Russia may lose half of its export earnings as a result of the introduction of the “oil ceiling”

As you know, since December 5, the toughest sanctions from the West against Russian oil come into force. We are talking about the introduction of a price ceiling for the export of Russian “black gold”, which was agreed upon first by the members of the “Big Seven”, and then by the members of the European Union. From February 5 next year, the ban will affect oil products from Russia. How will this price cap mechanism work? Will our country be able to bypass the declared restrictions? What damage will this measure cause to the domestic economy? These and other questions “MK” addressed to the expert.

Recall that the sanctions imposed by the European Union and the G7 states imply a ban on the transportation of oil from our country by sea, including through the territories of third countries that have not joined the new Western sanctions. In the event that the cost of “black gold” on board turns out to be higher than the stated limit, the owners of ships and the rest of the mobile infrastructure may refuse manufacturers not only to transport raw materials, but also to provide insurance services for such operations. The question of the price cut-off of the ceiling is still open: at first it was said that the price ceiling would be limited to $60 per barrel, but now we are talking about a horizon of $70 per barrel (world quotes remain within $90-100).

The other day, speaking in the State Duma, the threat of a price ceiling for the domestic economy was assessed by the head of the Ministry of Economic Development Maxim Reshetnikov. “We account for 14% of world oil production – this is 11% of world exports of “black gold”. If necessary, a reorientation of foreign supplies to eastern markets will be made and is underway,” the minister said. How serious will the sanctions strike on Russian oil be? Will the price ceiling crush the domestic economy? Will there be alternative supply routes for Russian oil? We discussed these issues with a specialist – TeleTrade’s chief analyst Mark Goykhman.

– Let’s first outline the current picture of our oil exports. What volumes do we deliver abroad and how?

– In 2021, according to the Federal Customs Service, Russia sold abroad about 230 million tons of crude oil worth $111 billion. The average price was about $480 per ton. Petroleum products are the result of the primary processing of oil, which serves as a raw material for petrochemicals. Over the year, 144 million tons of various Russian fuels worth $70 billion were sold on foreign markets. The average price was $485 per ton. In general, for domestic exports, it is more preferable to sell oil products than crude “black gold”.

There are significant differences in logistics. The easiest, that is, the most economical way of supply is pipeline transport. Such routes are widely used to transfer large volumes of crude oil to European countries. Oil products are transported mainly by more expensive methods: by water and by rail. The requirements for the conditions of storage and transportation of petroleum products are more stringent and varied than for oil.

– How sensitive is this measure for us – the price ceiling for the export of oil and oil products?

– Russia will feel very strongly the partial embargo on the sale of oil to the EU, introduced in December 2022, and oil products in March 2023. The European Union accounts for more than half of the export of “black gold” and processed products. According to Bloomberg estimates, the loss of the national budget of our country risks reaching $22 billion a year. Including approximately $12 billion of this amount will come from a reduction in pipeline supplies to Europe and $10 billion from a ban on exports to the Old World by sea. The income of about $6 billion from oil supplies remaining outside the embargo through the southern branch of the Druzhba pipeline to a number of Eastern European countries – Hungary, Slovakia and the Czech Republic will remain.

– But while the exact parameters of the price ceiling have not been approved. Is it possible to estimate by how much Russian oil exports will be reduced as a result of the introduction of the price cap?

– The hypothetical “ceiling” of prices for Russian oil, the introduction of which is constantly talked about in the EU and the G7, cannot be ignored. It is not known whether it will be introduced in practice, at what level prices will be, whether other countries will join it. After all, the initiators of the proposal themselves, primarily the UK, the EU, and the US, are refusing to buy oil in Russia. Directly for them, the “ceiling” is irrelevant. At the same time, the potential reduction in sales to European countries in physical terms is estimated at about 2.5-3 million barrels of oil and 1.5 million “barrels” of oil products per day.

– Will our country be able to replace these shortfalls in oil exports by redirecting resources to other regions? First of all, to Asia – to China or India?

– Unused reserve capacity of Russia’s main export pipeline to Asia, the East Siberia-Pacific Ocean pipeline, is 300,000 barrels per day. About 200,000 more “barrels” can be additionally delivered to Asia by rail every day. This is approximately 20% of the reduction in Russian oil supplies to the West.

Building this infrastructure will require huge investments and a very long time. Significant in this regard could be an increase in sea tanker traffic. Here, much rests on the ban announced by the EU and the G7 on the sale of Russian oil at prices above the ceiling, which the West continues to threaten. Its level can be set in December. The measure consists in banning banks and insurance companies from providing insurance and financing for the movement of tankers engaged in such transportation. Leading positions in the market of tanker transportation of hydrocarbons are occupied by European companies, in particular, from Greece, Cyprus or Malta. The insurance of these transportations is also mainly concentrated in the hands of European companies. For them, EU bans can be very significant.

– What can Russia do in a situation when the oil ceiling turns from a hypothetical threat into a real mechanism?

– Our top officials have repeatedly stated that with the introduction of a price limit on the sale of oil, Russia will simply refuse to deliver to the countries that have acceded to this agreement. Asian, Latin American and African consumers do not confirm their readiness to comply with Brussels’ ultimatums. Therefore, if the West introduces the notorious price ceiling for our energy resources, a new capacious niche will be formed on the global market for transportation, insurance, and financing of Russian oil exports. It is quite likely that the issues of insurance and charter of ships will gradually pass into the hands of new consumers of oil and gas from our country. It is possible that the relevant structures of China, India, and the states of the Middle East will show interest. After all, the cost of these services is growing before our eyes. In turn, part of the tanker fleet, subject to sanctions, may be unclaimed. Perhaps this will facilitate the transfer of tankers to other jurisdictions, which again will give us additional opportunities for their use.

Much will also depend on the demand for raw materials, determined by the dynamics of economic activity in the world. True, questions may also arise here, since the likelihood of a recession and economic slowdown in the economically developed trading floors of the planet is extremely high.

In any case, it will hardly be possible to completely replace the supply of oil and oil products to Europe with new directions. We can talk about compensation from about half to two thirds of the falling physical volumes.