Western countries have set a price ceiling for Russian oil. What does this mean

Western countries agreed on a ceiling on oil pricesfrom RUSSIA to reduce its ability to finance military operations in Ukraine. Moscow said that it would not supply raw materials to countries

The EU countries have agreed to impose a ceiling on oil prices from Russia at $60 per barrel, the European Commission announced on December 3.

It took European countries more than a week to agree on the price ceiling, which was initially estimated at $60-70. Poland and the Baltic states opposed $65 per barrel, considering it "too generous" in relation to Moscow. Warsaw offered to set it at $30. Other states with a developed shipping industry, including Greece and Malta, did not want to lower the limit below $70. As a result, the European Commission suggested that they stop at $60. The G7 countries ( usa , CANADA, UK, France, Germany, Italy and Japan) and Australia then joined this EU decision . The G7, the EU and Australia make up the Price Cap Coalition.

“The G7 and all EU member states have taken a decision that will further hit Russia’s income and reduce its ability to wage war in Ukraine,” said the HEAD of the European Commission, Ursula von der Leyen. “It will also help us stabilize global energy prices, which will benefit countries around the world that are currently facing high oil prices.”

The G7 countries announced in early September that they would introduce a cap on oil prices. A month later, this measure was included in the eighth package of EU anti-Russian sanctions. The restriction on the price of crude oil will come into effect from December 5, for petroleum products - from February 5, 2023. At the same time, the European embargo on the purchase of Russian oil and oil products by sea will come into force.

The G7 has agreed on cap prices for Russian oil.What is important to know Business

As the December 5 deadline approached, benchmark Russian oil Urals fell below the proposed ceiling. In November, its average price was $66.5, 6% less than in October, the Russian Ministry of Finance announced on December 1. According to the Argus pricing agency, on Wednesday, November 30, shipments of Urals shipped from the port of Primorsk on the Baltic Sea cost $48 per barrel (excluding freight, oil transportation and tanker insurance), said Giovanni Staunovo, an analyst for raw materials at UBS.

The ceiling on Russian oil prices could be adjusted if it does not achieve its goal of reducing Russia's revenues going to finance military operations in Ukraine, said US State Department chief economist Emily Blanchard. This indicator will be reviewed as early as mid-January 2023 and every two months to assess how the scheme works and respond to possible “turbulence” in the oil market, REUTERS reports.

How will the price cap work?

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In the early spring of 2022, the United States and Canada refused to buy Russian oil, the United Kingdom stopped importing Russian energy in June, Japan did not formally join the embargo, but significantly reduced oil purchases. Ministers of the G7 countries at the beginning of autumn confirmed their desire to abandon the use of Russian oil in their markets, as well as their intention to introduce marginal prices for it for other countries. British Chancellor of the Exchequer Nadhim Zahavi said the measure would include a ban on insurance and financial security for tankers carrying Russian oil above the agreed ceiling. Now buyers of Russian oil and oil products will have a choice: agree to buy them at a price not exceeding the established limit, or accept the fact that the West will completely ban its companies from transporting and insuring these raw materials.

According to the Institute of International Finance (IIF), about 50% of Russian oil exported from the country's ports is transported by tankers owned by Greek shipowners. 90% of the ships in the world are insured with the help of the London association "International Group of Mutual Insurance Clubs" (International Group of P&I Clubs). Before the imposition of sanctions, the European Union, the United States and the United Kingdom imported two-thirds of Russian oil and petroleum products sold on the international market.

What are the possible scenarios with the marginal price of Russian oil Pro

As the US Department of the Treasury clarified on November 22, the scope of services that Western providers will not be required to provide in transactions at a price exceeding the maximum price includes trading, financing, shipping by sea, insurance and reinsurance (including protection of the property interests of the shipowner), registration of the vessel in national ship registers and customs clearance. Moscow can now sell oil at or below the listed price using "best-in-class" G7 suppliers, or use non-G7 suppliers "which are limited in scope, more costly and less reliable," the agency warned Dec. 2.

