Russian “oil” answer to the West on the “ceiling” was considered difficult to implement

Controllers from the Ministry of Energy and the Federal Customs Service will have a hard time

On February 1, a presidential decree came into force to counteract the sanctions “ceiling” of prices for oil and oil products from Russia. Two days earlier, the government published a decree regulating the implementation of this document. Named and specific executors – the Ministry of Energy and the Federal Customs Service.

Recall that, according to the presidential decree of December 27, from February 1, the supply of Russian raw materials to foreign legal entities and individuals is prohibited, provided that the relevant contracts “directly or indirectly provide for the use of a mechanism for fixing the marginal price” of $60 per barrel. Moreover, the ban (valid until July 1, 2023) applies at all stages of supply to the final buyer.

As for supervision over the participants in export transactions, the government assigned this function, first of all, to the Ministry of Energy. Starting from March 2023, Nikolai Shulginov’s department must send a monthly report on monitoring the implementation of the decree to the “interdepartmental working group on issues related to activities in the fuel and energy sector” no later than the 10th day of each month. The Cabinet of Ministers also instructed the Energy Ministry, together with the Finance Ministry, to approve the procedure for tracking prices for oil exported from Russia by March 1. Exporting companies must submit to the FCS a contract for the supply of goods “according to which the price of oil is determined”, plus a statement confirming that the contract does not contain provisions for the application of a price ceiling.

“Domestic suppliers will have to check all the wording in the contracts concluded with foreign buyers of raw materials,” says Artem Deev, head of the analytical department at AMarkets. – There should be no indication that the principle of “price cap” (price cap) is used. If, under the terms of the contract, oil is sold at a large discount due to the price ceiling, neither the Federal Customs Service nor the Ministry of Energy will let such a batch pass. This means that exporters will be required to explain the discount to the buyer. This will become a formal reason not to supply Russian oil to other countries. In fact, the authorities are tightening control over at what prices and where Russian raw materials go.”

Moscow’s retaliatory measures are largely declarative, says Mark Goykhman, chief analyst at TeleTrade. The presidential decree prohibits the supply of Russian raw materials not to specific states (many of which themselves have long abandoned it), but to “foreign citizens and companies”, in whose contracts for the purchase of hydrocarbons one way or another there will be a reference to the use of the price limit mechanism. But the business itself will never allow such a puncture, it will simply indicate a certain value of the goods without formal reference to the “ceiling”. In addition, there are no clear penalties for violators. And the potential amount of documentation that is subject to verification in connection with the ban is so large that the regulatory authorities will not be able to thoroughly analyze it, the expert is sure.

“But the Western sanctions themselves (an embargo on maritime supplies and a price ceiling) significantly change the situation with Russian exports and hydrocarbon production,” Goykhman notes. – As for oil, it is not critical in terms of physical volumes: there is a redirection of “dropping out” supplies to other directions – to India, China, Turkey. Financial losses for exporters arise from huge discounts. The cost of oil below the “ceiling” of $60 per barrel is determined by contracts at the time of shipment. Thus, according to the Ministry of Finance, from December 15, 2002 to January 14, 2023, the average price for the Urals grade was $46.8. At the same time, Brent cost about $83.”

As for oil products (the embargo comes into force on February 5), everything is more difficult with them in terms of the physical volumes of supplies. For Russia, the loss of the European sales market is generally irreplaceable: unlike crude oil, the export of petroleum products can only be redirected to other directions to a small extent. There are processing capacities almost everywhere, neither India, nor China, nor Turkey will want to buy additional volumes. And for domestic consumption in Russia, these volumes are also redundant, since they have always gone exclusively to Europe. Accordingly, Goikhman sums up, it will be necessary to reduce the production of diesel fuel and fuel oil, reduce the loading of refineries, as well as oil production itself – by approximately 10-12% during 2023. Oil and gas budget revenues from exports may not reach the planned 8.9 trillion rubles even with the embargo. There is a high probability that they will not exceed 7-7.5 trillion.

“De facto, the state obliges oil companies to provide it with data on commercial contracts,” says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation. – The fact is that earlier the Ministry of Finance bought information on the average cost of the Russian grade Urals from the British agency Argus. This organization polled traders about transactions in the port of Rotterdam and ports in the Mediterranean Sea over a certain period of time. Today the situation is radically different: sea transportation is prohibited. But the government needs to have its own statistics on the average price of Russian oil for the previous month in order to fairly calculate the export duty and severance tax from it. Now the figures relating to the shipment of each barrel will come to the Ministry of Finance directly from exporters.”