The authorities agreed on a mechanism to counter the price ceiling

The authorities have decided on the form of response to the price ceiling for Russian oil – the draft presidential decree describing the mechanism of counteraction is generally agreed upon. This was reported to Vedomosti by a source familiar with the text of the document, the information was confirmed by two interlocutors close to the government. The idea of ​​refusing to supply countries that have joined the restrictions is reflected in the document, according to them. In particular, according to the draft decree, it is prohibited to sell oil on the following grounds:

There is also a clause in the document that allows you to circumvent any prohibitions on transactions, with the permission of the government.

The decree will not apply to relations that arose before December 5. It comes into force from the moment of publication and will be valid until July 1 of the next year with the possibility of extension. The details of the implementation of the decree, in particular the procedure for monitoring compliance with the ban, the range of goods, the list of countries, etc., should be prescribed by the government.

The document is still being finalized in the presidential administration, said a source close to the government. According to a third source, also close to the government, the provision on the maximum discount for Russian oil relative to international grades has not yet been fixed in the draft document, but with a high degree of probability this can be spelled out – apparently already in government by-laws, he specified.

Presidential press secretary Dmitry Peskov, as well as representatives of the government apparatus, the Ministry of Finance and the Ministry of Energy did not respond to inquiries from Vedomosti. Vedomosti also turned to the largest companies for comment:Rosneft“,”Lukoil“, “Gazpromneft”, “Surgutneftegaz“,”Tatneft“,”Russneft“.

Earlier on December 12, at a briefing with journalists, Peskov promised that the text of the decree would be published “in the coming days.” “I want to remind you that in Bishkek, the president said that they would discuss the relevant decree, and the president also said that there are still some aspects that are being discussed. In the coming days, this discussion will be finalized and already institutionalized in the form of a presidential decree,” Putin’s spokesman said.

“Response measures should correspond to the level of threats and challenges that the new price mechanism poses not only to Russia, but to all market participants,” said Leonid Krutakov, associate professor at the Financial University under the Russian government. “What is possible in relation to one country and one commodity today is possible tomorrow against other countries and other goods. At its core, the price ceiling is nothing more than a new form of interaction in the market, which can lead to the abolition of free trade principles and the introduction of strict regulation, ”the expert argues.

“In fact, we are talking about changing the order of world trade, manually regulating the market, introducing normalized prices for countries outside the “golden billion”, setting a two-level price for “ours” and for others,” the expert says. “Only the naive can believe that we are talking about some kind of extraordinary, exclusive actions in order to harm the Russian economy. In fact, a universal mechanism is being worked out for the destruction of the most fundamental norms of international law – the sovereign right of states to use their resources,” he believes.

Presidential Decree Won’t Put Oil Companies in Vulnerable Market Position, Senior Analyst Says Alfa Bank Nikita Blokhin. Most of the volumes that were previously sent to Europe have already been redirected to other markets, including countries in the Asia-Pacific region. This process continues, he noted, and will only deepen in early 2023. In October, only slightly more than one-fifth of all offshore shipments of Russian oil went to the European market. However, according to the analyst, these volumes did not completely settle on the European market – most of them probably did not stay in European ports and went to Asian countries as part of trading operations.

At the same time, Blokhin argues that Russian companies may need two to three months to completely redirect the remaining export volumes to other markets. This, in particular, will be facilitated by the emerging recovery of the Chinese economy, which will, to a certain extent, offset the negative effect on the industry. The export restriction will not be long-term, and the real effect on oil production in the Russian Federation due to the oil embargo, according to our estimates, will not exceed 5.6% by the end of 2023, the expert summed up.

Presidential decrees have legal force on a par with federal laws, are binding and do not require additional acts to regulate the relations they affect, said Pavel Ickert, managing partner of the law firm Ickert and Partners. If formally all the conditions are met, i.e., for example, the country that joined the sanctions does not act as the final buyer, then de jure the transaction must comply with the requirements. If, with formal compliance with the requirements, a violation is actually allowed, this can and will be assessed precisely as a violation. It is still difficult to judge the possible consequences for the violator, but, most likely, the sanctions may involve limiting participation in transactions related to the export of Russian energy resources for the violating company, he said.

Monitoring of deliveries can be carried out through the Federal Customs Service, the expert noted “BCS the world of investments” Yevgeny Mironyuk. It is impossible to rule out attempts to circumvent the ban, but due to the consolidation of the market in Russia and the supervision of large companies, manufacturers will not risk violating Russian laws, the expert believes. “Even if there is no ceiling in the contract, no country of the recipient, but the price is low, it is not difficult to trace the supply chain on the database from the customs and other government services in Russia and other countries,” he points out.

The ban will be fully respected by oil companies regardless of formal legal instruments and means of implementation, Blokhin agreed. This also eliminates the need for significant monitoring by the state to a certain extent, the expert argues. “This favorably distinguishes the position of the Russian authorities from their European counterparts, who are forced, on the basis of the European Commission and national legislation, to introduce new restrictions and control mechanisms on the domestic market,” Blokhin notes. “In the case of Russian oil and gas companies, their leadership historically takes into account state interests and adheres to the official political course, which the country’s leadership quite successfully communicates to key market participants on the platform of the presidential commission on the fuel and energy complex,” Blokhin concluded.

The EU countries have agreed on a price ceiling for Russian oil, the corresponding document was published on December 4 in the official journal of the EU. It was decided to set the limit at $60/bbl. with subsequent adjustment every two months starting from January 2023. The indicator will be changed so that it is at least 5% lower than the current Urals export price. The mechanism applies exclusively to oil supplies by sea, the restriction does not affect transportation through pipelines. Hungary, Bulgaria, Slovakia, the Czech Republic and Croatia will be able to buy Russian oil at a higher price.

As a result of last week, February futures for the benchmark Brent fell in price by more than 11%. Both contracts ended trading at their lows since December 2021. On Monday, the price of Brent moved to growth – from Friday’s $76.1/bbl. up to $78.5/bbl (+3%). The cost of the Russian grade of Urals oil on Thursday, December 8, was $43.73/bbl, Bloomberg reported citing Argus Media data. However, Argus’s information may not be illustrative, as a small, “absolutely unrepresentative” number of transactions pass through its system after the sanctions, a source close to the Kremlin told Vedomosti.

According to the latest data from the Ministry of Finance, the average price of Urals oil in November 2022 was $66.47/bbl, which is 1.19 times lower than in November 2021 ($79.68/bbl). The price for 11 months was $78.32/bbl, which is 14% higher than the same period a year earlier.

The Russian budget for the next year is drawn up based on the Urals price of $70.1/bbl. But underlying oil and gas revenues—that is, unconditional revenues determined based on a hypothetical application of the fiscal rule (temporarily suspended)—are set at $62/bbl.

The Ministry of Finance, during the preparation of the draft budget, compiled a matrix of scenarios for budget revenues depending on the price of oil and production volume. The minimum acceptable price, from the point of view of the Ministry of Finance, is $50/bbl. But such a value is generally acceptable for the budget only under the condition of a maximum production of 11 million barrels per day. With this combination, revenues will amount to 7.5 trillion rubles. At lower volumes, earnings start to fall into the red zone: for example, at $50/bbl. and a decrease in production to 10.5 million barrels per day, they will drop to 7.2 trillion rubles. The minimum production, which is relatively comfortable for the budget, is 7.5 million barrels per day. But with such volumes, the price should not be lower than $100/bbl.