Economic environment

The ongoing war in Ukraine, the addition of the Israeli-Hamas war to the geopolitical mix, rapid inflation and high interest rates were the dominant themes driving the global economy in 2023. Despite the challenging conditions, the global economy held up well and managed to grow by 3.1% in 2023, according to the International Monetary Fund (IMF). However, since 2021, the global economic growth has been on a slight downward trend, below its historical average of 3.8% over the period of 2000–2019. With the global economic growth of 6% in 2021 and 3.4% in 2022, IMF’s projections show that growth will in the future remain at a similar level to 2023. Global growth is projected at 3.1% in 2024 and 3.2% in 2025, as central bank interest rates are raised to fight inflation and economic activity is low. Although the global economy as a whole grew in 2023, the economic situation varied across countries.

The euro area’s gross domestic product (GDP) grew by 0.4% last year according to Eurostat, which is significantly lower than the global economic growth and the euro area’s own growth of 4–5% in the previous few years. Growth in both the euro area and the global economy was most constrained by high interest rates. From 2022 onwards, both the US Federal Reserve and Estonia has not seen such a large-scale recession since the housing market crash in 2008. the European Central Bank have gradually raised interest rates, taking base interest rates to record levels by 2023. By the end of the year, the US Federal Reserve’s interest rate stood at 5.33%, its highest level in the past 23 years, and the European Central Bank’s at 4.5%, its highest level since the global financial crisis of 2007–2008. The rate hikes were necessary to combat the rapid inflation caused by the expansionary monetary policies of central banks during the COVID-19 pandemic and the subsequent Russian invasion of Ukraine, which pushed up the prices of energy and raw materials.

The state of the Estonian economy is even bleaker. According to Statistics Estonia, Estonia’s GDP fell by 3% in 2023 (a drop of 1.3% in 2022). Estonia has not seen such a large-scale recession since the housing market crash in 2008. The weak performance in the last two years has been driven by a rapid price increase, which has left its mark on the competitiveness of the Estonian economy. In addition to rising energy and raw material prices, Estonia’s inflation has been driven by continued increases in labour costs. While in 2022, for the first time in 12 years, inflation in Estonia (+19.4%) outpaced the rise in average gross wages (+8.9%), in 2023 average gross wages (+11.3%) again outpaced inflation (+9.2%). According to the forecast, the economic recession in Estonia will continue in 2024, which should according to economic theory also lead to an increase in unemployment and a slowdown in the salary rally. While central banks are trying to curb inflation with their monetary policy the Estonian government is boosting inflation with tax increases from 20% to 22% in VAT and 5% in excise duties on alcohol and tobacco from the beginning of 2024.

The economic results of the VKG Group are influenced the most by developments in the global oil market. Compared to 2022, price volatility was lower in 2023, but still significant. Declining economic activity and the adjustment of the oil market to the sanctions imposed on Russia in 2022 kept oil prices on a downward trend in the first half of the year. In June, Brent reached the lowest point of the year of 72 dollars a barrel. OPEC+ production cuts and renewed geopolitical conflicts in Israel and the Red Sea pushed crude oil prices to their highest level of the year at the end of September at 97 dollars a barrel. The continuing economic downturn pushed crude prices back down again at the end of the year, with Brent ending the year at 77 dollars a barrel. The average Brent price for 2023 was 82 dollars a barrel, down 17% from the previous year.

VKG sells most of the produced oils on the basis of the price of fuel oil with 1% sulphur content. Compared to the Brent crude oil, the 1% fuel oil market is less liquid and the price of fuel oil may move differently from Brent, depending on the ratio between supply and demand. As the oil market transacts in dollars, but VKG’s expenses are denominated in euros, the company’s results are also influenced by the US dollar to euro rate. Thus, the Group’s results are best characterised by the following fuel oil price curve.