ACFE Insights Blog

Unethical Actions of Russian Energy Companies Are Rattling the Marketplace

In 2021, Russian crude and condensate output reached 10.5 million barrels per day, making up 14% of the world’s total supply. In the same year, Russia exported oil worth USD 300 billion, accounting for 11% of the global oil trade. The country exports most of its oil production, with almost all going to Europe (about 80%) and Asia (about 20%).

By Guest Blogger September 2022 Duration: 8-minute read
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By: Syed Zubair Ahmed, CFE 

The backbone of the Russian economy is energy exports. The Russian energy sector is an enormous global asset driving economic activity across the world. In 2021, Russian crude and condensate output reached 10.5 million barrels per day, making up 14% of the world’s total supply. In the same year, Russia exported oil worth USD 300 billion, accounting for 11% of the global oil trade.  The country exports most of its oil production, with almost all going to Europe (about 80%) and Asia (about 20%). Russia has the world’s largest proven crude oil reserves, totaling almost 264 billion barrels as of January 2021. The country also has the second largest proven natural gas reserves in the world, totaling about 1,688 trillion cubic feet as of the same date. The country’s oil and gas sector accounts for more than 50% of its GDP and more than 70% of its export. As the world’s largest oil producer, Russia has a major impact on global oil markets. 

Russian entrepreneurs have found a new and ingenious way to manipulate the Russian economy—through the use of their oil and gas wealth. In particular, they rely on natural gas and oil prices to determine their profit margins, which in turn gives them a lot of power over the country's oligarchs. This practice has led to rampant corruption, including political bribery or setting up front companies, as the energy companies keep enriching themselves at the expense of the Russian people. The abusive practices of the Russian energy sector have caused a public outcry in Europe and America, with some politicians calling for sanctions on Russia, as allegations have been raised throughout both the public and private sectors in the country.  

The recent, shocking surge in fake Russian oil sales has generated a great deal of confusion and speculation. Some believe that Russian President Vladimir Putin is trying to undermine the West by selling oil at a discount, while others suggest that he is stockpiling oil to create an artificial shortage and bolster prices in the event of a global crisis. It is impossible to know for sure what Putin’s motivations are, but it is important to be aware of the danger that these fake sales pose. The reason for this surge in fake Russian oil sales is still unknown, but many experts believe that it is due to the deteriorating situation in Ukraine. The fighting has caused a sharp decrease in the production of crude oil and shale gas, which is the main source of income for Russian energy companies. 

According to the U.S. Department of Homeland Security, these fake oil sellers are Russian energy companies, which are very keen to steal profits, as they know that the current oil market is currently unstable. These companies are often associated with corrupt officials and, as such, pose a threat to national security. 

Several major players remain in the Russian oil industry in recent years. Russia's top oil producer is state-owned Rosneft. It is followed by Lukoil, which is the largest privately owned oil company in the country. Gazprom Neft, Surgutneftegaz, Tatneft and Russneft also have significant holdings in the Russian oil industry. These five Russian energy companies represent how the nation's oil and gas industry is dominated by state forces. A post-Soviet group of companies, they all operate similarly and are closely intertwined, with one executive today even being accused of stealing more than $5 billion from his firm. 

According to a report by The Financial Times, Rosneft was manipulating the London Interbank Offered Rate (LIBOR), the global benchmark interest rate in a scheme that may have contributed to the financial crisis of 2007–08. LIBOR is used as a benchmark to set the rates for trillions of dollars worth of loans worldwide, so any manipulation of the rate can have serious consequences for the stability of the global financial system.  

As it turns out, mostly relying on natural gas and oil prices to determine their profit margins, the manipulation by Russian energy companies has led to wasteful spending on projects that have little to no benefit for the country as a whole. In 2013, Gazprom transferred 1.4 billion rubles (USD 27 million) from its subsidiary, Rusnano, to a company owned by Russian Deputy Prime Minister Arkady Dvorkovich. 

