“You can’t fool the market”: how can Russia respond to the oil price ceiling introduced by the EU and the G7

The Russian government is preparing countermeasures in response to the decision of the European Union and the G7 to introduce a ceiling on prices for Russian oil. According to the head of the Ministry of Finance Anton Siluanov, Moscow will not sign contracts that will mention restrictions on the cost of raw materials. The authorities intend to present the final decision in the near future. According to media reports, the Cabinet of Ministers is studying several options – from a complete cessation of exports to countries that impose restrictions, to the establishment of a so-called price floor. What other measures can Russia take in response to Western sanctions – in the material RT.

The Russian authorities will soon give an answer to the oil price ceiling imposed by Western countries, said on Thursday, December 8, the country’s Finance Minister Anton Siluanov.

“Now we are preparing retaliatory, reciprocal measures regarding how our companies will react to the introduction of the ceiling … We, as the President of the Russian Federation stated, will not sign contracts that will mention regulated prices and ceilings for these prices,” Siluanov said.

The head of the Ministry of Finance called the decision of Western states to limit the cost of raw materials absolutely not a market one. According to him, such measures “distort the market” and in any case will affect either prices or the volume of energy supply in the world.

“The West has always urged us to use transparent market measures to influence the economy, although it itself (we have seen it well before) uses double standards. Actually, this is happening now, but you can’t fool the market. If regulation is going on somewhere, then prices will be influenced from the other side,” the minister warned.

Recall that in early December, the G7 states (USA, Canada, France, Germany, Italy, Japan, Great Britain), the European Union and Australia banned their companies from insuring and transporting Russian oil by sea to third countries at a price higher than $60 per barrel. From February 5, 2023, the relevant restrictions should also apply to petroleum products.

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The ceiling price is planned to be reviewed every two months and set at least 5% below the market price. According to US Treasury Secretary Janet Yellen, such restrictions should limit Moscow’s profits from the sale of hydrocarbons and have a positive impact on the entire global energy industry.

According to US Treasury estimates, companies from the G7 countries control 90% of the shipping market. In this regard, Russia has two options, the ministry believes: either sell oil within the approved limit through the G7 service providers and remain on the world market, or turn to third-party conductors, who are supposedly less reliable and more expensive, limiting sales volumes .

The Russian authorities have repeatedly stated that they will not sell raw materials to those countries that support the price ceiling. As Deputy Prime Minister Alexander Novak noted, the actions of the West could result in a shortage and an even more serious rise in the cost of energy resources. At the same time, oil from Russia will continue to be in demand and will find its buyers, the deputy chairman of the Cabinet is sure.

“Yes, we are being put in more difficult conditions, but nevertheless we continue to sell oil and will continue to sell. Of course, new tools, new insurance mechanisms, interactions between companies, transportation will be used. Major players in the market, such as traders, are also changing,” Novak said.

From ceiling to floor

Russian presidential spokesman Dmitry Peskov said on Thursday that preparations for responding to Western restrictions are already being completed. Earlier, a Kremlin spokesman noted that Moscow is still analyzing the state of affairs on the oil market after the price ceiling is set.

“Relevant work and approvals are underway. After the final decisions are made, they will be documented,” Peskov added.

According to Alexander Novak, we can talk about creating a special mechanism that will prohibit Russian companies from trading oil with other countries within the price ceiling. The corresponding tool can start operating by the end of 2022, TASS reports.

However, according to Vedomosti, citing sources in the Cabinet, the authorities are considering several options for retaliatory measures. One of the scenarios implies a complete ban on the sale of oil to countries that supported the restrictions, even if they buy raw materials from Russia not directly, but through intermediaries. The possibility of banning exports under contracts that include a price ceiling condition is also being explored, regardless of who will be the final recipient of the oil.

In turn, according to Bloomberg, the Russian leadership is also discussing the introduction of a so-called price floor for energy exports. This can be done in the form of fixing a fixed cost of oil sold or establishing maximum discounts for it relative to foreign grades of raw materials.

To date, the United States, the EU states and some other Western countries that supported the price ceiling have already stopped buying oil directly from Russia and can only do this through intermediaries. Against this background, in order to completely stop the export of raw materials to such countries, Moscow will need to carefully monitor all supply chains, said Igor Yushkov, a leading analyst at the National Energy Security Fund.

“If at the end of such a chain oil gets, for example, to the EU, then all intermediaries will need to be fined at once. However, the first of the chain of traders may not have known that it would end up in Europe, then he would be fined wrongfully. As a result, we can scare the buyer of Russian oil, which is not worth doing. It is necessary to develop a coordinated approach, ”explained the interlocutor of RT.

The specialist believes that a more effective measure is a ban on the sale of oil under contracts where cost restrictions are indicated. In this case, Moscow will not sell raw materials to buyers who will insist on fixing the price ceiling in the contracts.

Establishing a fixed selling price for oil is a non-market mechanism and may lead to a loss of market share, as well as a drop in exports, Yushkov fears. At the same time, determining the maximum discount for Russian raw materials Urals relative to the reference grade Brent may be a working option, says Alexander Potavin, an analyst at FG Finam.

“If you try to increase the discount, the sale will be prohibited. The advantage of this mechanism is that buyers from countries friendly to us will not receive leverage on Russia and will not be able to demand such large discounts that the final cost of our oil will be lower than the ceiling set by the West,” the expert explained.

No drastic deterioration

According to Anton Siluanov, it is still premature to assess the impact on the budget from the introduction of a price ceiling for Russian oil. Earlier, analysts of the Central Bank in their study did not rule out that restrictions could become a new shock to the country’s economy. However, the position of the Central Bank experts is not shared by the Ministry of Energy of the Russian Federation.

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“It is important to note here that the analysis in the publication was prepared with the proviso that the opinion of experts may not coincide with (official. – RT) by the opinion of the Central Bank. In general, we do not agree that the introduction of a price ceiling is an event that will lead to significant consequences for the Russian economy,” First Deputy Energy Minister Pavel Sorokin said on Thursday.

According to his assessment, possible fluctuations in oil production in Russia due to the price ceiling will not be critical. A similar point of view is shared by Alexander Novak. As the Deputy Prime Minister noted, in December the volume of production of raw materials in the country will remain at the level of November, and in the future it may decrease, but only slightly.

“We do not exclude that, if necessary, we may have situations associated with periods of decline (production. — RT) oil, because the situation is uncertain: high volatility today. I don’t think it will be big. Nevertheless, we do not exclude this, although we are doing everything to ensure that the situation is stable and the sale of oil is at the levels that we reached in 2022,” Novak emphasized.

Igor Yushkov also does not expect any radical deterioration in the economy. As the specialist said, even with the most pessimistic forecasts, Russia can reduce oil exports by 1 million barrels per day, but the decline will be temporary, and in the future it will be possible to restore volumes.

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