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As part of the sanctions imposed on the Russian Federation as a result of the Russo-Ukrainian War, on September 2, 2022, finance ministers of the G7 group of nations agreed to cap the price of Russian oil and petroleum products in an effort intended to reduce Russia's ability to finance its war on Ukraine while at the same time hoping to curb further increases to the 2021–2023 inflation surge.[1]
In 2022 the Russian Federation was cushioned against energy sanctions because of a global rise in oil and gas prices. The rationale for the price cap is to remove that added value so that revenues earned by Russia are restricted and should not rise if world oil and gas prices increase again in the future. In addition, it will complicate maritime oil shipments for Russia and further restrict the amount of oil Russia can sell and ship to customers, further reducing revenue.[2]
The 2022 Russian crude oil cap would be enforced by a maritime attestation that Russian crude was purchased below a certain set price, irrespective of market conditions. On 3 December 2022, this price cap has been set at USD $60 per barrel.[3] G-7-based finance companies would only be allowed to provide transport and other services to Russian-based crude under these conditions.
Flow of Russian oil through pipelines has been exempted from the price capping on which land locked countries like Hungary is mostly dependent on for supply.[4]
G7 and EU countries duplicated the price cap system over crude oil to provide a price cap on petroleum products from Russia,[5] the price cap on refined oil products came into effect in early 2023.
By May 2023 the G7 countries considered the sanctions had been successful in achieving oil supply stability and reducing Russian tax revenue.[6] December 2023 saw oil future prices 10% lower than at the start of the year.[7]
Background
Russian production in 2021 was 540 million tonnes (4,030m barrels) of crude oil, with 260 million tonnes (1,940m barrels) (48%) exported as crude oil, 290 million tonnes was refined of which 140 million tonnes (48%) were exported as refined products. Over 70% of Russian produced oil is exported.[8] Around 1,100m barrels of crude oil were exported by ship in 2021, 1,400m barrels in 2022, with 75% leaving from western and 25% from eastern ports.[8]
The Russian economy is heavily funded by oil and gas taxes. In 2021 Russia's revenue from all sources was $343 billion with oil and gas providing $127 billion. In 2022 revenue from all sources was $358 billion with oil and gas providing $166 billion or 46% of the budget.[9] Oil revenue is a major sanction target.
Sanction proposals
On 3 September 2022 French Finance Minister Bruno Le Maire said the proposal would require wider international participation to be successful, saying "it should not be a Western measure against Russia, it should be a global measure against war."[10] In response, Russia said it would suspend sales to countries supporting the price cap.[11] Some energy analysts expressed skepticism that a price cap would be realistic because the coalition is "not broad enough"; OPEC+ called the plan "absurd". The U.S. and the E.U. would likely attempt to follow through with the plan by limiting Russia's access to Western insurance services.[12]
On 28 November 2022 the level of the price cap was discussed at length between the parties to the agreement and the International Working Group on Russian Sanctions reported that a price cap of USD75pb would be worse than having no price cap, whereas a price of USD55pb would reduce Russian oil revenue to USD166bn a restriction on finances for the Russian state, before recommending a cap of USD35pb as this would reduce revenue to USD100bn, giving a severe financial penalty, whilst still leaving the price above the cost of production.[2]
The price cap level eventually agreed for the price cap was a balance between the levelling of Russia's revenue stream without causing a major disruption to global oil markets. It was also important to show Russia that Russia had lost the ability to disrupt the international economic order without facing pushback.[13]
Price Cap price
The G7 Oil Price Cap for crude oil of US$60 per barrel came into effect 5 December 2022.[14]
The European Union had tentatively agreed on 1 December 2022 to set an initial USD60 barrel price cap on Russian seaborne oil with an adjustment mechanism to keep the cap at 5% below the market price, as reported by the International Energy Agency, reviewed every two months.[15] On 2 December 2022 the EU confirmed the price cap rate and joined the US,[16] other G7 countries and Australia in imposing the sanction from 5 December 2022 with two monthly reviews on the level of the price cap.[17]
Price cap review mid January 2023.[18] With Russian Urals oil trading well below the Cap price, reducing Russian revenue, not all countries are willing to undertake the political trading to get agreement on a lower price cap at this time, preferring to wait and see how the cap on refined oil, due to come into effect on 5 February would work.[19] G7 countries have agreed that the next review would be in March 2023 after the refined oil products price cap is set.[20] No change was made in March or April and reviews ceased.