Oil can be sold on CIF terms (when the buyer has already paid for insurance, shipping and some other services as part of the price) or on FOB terms (then the price does not include insurance and transportation). The US Department of the Treasury explains that the price ceiling does not take into account the cost of ship charter, transportation, insurance and customs clearance: these services must be billed separately and at "commercially reasonable rates." In other words, regulators should see how much the purchase price of oil was and how much the related services cost, and the latter should not be overpriced, that is, they should not mask the higher real price of raw materials. Recently, offshore shipments of Urals oil have been increasingly released in Russian ports on FOB terms, according to Argus.

According to BLOOMBERG, the cost of maritime transportation of Russian oil in anticipation of the EU decision on price ceilings is rising sharply: freight rates for delivery from the Baltic Sea to India after December 5, for example, are discussed at $15 million (or $20 per barrel) - compared with previous rates in the range of $9–11.5 million.

If Russian crude oil has undergone a “significant transformation” in another jurisdiction (for example, it has been processed into a new product), then the price ceiling no longer applies to it in further transactions, the US Treasury explained. But just mixing Russian raw materials with foreign ones is not considered such a “significant transformation,” the department emphasizes.

What concessions did the G7 countries go to?

In October, the European Union approved a rule according to which any foreign tanker that has ever transported Russian oil at a price above the marginal price must be excluded from European services for insurance, financing, etc. However, the United States then asked its European colleagues to soften this approach. As a result, the EU authorities have significantly revised this rule: European providers will be prohibited from providing services to ships only if they have intentionally violated the price ceiling, this ban will be valid for 90 days after the shipment of oil at a price above the ceiling, and, finally, during this period it will not be possible to provide services only for the transportation of Russian raw materials (and, for example, the ban will not apply to oil from Saudi Arabia).

The EU has also decided to establish a 45-day transition period after the date of the introduction of the ceiling on oil prices from Russia. It will apply to Russian oil loaded before December 5 and unloaded before January 19.

Bloomberg found outthat the EU has postponed negotiations on an oil price ceiling Politics

Blanchard at the State Department said the price ceiling had a "double purpose." The first is to cut funding for hostilities in Ukraine, and the second is to “avoid a global energy shock.” According to her, the level of $60 per barrel. is the best option to achieve these goals in the short term. “It should be noted that the oil price cap mechanism was deliberately designed to be flexible and if the targets are not met, the cap price level can be adjusted over time to ensure we hit them,” she said. On December 2, Brent crude traded at about $89.32 per barrel.

How will this affect Russia?

Supplies of oil and oil products from Russia to the G7 countries and the EU in 2021 amounted to 214.7 million tons for a total of $109.5 billion. This is 68–70% of the total EXPORT of these goods to the world market. In general, last year crude oil and petroleum products accounted for 37% of total Russian merchandise exports, according to data from the Federal Customs Service.

On November 21, President Vladimir Putin signed amendments to the Budget Code, which provide for a change in the budget rule. Since 2017, it has defined basic oil and gas budget revenues as fees from internal taxes on the oil and gas industry and export duties, as if Urals cost $40 per barrel in 2017 prices for the whole year (the figure was indexed by 2% annually). The “surplus” resulting from the fact that the actual oil price exceeded the base one was recorded in additional oil and gas revenues (more than 3 trillion rubles in 2021), which could not be directed to current budget expenditures. In the spring of 2022, the fiscal rule was suspended.

The new budget rule, which will come into effect from 2023, in determining basic oil and gas revenues, is based on the equilibrium price of Urals at $60 with a production of 9.5 million barrels. per day (slightly less than the current level of production), Vedomosti reported. In the budget, it was decided not to fix the cut-off price, but to fix the income constant - 8 trillion rubles, since the cost of Russian oil and the volume of production can fluctuate significantly. “Everything that is higher will go to the “box,” explained Finance Minister Anton Siluanov.

