Russia is preparing countermeasures for the introduction of the oil “ceiling”: experts assessed the risks

“Imbalance, rising prices and shortages in the energy market”

Russia is considering as many as three options for a response mechanism to the West’s imposition of a price ceiling of $60 on the supply of its crude oil. True, two of them, according to experts, look unrealizable and it is generally better to forget about them as a bad dream. At the same time, a scenario is not ruled out in which Moscow at some point refuses to act in accordance with the emotional principle of “an eye for an eye” so as not to harm its own and other markets. And everything will remain as it is.

So, the first option is a complete embargo on the sale of oil to states that supported the restriction. Including if they purchase raw materials from Russia not directly, but through a chain of intermediaries. The second option (it looks the most reasonable) provides for a ban on exports only under those contracts that include a price ceiling condition, and regardless of which country is the recipient. Finally, the third, according to Bloomberg, is the introduction of the so-called indicative price, that is, the determination of the maximum discount for Russian Urals oil to the benchmark Brent. If the discount increases, the sale will be prohibited.

“Not only the government of the Russian Federation, but also the authorities of Saudi Arabia and other producing countries consider the price ceiling to be a non-market instrument,” says Artem Deev, head of the analytical department at Amarkets. – Probably, Russia will eventually stop at the second option: not to supply oil under contracts where this restriction is fixed. The first is fraught with an even sharper decline in oil production in the Russian Federation. After all, already after December 5, when the embargo on offshore supplies of Russian oil came into force, our exports to the EU are reduced by 2 million barrels per day (an exception was made for the Druzhba oil pipeline), which is about 20% of all domestic production.

As for the idea of ​​indicative value, it will be difficult to put it into practice. In addition, according to Deev, against the backdrop of fluctuations in world quotations for the North Sea Brent, such a decision will most likely lead to large losses. Considerable volumes of Russian raw materials will leave the market, which will increase the imbalance on it, rising prices and shortages.

“Why be like the initiators of the introduction of the price limit? – asks the expert of the Financial University under the Government of the Russian Federation Igor Yushkov. – On the one hand, we criticize them for gross interference in the mechanisms of market pricing, and on the other hand, we ourselves embark on the same path, generating shortage risks. Why are we better then? Companies themselves must negotiate among themselves, and the price must be formed by balancing supply and demand. The first option proposed is frankly erroneous. The G7 states, the European Union, Canada, Australia do not buy Russian oil at all, since the ban has been introduced and is in effect in their “field”. We don’t need to ban supplies because they are already blocked – by the collective West.”

It turns out that Moscow, seeking to demonstrate its geopolitical rigidity, will once again intimidate and make a nightmare of business, both domestic and foreign. Formally, a customer of Russian oil (say, in India) might think: “Now I will buy it for resale as a trader. What if it gets to the Europeans without my knowledge, and a fine will be imposed on me, as on the first link in the trade chain? Under these conditions, Yushkov argues, domestic raw materials become as toxic as possible, no one wants to mess with him. The most optimal interlocutor of “MK” seems to be the second option, which, due to its flexibility, allows you to maintain the presence of Russian oil in the global market. It is beneficial to both producers and consumers, it does not threaten either the balance of supply and demand, or the price environment.

“But it will be incredibly difficult to implement the indicative price mechanism,” Yushkov sums up. – In fact, we are talking about a certain critical amount of discount on Russian oil. Maybe the idea is not bad, but there is a high probability that our exports will decrease. In general, do not be afraid of discounts. We saw how it grew to $35 per barrel throughout 2022, and then rolled back to 18. You just need to work with customers, the discount is a variable value, and there is no point in artificially limiting it.”