Oil "ceiling": Scepticism about price restrictions was premature. How and when russia will feel the sanctions
And what countries will help russia to avoid the sanctions pressure
For ten days now, the global commodity market has been living under price restrictions on russian oil, and it is already possible to draw preliminary conclusions that scepticism about the effect of this measure on russian producers was premature.
In particular, India in December (after the oil embargo and the oil price ceiling came into force) bought russian Urals not only much cheaper than the $60 per barrel limit, but sometimes at prices below cost. As Reuters reported the day before, due to Western sanctions, russian producers found themselves in fierce competition not only with each other, but also with suppliers from Asia, Europe and the Middle East. This means that their best hope to find buyers is only to reduce prices. As a result, the cost of Urals for India under some deals in December was $12-15 lower than the average monthly cost of Brent. For comparison: in November, the discount was $10-11, in October – $5-8.
Mind investigated how the discussions among Ukraine's Western partners on strengthening the sanctions pressure on the russian petroleum industry evolved, and when the most painful effect on the economy of the terrorist country should be expected.
When representatives of the EU countries finally agreed on the maximum price for russian petroleum equal to $60 per barre after several weeks of negotiations, the reaction of international experts was sceptical enough: before the new restrictions were adopted, the main oil brand Urals had been already trading below the "ceiling" with a significant discount compared to Brent. The most vocal in condemning the softness of the restrictions was the Eastern European camp led by Poland, which had to be persuaded by rest EU countries for a long time to agree to such a high "ceiling" for a terrorist state.
However, the more moderate "core" of the EU – Germany and France – and a number of other states of the bloc were primarily concerned about the risk of too violent reaction in the energy market immediately after the new sanctions are introduced, which was the actual reason of their cautious approach in setting the ceiling price for russia's "black stuff." Although the price of Brent futures did temporarily rise on the eve of the European Commission's final decision on December 2, the high ceiling combined with current energy market trends eventually "calmed" traders to such a level that at the time this article was being written, Brent stock quotes fell below $76 for the first time in this year.
Thus, the critics' of the latest EU sanctions fears about a possible surge in Brent prices turned out to be unjustified, which is already a success from the Western standpoint. Instead, the macroeconomic situation that has been unfolding in the world continues to push fuel prices down. The reduction in price may be explained primarily by trends in international demand – first of all in the US, EU and China, which are traditionally the largest oil importers.
The US, according to Reuters, may face a temporary recession next year, which makes the forecasts for imports in 2023 worse, while the recession in the EU is already underway. China is currently experiencing the effects of strict quarantine measures of previous years. This means a slowdown in economic growth and a related weakening in energy demand.
Despite the lifting of the most stringent anti-covid restrictions amid popular protests, economists remain sceptical about China. Thus, according to experts from Argus, the recovery of demand for oil and petrol in China should not be expected at least until April next year, and the overloaded medical system and the shaky political situation in the country continue to be destabilising factors.
On the other hand, policies of leading exporters, in particular OPEC+ and the United States, promote low prices. The former, led by Saudi Arabia, seem to have taken a rather wait-and-see attitude in spite of recent speculations about production cuts (and in fact, they even under-fulfilled the quota for production cuts adopted in October, having produced an extra 1.7 million barrels in November). The US, for its part, continues to saturate the energy market both by releasing the national Strategic Petroleum Reserve (SPR) and through political pressure on American oil companies to further increase production.
Are the sanctions as terrible as they are portrayed?
Despite the relative success of the first stage of the price ceiling, forecasts remain sceptical of their effectiveness in fighting the aggressor. Thus, Ben Cahill, American energy security expert, speaking to Reuters, calls the price ceiling “an unhappy compromise that will do very little to cut russia's oil revenue." Instead, the expert says, sanctions only formalise a partial embargo on russian petroleum, which Western partners have been following since the first months of the war.
