US plan to cap Russian oil prices failed

Washington seems to have lost its nerve. Having failed to agree with Europe and other world importers on the price ceiling for Russian oil, the introduction of which is scheduled for December 5, the Americans decided to partially abandon such an idea. In any case, according to Bloomberg, the Joe Biden administration is considering easing restrictive conditions.

Recall that earlier the EU countries rejected the US plan to introduce a gas flow of prices. It becomes obvious that this type of financial claims was not the most successful way for the West to hit the financial condition of Russia.

According to Bloomberg sources, the US authorities were forced to curtail the initial plan to impose a cap on Russian oil prices by “investor skepticism and growing risks in financial markets caused by volatility in energy prices.” Now the US and the EU will try to establish a “more freely manageable” marginal cost for oil from our country, the level of which will be “higher than previously expected.”

The process of fixing the export prices of Russian raw materials should be launched from 5 December. US Secretary of the Treasury Janet Yellen was the first to announce such sanctions. According to her, in the conditions of high quotations for raw materials (recently, the cost of a barrel fluctuates around $90-95, but back in the summer they gave $125 for it), supplies from our country should remain in the corridor of $40-60 per barrel. She recently spoke more specifically about $60 per barrel. But it seems that this figure did not suit the majority of participants in the oil market. If the ceiling is set at a higher level – say, $70 per barrel, then it completely loses its meaning, since at present, against the backdrop of sanctions, our country is already selling its oil at a discount of 20-30% from the market price of Brent.

Today, the disposition is as follows: in addition to the States, the G7 countries, as well as Australia and South Korea, have joined the idea of ​​an oil ceiling. New Zealand and Norway have promised to think about supporting price caps. But a number of the largest consumers of hydrocarbons, including China and India, categorically refused to participate in a conspiracy against energy resources from our country. In other words, Washington failed to convince a sufficient number of market participants of the expediency of such a measure.

So will the Western countries adopt a price ceiling for Russian oil and in what form? The answer to this question was given to us by experts: Dmitry Alexandrov, head of the analytical research department at IVA Partners Investment Company, Mark Goykhman, chief analyst at TeleTrade, and Vladimir Chernov, analyst at Freedom Finance Global.

– Why did the idea of ​​a price ceiling for Russian oil fail?

Goykhman: Limiting the price of Russian oil was originally conceived to deprive Russia of additional export revenues, and not to reduce the physical volumes of sales of our raw materials. Therefore, the ceiling had to be lower than the market price, but high enough ($60 per barrel) to ensure a minimum profit margin on sales. If the idea worked and all consumers joined the agreement, and Russia agreed to sell oil no higher than the specified limit, then in general the world quotations of “black gold” would decrease. But Moscow threatened not to sell hydrocarbons to those states that would sign under the “ceiling”. Almost no one joined the pact, except for the organizers of the sanctions – the G7 countries. Most market participants decided that the consequences of these measures could be exactly the opposite of what was intended. The departure of the Russian share of supply from the market would raise world prices, according to various estimates, to $120-140 per barrel. In this case, both the US and the EU would have to buy raw materials at an inflated price. This would lead to an increase in inflation, a blow to economic growth, production, incomes of the population and businesses in these countries, and negative elections for their leaders.

– The United States and the European Union are going to establish a “more freely manageable” ceiling on the cost of Russian oil. What can be discussed? How can such a measure harm the supply of energy resources from our country?

Chernov: There are several possible options. For example, a price corridor can be introduced, within which it will be possible to set a ceiling on the cost of Russian oil in the future, depending on world quotations. Also, the new parameters of restrictions may not apply to a specific price of oil from our country, but to the deviation of the cost of raw materials on world trading floors – as a percentage. However, it would be most reasonable to set limits taking into account the cost of production, the level of which, like stock quotes, can increase or decrease. Thus, the West, on the one hand, would fix the export profit of Russia, but would provide our companies with a small premium to maintain the profitability of the business.

Goykhman: In fact, this means a veiled form of rejection of the idea of ​​a “ceiling”. Formally, some restrictions will probably be introduced in order to “save face” to the initiators of the idea, but no one will exercise actual control over the fulfillment of such conditions. If the initiating countries themselves stop buying Russian oil at prices above the established limit, then the rest of the importers will continue to purchase our “black gold” at market value.

– Previously, an attempt to introduce a gas price ceiling on the part of the EU failed. Now the West cannot agree on an oil ceiling. Doesn’t this mean that such a measure to limit export prices for raw materials from Russia is not effective?

Alexandrov: The effectiveness of price ceilings is indeed extremely low and is possible only if the balance between demand and buyers’ own production is neutral, and sellers have the ability to provide additional volumes of energy resources. Today there is neither one nor the other. The EU market remains deeply scarce, and against many producers – not only Russia, but also Iran, Venezuela – the importers themselves have introduced severe restrictions that do not allow increasing production. Thus, such measures harm not so much the countries against which they are introduced, but the very initiators of the sanctions.