Initial reactions
China
The pipeline to China is not affected by the sanctions, which only concerns shipped oil. The eastern oil is a higher quality than the western Urals oil, attracts a higher price and represents about 20-30% of Russia's production.[21]
Whilst China has not joined in the price cap it appears that they are increasing purchases from Russia whilst using the cap to argue for lower prices for future deliveries.[22] The Chinese company COSCO Shipping appears to have pulled out of shipping oil from Far East Russian ports since 5 December where oil shipments have fallen by 50%.[23] A Chinese shipping company believes China could divert up to 18 supertankers and 16 smaller Aframax tankers in 2023 which could transport 110m barrels per annum, being 10% of shipped Russian Urals oil.[24]
India
India has rejected the price cap, and Russia supported India's tanker fleet to enable them to ship Russian oil directly to India, bypassing the sanctions. In late 2022, India was buying around one shipload of 1m bpd.[25] During December India increased Russian oil imports, receiving a discount of USD12-15pb which is around USD7pb higher discount than in October, giving a buy price below the price cap.[26] Imports from Russia in 2022 totalled 33.4m tonnes (250m barrels).[27] In 2023 as the price of Russian crude oil passed the price cap of $60, the third largest bank in India, the State Bank of India, advised that it would not process transactions in breach of the price cap,[28] leading to billions being blocked in India, with Russia not being able to remit the money back to Russia or spend it elsewhere. This led in December 2023 to a suspension of most oil deliveries to India.[29]
Russia
The Kremlin issued a presidential decree that prohibits Russian companies and any traders from selling oil to anyone that participates in a price cap. The decree also forbids dealings with both companies and countries that join the price-cap mechanism.[30] This decree was amended in April 2023 to allow sales to "friendly countries", such as China and India.[31]
With shipping insurance and reinsurance normally coming from Europe or the US and Lloyd's syndicates declaring Russian waters a war risk zone, making insurance hard to get and expensive, Russia is seeking to boost acceptance of its own shipping insurance through Russian National Reinsurance Company.[32]
An experiment in sending one of its three ice-breaking oil tankers to China, sailing through the arctic circle north of Russia, has been tested, the journey is 3,300 miles and will take around 8 weeks.[33]
It is believed that Russia has been purchasing around 100 old (12-15 year) oil tankers to create a "shadow fleet"[34] in order to circumvent sanctions, and paying two to three times the normal price for tankers with ice-class ratings.[35] Russia needs around 240 tankers for its current level of production.[34]
On 4 December 2022 Russia stated that it rejected the price cap of USD60 but would wait before responding to the sanction.[5] Three responses have been suggested, which could become operational at the end of December 2022, a ban on sales to the price Cap participants, (only Japan is still importing ship borne oil from Russia), setting a floor price where Russian producers could not sell crude oil below a pre determined price and thirdly a maximum discount on Russian crude oil compared to the market price of crude oil from other suppliers.[36]
On 27 December 2022 Russia issued a decree applicable from 1 February 2023 until 1 July 2023 which banned the sale of crude oil and finished oil products to any country or company that, directly or indirectly, referred to the price cap in the contract.[37]
Russia announced that its tax on oil production would be based on a $20–25 discount on Brent oil, rather than actual Urals oil prices, which will result in increased tax revenue and equivalent increased costs for producers.[38]
Announced in February 2023 was a reduction in production of 5% (500,000 b/d) as a response to the price caps for whole of 2023.[39]
Russia claims its exports had already involved different types of crude oil sources. The RF exported Urals crude, a type of commodity that undergoes particular dynamics controlled by Russia, and as these discounts are gradually reduced, income flows to Russia will increase again, "contributing to the gradual recovery of tax revenues from the oil sector, especially in the second half of 2023," according to TASS, quoting the Ministry of Finance.[40]
To reduce the taxation impact of the sanctions, Russia set a maximum discount to Brent oil for tax purposes of $34 in April 2023, decreasing monthly to $25 in July 2023, resulting in oil companies paying higher taxes if the real discount is higher.[41] Russia is also seeking to create a Ural price index, rather than using western indices, for tax revenue purposes.[42]
Ukraine
Ukrainian president Volodymyr Zelenskyy called the oil cap "a weak position" and not "serious" enough to damage to the Russian economy.[43]
In December 2022 Ukraine provided the International Maritime Organization a list of 30 oil tankers that they believed were involved in ship to ship transfers of Russian oil, risking environment pollution. The tankers flagged by Malta, Greece, Panama and Liberia with some switching-off AIS transponders.[44]
OPEC
Global oil production was 100m bpd in 2022. The ten OPEC countries produce around 24.5m bpd and generally produce 1m bpd less than their target production.[45] Russia is not in OPEC, its roughly 10m bpd comes into the OPEC+ number of around 40m bpd in 2022.
