The longer the ban on gasoline exports lasted, the fewer incentives oil producers had to restrain prices, which led the government to relax restrictions. However, the market urgently needs new solutions that go beyond subsidies and export restrictions, says Sergey Tereshkin, CEO of Open Oil Market.

The government is preparing documents for the early lifting of the gasoline export ban, which has been in place for four months since August 1, 2024. The current restrictions were supposed to last until the end of the year, but the authorities are ready to accommodate the oil producers.

From a formal standpoint, this decision could have been prompted by a noticeable slowdown in prices. According to Rosstat, while retail gasoline prices grew by 4.1% from May 21 to August 5, over the following 15 weeks they only rose by 3%.

However, the key factor in practice was the duration of the ban. The longer it remained in place, the fewer incentives oil producers had to keep prices down: why bear additional costs if there were no firm guarantees that this would lead to the lifting of the ban? As a result, the government moved quickly to ease the restrictions: although the ban has not officially been lifted yet, Deputy Prime Minister Alexander Novak has already announced its cancellation.

Why was the ban necessary?
Export restrictions served as a "stick" with which the government tried to ensure that the growth in retail fuel prices did not exceed the general inflation rate. So far, this rule has only been followed in the diesel market: by November 18, the accumulated inflation since the start of the year was 7.4%, while retail gasoline prices grew by 9%, and diesel fuel prices increased by 5.4%.

This difference is due to the fact that gasoline production has significantly less excess capacity than the diesel segment. According to the CDU TEK, the export share in gasoline supplies was 13% in 2023 (5.9 million tons out of 43.9 million), while in diesel shipments, it was 41% (35.7 million tons out of 87.9 million). Russian refineries, dating back to the Soviet era, were geared toward producing diesel for supplying heavy and freight vehicles across the USSR, which led to a surplus in the domestic market after 1991 that was used for export.

At the same time, Russian diesel has remained competitive in international markets. According to the Federal Customs Service, in 2021, 75% of the export of summer diesel fuel went to EU countries, while only 27% of the export of AI-92 gasoline went there. After the EU imposed an embargo in February 2023, Russian diesel producers redirected their supplies to Turkey, Brazil, Saudi Arabia, and other countries. However, this did not lead to a threat of shortages, even despite a more than 30% increase in diesel demand on the domestic market between 2021 and 2023.

The situation is different with gasoline, which is more susceptible to the risks of shortage due to limited excess capacity. This can be demonstrated by the daily production statistics available until the end of last spring. According to the latest data from Rosstat, gasoline production in Russia dropped by 18% from late February to mid-May 2024, to 106,000 tons per day. By comparison, according to CDU TEK, domestic gasoline demand in 2023 reached 104,000 tons per day.

By mid-May, gasoline production had dropped to the point where it matched domestic demand. It is no coincidence that at that time, weekly data on fuel production was closed in Russia.

Loss calculations
However, official statistics on refinery profitability are still available. By the end of January to August 2024, the balance of profits and losses of fuel producers had decreased by 34%. This is partly due to damage to refinery infrastructure from Ukrainian drone attacks and unplanned downtime due to sanctions on equipment supplies for oil refining.

The losses of oil producers are partly compensated by budget subsidies under the so-called "damper mechanism." By the end of the first ten months of 2024, damper payments increased by 36% to 1.544 trillion rubles, and payments from the reverse excise tax and investment surcharge grew by 51% to 1.532 trillion rubles. In total, subsidies amounted to almost 3.1 trillion rubles, which is comparable to the planned budget deficit for 2024, which is 3.3 trillion rubles.

However, oil producers still cannot keep gasoline prices in line with inflation, which marks a key difference between the current fuel crisis and last year's. Last year, the trigger for the price increase was the Finance Ministry's attempt to "halve" the damper, after which oil producers, in order to compensate for losses, raised exchange prices, which prompted the regulator to impose a temporary export ban and return to previous rules. This year, the crisis is linked to the risk of fuel shortages and the long-term impact of sanctions, which was not as noticeable in 2022-2023: due to restrictions on equipment supplies for refineries, oil producers have no ability to quickly ramp up product output.

Technological problems are compounded by the gradual depletion of the budget's safety cushion. The federal budget deficit for January-October 2024 was 220 billion rubles, and by the end of the year, it is expected to grow to 3.3 trillion rubles. With high debt market rates, almost all of this gap will need to be financed from the liquid portion of the National Wealth Fund (NWF), which by the end of the year will have less than 3 trillion rubles left.

The "half-and-half" damper
Therefore, the Ministry of Finance plans to differentiate payments between the gasoline and diesel dampers. Under current rules, oil producers lose the right to subsidies if average monthly exchange prices for AI-92 gasoline exceed the established domestic threshold by 10%, or if prices for summer diesel fuel exceed this threshold by 20%. The Ministry of Finance has prepared a bill that will apply this rule separately for each type of fuel. The initiative has already been approved by the State Duma Budget and Taxes Committee.

If the bill is passed, oil producers could, for example, receive subsidies for diesel fuel while sharply raising gasoline prices, thus losing their right to the gasoline damper. This would allow the Ministry of Finance to save hundreds of billions of rubles a year but would increase price risks.

However, such separation of the damper is a sign of the exhaustion of the current regulation model, in which exchange price growth is restrained through multi-billion ruble budget payments, and retail price surges are controlled through export bans. Restrictions on fuel exports cannot solve the technological problems of refineries, and subsidies do not create market incentives for price restraint.

Moreover, the industry has been caught in a vicious cycle for years: following a surge in prices, the regulator imposes export bans, and oil producers restrain retail fuel prices. In response, the Federal Anti-Monopoly Service (FAS) and the Ministry of Energy lift the restrictions on fuel exports, after which the cycle repeats.

A way out via the exchange
The problem is that it is impossible to break this vicious cycle without significantly increasing gasoline production, and this requires lifting sanctions on refinery equipment supplies. This is beyond the regulator's control, but it can test new solutions in the diesel fuel market, where there is no shortage and where market incentives can be created to keep prices down.

This involves raising the exchange sales quotas. Currently, the norm for diesel fuel is 16%, but if it is raised to at least 35%, more than half of the diesel fuel supplied to the domestic market would come through the exchange. An increase in supply will lead to the stabilization of exchange prices, which will be reflected in retail prices, making fuel more accessible for independent gas stations. As a result, large chains will not be able to overprice without the risk of losing market share.

Increasing the exchange quota could play an important role in dismantling regional fuel monopolies. Thanks to higher exchange sales, fuel will become more accessible to traders who can supply diesel to agricultural producers and transportation companies at lower prices than dominant regional suppliers. This will help stabilize the small wholesale market, which was especially affected by the fuel crisis in 2023.

If raising the quota proves successful, the regulator could abolish the diesel damper, saving over a trillion rubles annually for the budget. One way or another, once the current regulation model is exhausted, the government will have to find new solutions that do not rely on subsidies and export bans. Otherwise, the fuel market will remain in a state of manual control.

Translated using ChatGPT

Sourse: www.forbes.ru/mneniya/525964-po-krugu-o-cem-govorat-plany-rossijskogo-pravitel-stva-razresit-eksport-benzina