“Oil-producing countries such as Iran and Venezuela, which have been hit by economic sanctions in the past, suffered severe blows to their oil production from which they have yet to recover,” said Takahide Kiuchi, an economist at Nomura Research Institute. That’s because the sanctions are designed to reduce demand, in turn forcing the country’s oil producers to cut output, experts told Insider. Russia’s oil industry is also likely to suffer from a drop in technological progress as foreign investment pulls out of the country en masse. And Russia could be affected even worse by Iran and Venezuela, as most of their sanctions are imposed by the US, Kiuchi told Insider. Restrictions on Russian trade are much more far-reaching, he said, and the US is not alone in imposing sanctions on Russia: The UK has also banned imports of Russian oil and EU countries have agreed to ban 90% of purchases of Russian crude at the end of the year. All these factors combined, experts say, point to a decline for Moscow’s cash cow as trade restrictions gnaw their way into the economy. See how Iran and Venezuela’s oil industries have been hit by sanctions in recent years – foreshadowing what could happen for Russia.
Oil production from Iran and Venezuela plummeted after US sanctions
In July 2015, Iran reached a historic deal with six world powers – the US, UK, China, France, Germany and Russia – to curb its nuclear program in exchange for sanctions relief, including on oil. After sanctions were lifted, Iran’s oil exports rose to 2 million barrels per day in 2016 and peaked at 2.8 million barrels per day in 2018, according to Reuters data. That number began to decline when the US – under former President Donald Trump – unilaterally withdrew from the deal in May and reimposed sanctions. The move saw Iran’s oil exports drop more than 90 percent later that 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 sanctions, Schroders, an asset manager, wrote in a March note. Venezuela was sanctioned by the US in 2019 in an attempt to oust socialist President Nicolas Maduro. As a result, Venezuela’s exports fell to a 77-year low of 623,600 barrels a day in 2020 — down by a third from 1.89 million barrels a day in 2016 before the sanctions, according to Reuters data. Sanctions against 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 be modest compared to Russia’s windfall in the current bull market . This comes as oil prices have risen to 13-year highs due to a crisis in energy supplies not only due to the war, but as global demand also recovers from the pandemic. Despite strong sales revenue, Russia’s economy ministry still forecasts a 17 percent drop in oil production 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 such as India and China have stepped in to buy Russian oil shunned by the rest of the international community, it is unlikely that Moscow will be able to find buyers for all the oil it sells to the EU, said Henning Gloystein, the energy director. , climate and resources at Eurasia Group, a risk consultancy. “The rest of the world cannot fully absorb what Europe has imported in terms of crude,” Gloystein told Insider.
Sanctions on Russia will lead to technological and technological decay
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 hurt the hardware in the long run, experts told Insider. In Venezuela, the deterioration of its oil infrastructure has already hurt the quality of the crude it exports, resulting in price discounts and shipping delays, Reuters reported in January, citing documents from state oil company Petroleos de Venezuela. In Iran, oil embargoes and technology restrictions have driven the industry into a state of chronic underinvestment, according to Schroders. The country’s Oil Minister Javad Ouji said in November that the country needed $160 billion in investment to upgrade and improve production to avoid becoming a net importer of oil and gas, Iran’s International Television reported. If Russia’s energy production falls to a stage where – as Iran now fears – it has to start importing, that could push up inflation and spill over into the rest of the economy, Schroders said. The situation is already playing out in Russia as key software used in the oil and gas industry is becoming obsolete as exiting companies won’t continue to update or service software and codes, Bloomberg reported on June 28. “The withdrawal of Western energy companies from Russia will also result in a lack of investment and highly trained personnel needed to maintain or increase production,” said Eurasia’s Gloystein. While Chinese investors may step in at some point to fill the gap in Russia’s oil industry, Kiuchi said it may take time for that scenario to materialize as the Chinese are wary of appearing too pro-Russia for fear lest they be trapped in secondary sanctions. So while Russia appears to have the upper hand now because of favorable market conditions, history shows that sanctions leave “deep and long-lasting scars on the target country,” Schroders added. Ultimately, “Russia may lose its status as a resource-rich country,” Nomura’s Kiuchi said.
