Both measures, according to the plan of the initiators, should reduce the budget revenues of our country received from the production and export of oil. In fact, they will have no less impact than on Russia on the economies of European countries that depend on our supplies by a quarter, and in a global sense, they will finally destroy the entire mechanism of world oil trade with the most sad consequences for the market.
According to Deputy Prime Minister Alexander Novak, the price ceiling is an act of unprecedented interference in the market principles of the oil market. Russia does not plan to supply oil to countries that will apply the price ceiling principle. “We will reorient supplies to market-oriented partners or reduce production,” Novak said.
The oil and gas industry is the main source of our budget revenues. In 2021, they accounted for almost 36%. The main income came only from the extraction and export of oil – more than 8 trillion rubles out of 25.3 trillion rubles of all income. In 2022, thanks to the growth in barrel prices, in ten months our treasury has already received almost 9.6 trillion rubles from oil, so these decisions of Western countries should not be underestimated. But they also have the opposite effect, like a boomerang.
The ban on the import of our oil will force the EU to buy it from other suppliers, first of all, these are the countries of the Middle East and the USA. An increase in demand for a product causes its price to rise, which is very good for sellers, but bad for buyers. The Middle Eastern countries, for which the Asia-Pacific region has long been the main market, will take advantage of this situation with pleasure. The US, a major oil exporter but also a major oil importer, will also seize the moment. Will it make sense for American companies to supply oil to the European market at low prices? Of course not. That is, it is not even about the rise in price of raw materials, but its high cost for Europe. She will have to overpay for it, since she voluntarily abandoned the most profitable supply route.
The decision to ban oil imports from Russia was made by the EU back in May, but six months were given to buyers to adapt to new conditions. Our country also took advantage of this period. During this period, more than half of our oil exports to Europe turned out to be redirected to other countries. By the time of the embargo, according to various estimates, from 1.1 to 1.3 million barrels of Russian oil per day went to Europe (in 2021, supplies were over 2.3 million barrels per day).
The ban does not apply to deliveries via the Druzhba pipeline, through which oil is supplied to refineries (refineries) in Germany, Poland, the Czech Republic, Slovakia and Hungary. Germany and Poland have previously said they will voluntarily withdraw these supplies in 2023. But it is already known that Poland has applied for pumping 3 million tons of oil (on average, a little less than 60,000 barrels per day) through Druzhba for the next year. The final position of Germany is still unknown, but the two largest German refineries used to receive about 140,000 barrels of oil from Russia daily via Druzhba.
Effect for the global market
If the ban on the import of Russian oil concerns only the EU countries, then the G7 and the EU plan to extend the price ceiling to the whole world. The EU has too little influence for this, for example, in the countries of the Asia-Pacific region (APR), the largest oil importers in the world – China and India. Therefore, the main acting force here is the United States (which abandoned our oil back in March 2022), which plans to accumulate all information on the world trade of our oil and control it through financial and insurance institutions (mainly British). According to US Deputy Secretary of Energy Adewale Adeyemo, the price ceiling can be reviewed as the situation changes.
The most serious effect on world oil trade will be produced not by the EU embargo, but by the currently discussed introduction of a ceiling on prices for Russian oil, Daria Perkovskaya, audit and consulting partner at DELOVOI PROFILE Group, believes. The rejection of market regulation of prices and the establishment of artificial barriers cannot but cause “distortions” in the oil market. High volatility in world oil prices will persist at least until the spring of next year. And in the event that Russia completely refuses to supply oil to countries that have set a price limit, there will certainly be interruptions in their supply, which will lead to an increase in price fluctuations, the expert notes.
What we usually call world prices are speculative quotes formed on the largest Western trading floors, says Valery Andrianov, Associate Professor at the Financial University under the Government of the Russian Federation, an expert at the InfoTEK Analytical Center. They have long been out of touch with the real physical market. The introduction of an embargo on the import of Russian oil is an event long planned and already won back by the stock exchanges. Prices approaching $90 per barrel against the backdrop of a slowing global economy are just the result of the mentioned embargo and other anti-Russian sanctions and actions. And the onset of the long-appointed “hour X” is unlikely to change anything here, the expert notes.
Effect for Russia
Our country is losing the European market, which in the past was the main market for the sale of hydrocarbons from Russia. We need to resolve issues related to the redirection of supplies to other regions. These are the problems of transportation, insurance and financial support for trade transactions related to Russian raw materials. It is clear that no one will help us for nothing, and here we will have to give up part of the profit. Russian companies are already supplying oil to the Asia-Pacific region at a discount, our Urals oil costs about $69 per barrel, and the reference grade Brent is $86 per barrel. Previously, the difference in cost was no more than 3-4 dollars.
According to Andrianov, what is commonly called discounted prices for our oil are the equilibrium prices for oil supplies to Asia, which reflect the balance of supply and demand and suit both sides. That is, they are simply deprived of the speculative markup and premium for sanctions that Western consumers are forced to pay. At the same time, due to the actions of the EU and the US, the costs of Russian companies will increase, the cost of freight and insurance may increase, but only for the first time.
At a recent Russian-Chinese energy forum, the issue was raised that the PRC authorities and local companies now refuse to recognize insurance documents for cargo and ships issued in Russia. Perhaps this is a transparent hint that Chinese companies themselves would like to go into this business.
Ship owners are also people and want to earn extra money on other people’s difficulties. In addition, the law enforcement practice that will develop after the introduction of the embargo and the price ceiling is not yet clear. Most likely, this system will be a sieve and will be aimed at expanding the gray zone of the market in order to obtain cheap Russian oil for Western countries without losing “political face”. Accordingly, when this becomes obvious, the number of shipowners and insurance companies willing to participate in the supply of Russian oil will increase, and the rates will go down, Andrianov believes.
According to Alfa Capital portfolio manager Dmitry Skryabin, the discount of Russian oil to Brent may increase to $30 per barrel. But as the work adapts to the new conditions, the discount will decrease.
Russia, of course, will lose money on this, but taking into account the increase in the tax burden on oil companies and the abolition of the budget rule (now the oil and gas revenues of the treasury are not calculated from world quotations, but are indicated in the budget by the final amount – 8 trillion rubles), losses will be minimized.
Europe’s ban on the export of oil products from Russia, which comes into force on February 5, 2023, should have a strong effect. More than half of the volumes of diesel fuel produced in our country were sent to European countries. But considering that after processing our oil, the price ceiling will no longer be applied to it, it is possible to increase its export to the Asia-Pacific countries, where there are capacities to increase fuel production and its export to Europe.
As Deputy Dean of the Faculty of Economics of Moscow State University Alexander Kurdin notes, Europe is preparing more for this ban. Western consumers will look for sources of supplies of oil products from third countries, and in these countries, products can actually be made from Russian oil.
According to all experts, the main beneficiary of the processing of Russian oil and the sale of products made from it under the European embargo and price ceiling will be India and China. And the Middle Eastern countries will still be able to earn on the transportation of Russian oil.