What is Russia’s response to the oil price cap?

The Russian president Vladimir Putin has signed a decree on countermeasures against the imposition of cap on Russian oil prices from the West. According to the February decree, Russia will not supply oil to countries that have “directly or indirectly” joined these sanctions. It remains to be seen how this will be implemented in practice.

It will enter the ban on supplies of Russian oil under contracts with countries that meet the maximum price effective from 1 February 2023. The decree does not list the countries to which Russia will no longer supply oil. In a separate clause, however, Putin reserves the right to issue special permission to circumvent the decree.

Putin issued the decree with countermeasures to the oil price ceiling

Deliveries to buyers adhering to the restriction are prohibited

On December 2, the G-7 countries and their allies officially approved a cap on Russian oil prices. This happened some time ago the embargo on Russian oil, imposed by the EU, will enter into force on 5 December. The ceiling of the price was set at $60, since at the time of the deal, the main Russian oil – the Urals grade – was being sold below this price.

Russia is building an illegal navy to get around the oil embargo

Russia is building an illegal navy to get around the oil embargo

Tankers are registered in offshore areas

The decision was made at “prevented Russia from benefiting from its war of aggression against Ukraine”, the statement said, but it also aims to “support the stability of global energy markets” and “minimize the negative economic impact” of the Russian invasion.

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Already in early December, news began to appear in the media that Russia is preparing retaliatory measures against the oil price ceiling and it was clear from the reports that something was wrong with this reaction.

Moscow has not yet responded to the EU gas price cap

Moscow has not yet responded to the EU gas price cap

According to Dmitry Peskov, it’s too early to talk about a solution

Vladimir Putin’s decree in response to the introduction of a cap on Russian oil is written as generically as possible. It’s not clear how these restrictions will work, or if they will work at all. The document prohibits the supply of oil and petroleum products to the final buyer, if the contracts for such supplies “directly or indirectly provide for” an oil price cap mechanism. It’s not clear how Russian officials will know the buyer is complying with the restrictions.

In early December, Bloomberg reported, citing its sources, on two specific measures. First, the authorities would set a minimum price for Russian oil – it would be forbidden to sell it cheaper. According to – determination of the maximum discount, i.e. how much cheaper Russian oil can compare with Brent oil and other international grades. In theory, such measures could in fact limit supplies to those who comply with the sanctions. About a week after Bloomberg, “Vedomosti” has already written about it a milder version – the prohibition of supplies to countries that have “formally adhered” to the cap and the prohibition of supplies if the contractual price of 60 dollars per barrel is specified as a condition for delivery. But even these details are no longer present in the published decree. “Vedomosti” writes that the Ministry of Energy will issue a statute in addition to the decree, in which, for example, the maximum amount of the discount will be specified. Probably like this Russian officials are trying to develop a flexible mechanism for countermeasures, with which the Russian Federation can respond to growing economic pressure.

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Why is it needed?

Russian oil exports appear to have started to decline in December. According to Bloomberg data in the first week of the European embargo Russian oil sea shipments down 54% – it is very likely that this is a technical malfunction and some supplies will recover over time, as analysts report that exports have decreased not only to Europe, but also to India and China, for example. On the other hand, unspecified supplies increased – perhaps Russian oil exports are turning “gray”.

Moreover oil prices have fallen. In two months, the Brent variety has lost more than $10: on Tuesday, the barrel cost about $85. However, Russia does not supply Brent, but the Urals, and at a discount of more than 30 dollars compared to market prices. But next year’s budget is based on a price of $70 a barrel – and deficits. Perhaps, given the declining supply and falling prices, the Russian authorities simply decided to devise a mechanism that would allow them to announce a “response” to the maximum price, but “not shoot themselves in the foot” – or their own budget. It was about the same with the “gas for rubles” scheme.

Oil markets are reacting cautiously to the new sanctions

Oil markets are reacting cautiously to the new sanctions

Fears of a recession have gripped the market

How does the ceiling work?

By limiting oil prices, Western countries have tried to prevent Russia from profiting from oil exports.

The ban concerns not only and not so much the purchase of oil and petroleum products worth more than 60 dollars a barrel from Russia, but rather to transport, finance and insure shipments of such oil by sea to any country.

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Since deliveries of tankers are carried out mainly from Greece, insurance is concentrated in London, and trade – in Switzerland, Russia will not only have to find new buyers among the countries that did not join the sanctions, but also build alternative ones from zero global market supply chains.

It is associated with such a large-scale restructuring of the world oil market sharp decline in Russian oil production and a sharp rise in the prices of petroleum products and raw materials around the world. The “price ceiling” should avoid both. Russia was offered to pay for it.

As a result, by 2030, Russia’s share in the global energy market will shrink to around 13%, down from 20% last year. The United States and the Middle East will win, while The Kremlin will lose about $1 trillion export revenue, predicts the International Energy Agency (IEA).

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