Putin signed the law on changing the budget rule Economics

The price of $60 per barrel is acceptable for the Russian budget, approximately this level of oil prices is included in the draft budget law for 2023-2025, says Alexandra Osmolovskaya-Suslina, head of the Fiscal Policy direction of the Economic Expert Group. “Such a ceiling will not allow you to receive any super-profits, but I don’t see the main threats to budget revenues in such a ceiling,” she said.

True, although formally the volume of oil and gas revenues will decrease slightly, these restrictions may negatively affect the rest of the Russian economy - the volume of potential domestic investment, wages, consumption, warns Osmolovskaya-Suslina. “That is, all other tax bases will decrease, followed by non-oil and gas revenues, not only to the federal budget, but also to the regions,” she explained.

It is difficult to say how the price ceiling will affect budget collections due to several unknown variables at once: the volume of production and exports, the price and the ruble exchange rate, Dmitry Polevoy, Investment DIRECTOR of Loko-Invest, argues. According to the Ministry of Finance, it is possible to collect the required basic volume with production from 9–9.5 million barrels per day. per day and prices from $60, but it is possible that the rate in these estimates is weaker than it is now (if so, then it may not be possible to collect 8 trillion rubles), the expert warns.

The start of these sanctions may somewhat reduce revenues from oil and oil products, but this decline will not be so dramatic and will probably be extended in time, so one should not expect any sharp reaction from the ruble, Polevoy said. Western politicians need to "save face" and at the same time keep the supply of Russian raw materials to the market at least stable prices for it, he concludes.

But in anticipation of the introduction of this measure, the Russian authorities have repeatedly warned that Russia will not supply oil to those countries that support it. Deputy Prime Minister Alexander Novak said that Moscow would reorient supplies "to market-oriented partners" or cut production. Attempts to limit oil prices will lead to destabilization of the oil industry, and first of all, European and American consumers, for whom energy resources have already risen in price, will have to pay, he noted. Putin also emphasized that Western countries are stepping on "the same rake" as with Russian gas, because as a result, oil prices "will skyrocket."

What part of the supplies managed to be redirected

US Deputy Secretary of State Victoria Nuland admitted back in July that in the event of a complete ban on Russian oil imports, oil prices could rise even more and then Moscow could earn on sales to other countries such as India and China. Therefore, she advocated the introduction of a price cap: “In this way, the Russians will receive a tiny part of the profits that will pay for their presence in the market.” But the largest Asian countries showed no desire to join this decision and increase purchases in Russia.

According to Argus Media, in January, before the start of the military conflict, deliveries to the EU accounted for 85% of the total volume of Urals sea shipments - 5.16 million tons out of 6 million tons, and in September - only 24% (1.78 million tons out of 7.4 million tons). India increased purchases of Urals from zero at the beginning of the year to just over 40% by early autumn, while Turkey increased from less than 5% to 21%. In January-September 2022, India increased its purchases of Russian oil (not only Urals, but also the ESPO mixture transported to the port of Kozmino via the East Siberia-Pacific Ocean pipeline) by eight times, up to 20.5 million tons, follows from Indian customs statistics. According to Chinese customs, China purchased almost 72 million tons of Russian oil over the same period, compared to 65.7 million tons in the same period a year earlier.

India, China and Turkey increased their exports of Russian crude oil by 1.2 million barrels during the summer. per day, practically compensating for the reduction in supplies from Russia to Europe. However, by December 5, when the European embargo comes into force, Moscow had to redirect about 1.1 million barrels more. to other destinations, writes the Oil & Gas Journal. Nevertheless, the Russian authorities are unlikely to agree to reduce oil production, as it is both costly and not so easy - it is necessary to mothball the wells, says Pavel Verevkin, an investment strategist at Alor Broker. As a last resort, during overproduction, oil can be stored in reserve storage facilities, which can be built additionally, he admits.