What will happen if the West limits the price of Russian oil

Victoria Pavlova

At first, the US proposal to link the possibility of transportation with the price of Russian oil was received with skepticism - you never know how many strange statements from the US government can be heard. But at the G-7 summit, which includes Great Britain, Germany, France, Italy, Japan, Canada and the United States, this idea was seriously discussed. Members of the G7 were not at all opposed to depriving Russia of income.

Everything has already begun

The United States officially abandoned Russian oil back in March, and in early June, Europe approved an embargo on oil supplies by sea and along the northern branch of the Druzhba oil pipeline to Poland and Germany. These bans cover the export of raw materials for almost $40 billion. But in addition to direct bans, there are also indirect ones. Biden has already pledged to formally ban, along with allies, the insurance of ships carrying Russian oil. There are already problems with obtaining insurance, without which international transportation is impossible - insurance companies voluntarily refuse to work with Russian raw materials. Already in April, difficulties arose with the supply of oil from the Sakhalin-1 project: Sovcomflot tankers, which delivered raw materials to the ports of South Korea for further transshipment, were left without insurance, and Asian transport companies did not have ice-class tankers.

Vessel insurance has become one of the strongest instruments of influence on the Russian economy and a potential mechanism for forcing oil prices down. Getting around insurance restrictions is not easy. The majority of shipping is insured through the British site Lloyd's of London, and secondary insurance is carried out by the world's leading reinsurers from Germany. Also, many tankers are owned by companies registered in Greece, Malta and Belgium.

But the G7 countries are discussing the removal of restrictions on maritime transport ... if the raw materials are supplied to countries that have agreed to buy them, no more than a certain level. Specific prices have not yet been named, but, according to Japanese Prime Minister Fumio Kishida, the upper threshold will be set "at about half the current price." Will the West be able to force Russia to give up profits and what consequences can such attempts to reduce the price of black gold have?

Cartel of consumers - the impossible is possible?

Some experts believe that the threats from the US and G7 leaders are nothing more than words. And it will not come to real price limits. Too many countries will have to negotiate. In addition, such forceful attempts to bring down the cost of oil can, on the contrary, lead to an increase in prices, says Igor Yushkov , a leading expert at the National Energy Security Fund.

- The problem with setting a price ceiling is the following: for it to work, it is necessary that absolutely all buyers of Russian oil agree with this ceiling. And what will this ceiling be? It is logical to make it very low, because the point of the sanctions is to make Russia earn less. And then, on the contrary, they impose sanctions, limit its import, it reduces production, and the fact that it reduces production worsens the shortage in the world and the price rises. And here's the idea - let's pay less. But it would be logical if they set a corridor from 30 to 40 dollars per barrel, so that the budget would certainly not meet in any way and there would be a deficit. Our budget stipulates a little over $40 per barrel. (just about half of the current price - ed.) Russia, of course, will not agree to the sale of oil at such prices, and this is the main problem why these restrictions are still not introduced. China and India will not join such a ban, because there is a risk that we will not supply those who want to buy at such a fixed price, that is, the state will prohibit companies from selling under such schemes.

Stanislav Mitrakhovich , a leading expert at the National Energy Security Fund and the Financial University, adds that in world history it has never been possible to form a consumer cartel.

- In order to set marginal prices for energy resources, we need some kind of cartel of consumers, such a monopsony - that is, a monopoly in reverse. And how to make such a monopsony cartel, provided that different countries have different plans for the purchase of raw materials. Now it is not the 90s in the yard, now there is China, there is India, why should they participate in the cartel? Why do they need any agreement? If they need to get a discount from Russia, they themselves negotiate with Russia at the level of their companies and receive discounts. It has never been possible to create a cartel of consumers, because everyone is on his own mind, a cartel of suppliers - yes, it was possible, this is OPEC or OPEC plus. Although, in general, the idea of many cartels was popular in the commodity markets about 15 years ago, they wanted to create a gas OPEC - this did not work out, they wanted to create a rice OPEC, a coffee OPEC - but all this was not very successful. A cartel of consumers - there was no such thing.