The main argument of critics is that the ceiling price is too high, which allows moscow to supply oil to Asia at approximately the same price that had existed before the ceiling was introduced. This, in particular, is the opinion of Massimo di Odorado, energy specialist of the British consulting company Wood Mackenzie.
There are also difficulties related to the supervision over the following the requirements set by the EU and G7 in the new anti-russian sanctions by third countries. Thus, since the evidence of contracting at the permitted price will be presented to Western insurance companies in the form of receipts, invoices and similar documents, there will always be a risk of their forgery by dishonest companies.
Another serious problem is the verification of the origin of raw materials, since the russian trace may be easily lost after the crude oil is processed at the refineries of importing countries. This threat is well exemplified by the history of petroleum purchases by South Korea, which "laundered" this russian energy carrier via Tunisia. The same is true for India, which has significantly increased its energy imports from russia since the beginning of this year and trades already processed russian oil with European countries. The reputation of the price ceiling is also hit by the so far neutral behaviour of Chinese traders, who continue to buy ESPO crude oil from russia at a price that is several dollars higher than the price allowed by the EU and G7, thus ignoring Western sanctions.
But is the price ceiling really as pointless as its critics portray? A more detailed analysis proves that the anti-russian innovation of December 5 bears much more potential harm for the kremlin than is apparent at first glance.
First, the ceiling has already hit the value of Urals futures (a brand aimed mainly at Western markets and accounting for 30-40% of russia's total oil exports): their fall exceeded 20% over the past week. According to Bloomberg, russian Urals coming to the Baltic ports is sold for slightly more than $40 per barrel, which is significantly below the ceiling figure.
According to the publication, russia's possibilities to channel fuel to the east are almost exhausted: the only petroleum pipeline running from the aggressor country to China and the port terminal in Kozmino are already working at their full capacity. In addition to 1.5 million barrels per day that are already lost in the European market, russia risks losing another 500,000 barrels of daily supplies by the end of the year, if Poland and Germany fulfil their promise to refuse to import russian energy through the Druzhba Pipeline.
Second, even if russian oil anyway gets to Europe and the G7 countries through third countries, such as India or Turkey, the profits will go to the latter, not the kremlin.
Third, despite putin's threats to cut production and thus cause a sharp rise in international fuel prices, the very moscow’s response was rather toothless. According to the WSJ, russia's daily oil production fell by 500,000 barrels after the introduction of the price ceiling, which is less than 20% of the figure earlier predicted by Western experts. This means that the kremlin has in fact agreed to play by the West's rules and continue to supply fuel as before, but at much lower prices.
Hot war
The current macroeconomic situation in the world highlights the future geopolitical prospects of russia and the West. Both sides are now competing for global energy markets: the EU and the US – on the demand side, and russia – on the supply side of energy resources. Particularly interesting from this point of view are the future policies of one of the main oil exporters, Saudi Arabia, and the world's largest importer, China, which have set a course for mutual rapprochement judging by the recent meeting of the leaders of the two countries in Riyadh. This, unfortunately, plays in favour of the kremlin so far, although the future unfolding of the situation both in the energy market and in the US strategic relations with China and Saudi Arabia remains unpredictable.
The worrying news for Ukraine is that this struggle is likely to last for a long time, and russia's fuel exports will continue to finance its war against Ukraine despite new EU and G7 sanctions. However, figures show that the russian state budget has suffered significant losses over the past few months. In early September, the Financial Times estimated russia's budget deficit in August at $5.9 billion, which was moscow's first unprofitable month since the start of the war in February.
According to official data from russia's Ministry of Finance, the kremlin's revenues from oil production tax paid by companies in November amounted to 527.8 billion rubles, being the lowest result for the year and was almost half the figure for the first three months of the war. Unfavourable market conditions push the russian government to reduce export tariffs, which also badly affects the resources available to the kremlin.
In the end, the new Western sanctions are unlikely to give a decisive blow to russia's revenues, although they are a move in the right direction. But only the next few months will show, whether this move was decisive and opportune enough in the fight against the terrorist state.
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