Some OPEC delegates attending an OPEC meeting in Vienna on 4 December 2022 believed that the production of Russian oil could decrease from the current 9.9m bpd by over 1m bpd because of the price cap. The International Energy Agency believes the drop in production could be 1.4m bpd. Some OPEC delegates believe global production should be decreased to force the recent fall in oil prices back to a higher level, whilst others believe a small increase in production could be undertaken to fill the gap left by the predicted fall in Russian production.[46] The OPEC decision was to not change production levels from those set in October 2022.[47]
OPEC production in February 2023 was up 0.15m bpd from January but still 0.88m bpd short of the targeted production.[48] In March OPEC oil shipped was 24.1m bpd up 0.53m bpd from February and 1m bpd higher than March 2022.[49] addition to the existing 0.5m bpd cut by Russia, Saudi Arabia will cut oil production by a similar amount and Iran by 0.21m bpd, UAE, Kuwait, Algeria and Oman are making smaller cuts.[50]
On 4 June 2023 at an OPEC meeting Saudi Arabia announced it would continue further cuts through 2024 as the oil price had fallen below the $80 level it needed to cover its budget, other countries, including OPEC+, agreed to continue their previous cuts.[51]
Crude oil price, production per day and export duty
| Ural average crude oil price | Production | Export Duty on Ural oil per tonne | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Month | Per barrel | Per tonne | Ref. | Month | m bpd | Ref. | Crude † | Light oil | Ref. | ||
| October/November 2022 | $71.10 | [52] | November 2022 | 11.40 (9.81‡) | [53] | $42.7 | $12.8 | [54] | |||
| November/December | $57.49 | [55] | December | 10.87 (9.81‡) | [56] | $43.3 | $12.9 | [54] | |||
| December/January 2023 | $46.82 | $341.8 | [57] | January 2023 | 10.83 (9.90‡) | [58][59] | $16.7 | $5.0 | [60] | ||
| January/February | $50.51pb | $368.7 | [61] | February | 11.05 (9.87‡) | [62] | $12.8 | $4.2 | [63] | ||
| February/March | $50.80 | [64] | March | 10.36 (9.58‡) | [65][66] | $14.2 | $4.2 | [61] | |||
| March/April | $51.15 | $373.4 | [67] | April | ¶ | $14.3 | $4.2 | [64] | |||
| April/May | $55.97 | $408.6 | [68] | May | ¶ | $14.4 | $4.3 | [67] | |||
| May/June | $54.57 | $398.3 | [69] | June | ¶ | $16.2 | $4.8 | [68] | |||
| June/July | $58.03 | $423.6 | [70] | July | ¶ | $15.6 | $4.6 | [69] | |||
| July/August | $70.33 | $513.4 | [71] | August | ¶ | $16.9 | $5.0 | [70] | |||
| August/September | $77.03 | $562.3 | [72] | September | ¶ | $21.4 | $6.4 | [71] | |||
| September/October | $83.35 | $608.4 | [73] | October | ¶ | $23.9 | $7.1 | [72] | |||
| October/November | $79.23 | $578.4 | [74] | November | ¶ | $26.2 | $7.8 | [73] | |||
| November/December 2023 | $66.12 | $482.7 | [75] | December 2023 | ¶ | $24.7 ◇ | $7.4 ◇ | [74] | |||
| December/January 2024 | Zdroj:https://en.wikipedia.org?pojem=2022_Russian_crude_oil_price_cap_sanctions|||||||||||