Conditionally loyal China and India

Regarding the main consumers of our oil - China and India - there is another opinion. They are well aware that the Russian economy is not in the best condition, which means that this can be used to extract their own profit. The pragmatism of Asian countries can push aside the ideas of friendship between peoples, the great confrontation between the West and the East, and force them to join the restrictions too. China and India have already knocked out a considerable discount: in June 2022, the average price of Urals oil was $ 84.09 per barrel, although the benchmark Brent traded at $116.28 per barrel. The discount was almost 28%! So why don't they go for an even bigger discount. For them, the cheaper the better. Ivan Nesin of the Forex Club believes that for the sake of profit, China can support the West.

- As a rule, these countries rarely have a strong political position, so out of love for Russia they are unlikely to advocate high prices. If it is beneficial for them (in the event that Russia does not promise them something in return), then they can also join the restrictions.

Independent expert Anton Sokolov also clarifies that China has an additional incentive to bring down oil prices. So China will reduce the risk of falling under secondary sanctions.

- China buys our oil at a significant discount, in fact, we pay for its insurance against falling under secondary sanctions. With the introduction of a price cap on Russian oil, China will be able to “break the price” even more, without formally joining the restrictions. Much depends on what kind of sanctions are imposed on those who do not join this regime and its violators.

Inconvenient for all Russian oil

Deputy Prime Minister Alexander Novak , in response to proposals to bring down prices, threatens the world with an imbalance in the market, a shortage of energy resources and rising prices for raw materials. Russia simply will not sell oil for a penny. Indeed, no one can force you to do so. The market is free: if you want - you sell, if you don't want - you don't sell. But the consequences of such a refusal for our country will be very unpleasant. The share of oil and gas revenues in the country's budget is growing rapidly. Of the 10 trillion rubles received by the federal budget in January-April, 4.77 trillion rubles fell on the oil and gas sector. Refusing to export is like sawing the branch you are sitting on.

There is also a purely technical problem of refusing to export oil. Firstly, the extracted raw materials will simply have nowhere to go - says Anton Sokolov .

- For a long time, our country ignored the issue of creating a strategic oil reserve, which could just allow mining companies not to reduce production at all or reduce it slightly. The solution to this issue in the last year has nevertheless moved forward, but, of course, the formation of a reserve will take some time. In general, the export paradigm within which our country lives, initially carried enormous risks. I hope that now more attention will be paid to the development of existing and the formation of new domestic markets, which will be able to provide domestic consumption with two-thirds or three-quarters of the oil produced, and not half, as it is now.

Secondly, stopping oil production is not at all the same as turning off the water tap in an apartment. The well must first be mothballed, and then, when the time comes to resume production, it must be re-mothballed. But this requires technology, which has big problems under the sanctions. Anton Sokolov sees this as a big problem.

- Reducing production is an extremely painful process. If you think that the disputes over OPEC+ production quotas that have arisen regularly during lockdowns have nothing to do with lost profits, then you are mistaken. A well can be stopped, it can be mothballed, but then bringing it back to the design production levels can be a very, very complicated and expensive event, or even a whole range of measures.

The fears are unfounded. Last year, Russia did not immediately take advantage of the opportunity to increase oil production under the OPEC + agreement, although in the past it always produced the maximum possible volumes, sometimes even exceeding them. According to experts, this could happen due to problems with the resumption of production at mothballed wells.

This is exactly what happened to the extractive industry in Venezuela - recalls Anton Sokolov .

- The Venezuelan oil industry is practically destroyed - production levels have fallen to the volumes of the 30-40s of the XX century. Lifting sanctions on oil supplies to the market is not enough, it is necessary to increase production, and Venezuela will not be able to do this without foreign technology and money.

Now everything depends on the decision of the largest oil importers. If they agree, then there will be practically no room for maneuver. If Russia agrees to lower prices, it will be difficult to fulfill the budget and meet social obligations. If he refuses, then the financial hole will be even larger, and there will also be a shortage of jobs in the extractive industry. The financial blow will be especially tangible, because the Ministry of Finance will not place external loans in 2022 (after Moody's recognized the default, it will be difficult to raise capital in any case). On the other hand, in order to compensate for the lack of Russian oil on the world market, other exporting countries need to increase supplies by a very real 4.5 million barrels. Alas, it seems that driving Russia into the trap of oil prices is beneficial to almost all countries of the world today. So the threats may not be empty words.