorable market conditions. So Russia is facing a double challenge here. Lower production and reduced ability to take advantage of stronger refining economics. The timing also matters. Fuel demand increases during the agricultural season in Russia. Farmers require large amounts of diesel for tractors, combines and transporting crops. Any disruption during this period has the potential to affect wider economic activity. If they can't actually harvest the crops then they can't sell the crops and also it creates food problems within the food supply chain in Russia. And looking ahead there are still lots of uncertainties. How quickly can damaged facilities be repaired? We've got the question as to how domestic demand will evolve over the summer period and what policy decisions Russia will take regarding exports and fuel supplies. All of those factors will influence how this story develops over the next few months but one thing is becoming increasingly clear. Over the past few weeks we have seen progression. First came isolated store shortages, then those shortages spread across multiple regions, then emergency measures were announced including rationing. Now we're seeing higher prices for consumers, reduced refined exports and broader economic consequences. So this is no longer simply a story about fuel. It's a story about household budgets, business costs, inflation, interest rates, export earnings, government revenues and ultimately the performance of the wider Russian economy. So we'll continue monitoring the data because this remains one of the most important economic stories coming out of Russia this year. So hopefully you found today's video useful, informative and most importantly thought-provoking. I'm trying to provoke some thoughts getting you to think about things in different ways. 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