Mikhail Abyzov, a former Russian politician and businessman, was arrested in March 2019 on suspicion of embezzling over USD 69 million from a state-owned company. This high-profile arrest of the once-influential Russian politician and businessman sparked public outcry. The arrest came as a surprise to many, as Abyzov was previously close to Prime Minister Dmitry Medvedev. Abyzov is known for two things: He was on Prime Minister Dmitry Medvedev’s team, but more importantly, he was the chairman of the board of the state-owned Russian electricity grid holding company. 

Roman Abramovich could be considered one of the luckiest men in the world. He was born into a family of Jewish immigrants in the Soviet Union and was able to parlay his family's connections into a successful career in the oil industry. Russia’s richest man and owner of the Chelsea Football Club, Abramovich's net worth is USD 8.7 billion, and he has been able to amass this fortune through his company, Lukoil, one of the largest oil companies in the world. Unfortunately, Abramovich has been implicated in oil scams, and it has been revealed that his company needs more money because it used rackets to launder money from the people in the Middle East.  

Oil companies like Rosneft and Lukoil, as well as aluminum producer Rusal, is subject to political shell games that lead to instability in global markets. This has serious consequences for oil prices and shorter-term commodity prices like copper and aluminum, which was seen recently with a sharp sell-off in those stocks on Wall Street. The reason for this price drop is that Russia's energy companies are dumping their bad news into the market by dumping billions upon billions of dollars worth of shares onto the public markets over the last several months. Most of this came following sanctions imposed on Russia by western governments across Europe (more specifically Germany) after Putin annexed Crimea from Ukraine. It’s the first-time sanctions of this nature have been imposed on Russian companies. They range from bans on defense exports to outright bans on key oil or gas exports such as Novatek. As per speculations made by investors, Russia's oil industry is going to slow down due to the current economic condition and sanctions imposed on its energy companies.  

To seize control of the oil resource, Russian energy companies continue to cheat the system and enrich the privileged. The years-long lull in global oil prices has done little to deter Russia’s thirst for oil. Instead, it has fueled a renewed focus on “unconventional” sources of crude that are becoming more prevalent in the interior and country's vast wilderness. 

Over the past decade, Russia has been one of the few nations in the world that haven't been struck by a major oil crisis. But this doesn't mean that Russia isn't worried about oil prices either. Oil has played an important role in Russia's economy and politics for decades, so it's no surprise that when oil prices began to fall rapidly and unexpectedly, the Russian leaders believed that action needed to be taken. 

The Russian media has been ineffective in helping to uncover the corruption of the Russian government. While it does have a role in spreading propaganda, it is also responsible for disseminating fake news. This is because Russian reporters are often paid to disseminate propaganda rather than report on indisputable facts. This makes it difficult to find accurate information about the Russian government. 

It appears that the Russian government has a great need for the oil they produce. It's estimated that they are making USD 27 billion from unethical practices. Although many people think these crimes are just perpetrated by low-level workers, professionals are almost certainly involved in the crimes. 

Russia has been able to maintain a stable supply of energy throughout its territory despite extreme winter conditions and poor infrastructure for one reason: the sheer size of its oil reserves. Other countries are unable to keep up with these large reserves because they lack enough cold weather and natural gas to power their economies. The Russian oil industry and its pipelines carry over 90% of all Russian international energy exports. Russia's oil sector has been under scrutiny by Western governments, which have often accused Russia of covering up its arms or conducting underground trade with Iran. The Russian government has mostly denied these allegations and labeled them as propaganda campaigns that are intended to discredit Russia's foreign policy.

The question of whether Russia is going to tighten the control of its economy or strengthen its relations with the West has become a hot topic for many political analysts. With oil prices continuing to decline, the Kremlin has shown signs that it may be more inclined to tighten its control over its economy. However, given Russia’s history of engaging in Eurasianism and its recent achievements in Ukraine, some analysts believe that Russia will instead strengthen its relations with the West.