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Sep 4, 2022
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What threatens the oil ceiling: will hit Russia’s export earnings

Finance ministers of the G7 countries at an online meeting on September 2 are going to discuss a plan to introduce cap prices for Russian oil. The details of the new policy regarding the export of “black gold” from our country, according to The Wall Street Journal, the members of the “Big Seven” are going to finalize before December. The US has made no secret of its position on the “price cap”: as White House press secretary Karine Jean-Pierre said, this is “the most effective way to hit hard on Russia’s income.” In response, Deputy Prime Minister of the Russian government Alexander Novak threatened to completely cut off the supply of those countries that would vote to limit the cost of Russian hydrocarbons.

The new sanctions trick, which could become an alternative to a complete embargo on Russian oil imports, was discussed in the EU countries back in April. Having first announced a centralized refusal to purchase Russian “black gold”, the Europeans quickly realized that the consumers of the Old World would not be able to carry out an instant castling and find manufacturers on the world market that could make up for imports from the Russian Federation. Therefore, a duplicating scheme was proposed – a “price ceiling”, aimed at reducing Moscow’s raw material revenues without limiting the physical volumes of supplies. Thus, as the authors of this measure believe, the export of energy resources from our country will decrease slightly, while it will be possible to pay for raw materials with a noticeable discount.

According to Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation, there are no historical examples of setting such a “price ceiling”: countries that were subject to a trade embargo were subject to a complete ban on the sale of a certain product, without limiting its value. Although the countries of the continent generally supported the initiative to put a “ceiling” on Russian oil, no one dared to fix specific restrictions on paper. “Small external energy needs of some participants allow them to replace Russian imports relatively cheaply with supplies from American or Arab producers. For other countries, the re-registration of foreign purchases will result in a tidy sum that will not be able to offset any discounts negotiated at the political level, ”the expert notes.

In this regard, the discussion of the “oil ceiling” for oil from Russia was transferred to the G7 level, whose countries – the UK, Germany, Italy, Canada, France, Japan and the United States – are, to one degree or another, able to quickly find alternative suppliers of “black gold”. “. However, apparently, even in such a relatively narrow composition of participants, disagreements regarding the calculation of the maximum cost of Russian raw materials remain. According to TeleTrade’s leading analyst Mark Goykhman, the US and its allies are discussing price caps for Russia in the range of $40-60 per barrel. With the current cost of a “barrel” in the region of $95-100, such a limit will suit the Russian budget, calculated on the basis of $44 per barrel. The cost of producing a barrel at West Siberian and other domestic fields varies at $15-40. The export restriction, if it is actually introduced, will spoil the oilmen’s accounting and treasury revenues, but will not become critical for the Russian economy.

Most long-term contracts for the export of Russian raw materials should not be affected by the price cap, since tariffs in multi-year contracts are calculated mainly taking into account economic, not political factors. With the “oil ceiling” the West is going to regulate the pricing of raw materials exported by our country through sea tankers, without trying to set price limits for pipeline fuel. In 2021, oil exports from Russia to Europe amounted to about 2.3 million barrels per day, of which 68.6% came from ports and 31.4% through pipelines. The International Energy Agency has calculated that since May, tanker shipments of Russian oil to the US, UK and EU countries have decreased by 2.2 million barrels per day, but two-thirds of these exports have been diverted to other countries – China, India or Turkey, which are not for us “unfriendly”. If new restrictions are adopted within the G7, then the supply ban that Novak spoke about can only affect three European powers – Germany, France and Italy (Great Britain has already embargoed our hydrocarbons). Since the French mainly import Russian gas, the main losses should be expected from a decrease in trade with Berlin and Rome: last year, domestic producers sold more than 28 tons of crude oil to these countries, worth almost $14 billion.

According to Mark Goykhman, it is no coincidence that Western politicians are going to agree on the introduction of a price ceiling for Russian oil by December 2022. At the same time, European states intend to announce a full or partial embargo on the purchase of hydrocarbons in our country. Choosing between two evils, it should be recognized that a framework restriction on the export cost of raw materials from our country will turn out to be less of a nuisance: by increasing supplies to China and India, our country has long been offering them a 30% discount for each barrel. Therefore, the marginal cost of prices, although it will reduce revenues to the federal budget, will nevertheless make it possible to maintain unhindered oil exports to other directions. “If the program to declare a complete embargo on the import of Russian oil by European consumers is implemented, the effect will be much worse,” the expert believes. — In 2022, Russian budget revenues from oil exports were expected to be over $20 billion per month. With the introduction of the ceiling, the corresponding profit could be reduced to $15 billion.”

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