Four months into the Ukraine war, Russia is reaping bumper revenue from its oil and gas sales — but experts say Moscow should consider other heavily sanctioned countries in recent history, including Iran and Venezuela, as a cautionary tale in the longer run.
“Oil-producing nations like Iran and Venezuela, which have been hit with economic sanctions in the past, suffered grave hits to their oil production, from which they still haven’t recovered,” said Takahide Kiuchi, an economist at Nomura Research Institute.
That’s because the sanctions are designed to lower demand, in turn forcing the country’s oil producer to cut output, experts told Insider. The Russian oil industry is also likely to suffer from a decline in technological advancements as foreign investments pull out en masse from the country.
And Russia could be affected even worse than Iran and Venezuela, as most of their sanctions are imposed by the US, Kiuchi told Insider. Restrictions on Russian trade are far more wide-ranging, he said, and the US is not the only one sanctioning Russia: The UK, too, has banned Russian oil imports, and EU countries 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 for Moscow’s cash cow as trade restrictions gnaw their way through the economy.
Here’s how the Iranian and Venezuelan oil industries have been battered by sanctions in recent years — heralding what could come for Russia.
Iranian and Venezuelan oil production went into free fall after US sanctions hit
In July 2015, Iran reached a historic deal with six world powers — the US, UK, China, France, Germany, and Russia — to limit its nuclear program in exchange for relief, including for oil.
After the sanctions were lifted, Iranian oil exports rose to 2 million barrels per day in 2016 and reached a peak of 2.8 million barrels per day in 2018, according to Reuters data. This number started to fall back after the US — under former President Donald Trump — unilaterally withdrew from the agreement in May and reimposed sanctions. The move sent Iran’s oil exports plunging by over 90% later in the same year to 200,000 barrels per day, according to Reuters.
Like Iran, “the supply-side of Russia’s economy will almost certainly be impacted” by sanctions, Schroders, an asset management firm, wrote in a note in March.
Venezuela was sanctioned by the US 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 sanctions hits, 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 eke out would have been modest compared to Russia’s windfall in the current boom market. That’s as oil prices have risen to 13-year highs due to an energy supply crunch not just because of the war, but as world demand is recovering from the pandemic as well.
Despite robust sales revenues, Russia’s economy ministry still forecast 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, it’s unlikely that Moscow will be able to find buyers for all the oil it sells to the EU, said Henning Gloystein, the director for energy , climate, and resources at the Eurasia Group, a risk consultancy.
“The rest of the world cannot fully absorb what Europe used to import in terms of crude,” Gloystein told Insider.
Sanctions on Russia will lead to technological and hardware decay
More importantly for Russia, the energy market boom will not last forever and a slowing of major investment into the country’s oil industry will hit hardware in the long run, experts told Insider.
In Venezuela, the degradation of its oil infrastructure has already hurt the quality of the crude grades it exports, resulting in price discounts and shipping delays, Reuters reported in January, citing documents from state-owned oil firm Petroleos de Venezuela.
In Iran, oil embargos and technological restrictions have sent the industry into a state of chronic underinvestment, according to Schroders. The country’s oil minister Javad Owji said in November the country needed $160 billion in investment to upgrade and improve production to avoid becoming a net oil and gas importer, Iran International TV station reported.
If Russia’s energy production declines to a stage at which it — as Iran now fears — has to start importing, that could push up inflation and spill over into 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 exiting the market will not continue updating or servicing software and codes, Bloomberg reported on June 28.
“The departure of Western energy firms from Russia will also result in a lack of investment and highly trained staff required to maintain or raise output,” Eurasia’s Gloystein said.
While investors from China may step in at some point to fill the void in Russia’s oil industry, Kiuchi said it could take time for this scenario to play out as the Chinese are speculating about appearing overly supportive of Russia for fear of being caught up in secondary sanctions.
So, even though Russia appears to have the upper hand now due to favorable market conditions, history shows sanctions leave “deep and long-lasting scars on the target country,” Schroders added.
Eventually, “Russia may lose its status as a resource-rich country,” Nomura’s Kiuchi said.