Oil Prices
The oil price scene has been relatively uneventful in the last two months, with Brent loitering in the high-$70s to the low-$80s and dropping $6 last week alone to a tepid $77 / barrel on Friday.
Urals, Russia's western oil export price, has similarly been hanging around the Price Cap limit since early December, averaging $59.50 until the past week. Even as Brent was sliding, Urals has spiked up the past ten days, gaining $7 / barrel to close at just under $68 / barrel on Friday.
Accordingly, the Urals discount - the difference between the Urals price and Brent -- has narrowed, closing at $8.72 on Friday and averaging $13.19 / barrel for the week. This average is actually close to our forecast value of $12.62. Notwithstanding, the discount is probably understated as changes in Brent tend to be reflected only with a lag in Urals, and the drop in Brent will only be captured in the Urals price this coming week.
Still, it looks like the Urals discount is on the decline once again. This is not unexpected, as this sort of volatility is typical of black markets. The US stepped up Price Cap enforcement in November, and the discount widened as a result. A greater discount increases profits, and this induces the introduction of new players or new smuggling methods to the Russian oil trade. The resulting increase in demand then closes the discount once again.
This is the same dynamic which we see with illicit drug prices. A round of enforcement creates scarcity in the narcotics supply, which raises prices and profits, and stimulates innovation in smuggling practices. This in turn causes the Whac-a-Mole syndrome which we see in not only Russian oil smuggling, but also in drug smuggling and illegal immigration, the latter being the smuggling of illicit labor over the US southwest border. Because enforcement increases available profit margins to intermediaries like drug cartels or UAE shipping companies, enhanced enforcement is quite literally self-defeating, and a key reason why prohibitions are to be avoided as public policy. Every time one channel of smuggling is blocked, another appears somewhere else, with the authorities constantly chasing the smugglers' ever-changing tactics, just like the children below trying to whack the moles as they pop up.
The Urals price is not particularly high by recent standards, but is in fact the highest since 2015, excluding only the surge of 2022 at the start of the war.
Ruble
Like Brent, the ruble has been largely range-bound since November, trading within a few points of 90 ruble / USD.
Russian money supply growth, as measured by M2, has been ebbing according to the statistics of the Russian central bank. Annual money supply growth in Russia reached 24% in 2022, but only 19% at the close of 2023. The Russian money supply from 2015 to 2021 grew by 10% annually on average. Thus, Russian M2 growth has substantially exceeded historical norms in the past two years, with the implication that accommodative monetary policy has been supporting the Russian economy, and by extension Russia's war effort, by the equivalent of $114 bn in 2022 and $71 bn in 2023. Russia's elevated interest rates, 16% from December, appear to be having the desired effect of reducing inflationary pressures. Moscow appears to be successfully adjusting policies, notably fiscal policies, to deal with the costs of the war.
