Russian oil price cap takes effect
Major Western measures to limit Russia’s oil profits over the war in Ukraine took effect yesterday, bringing with them uncertainty about how much crude could be lost to the world and whether they will unleash a hit to the Russian economy.
In the most far-reaching efforts so far to target one of Moscow’s main sources of income, the European
Union is banning most Russian oil and the Group of Seven democracies has imposed a price cap of US$60 ($95) a barrel on Russian exports.
The impact of both measures, however, may be blunted because the world’s second largest oil producer has been able reroute shipments to China, India and Turkey, although at steep discounts, and the price cap is near what Russian oil already cost.
As it stands, Russia will likely have enough money to not only fund its military but support key industries and social programmes, said Chris Weafer, chief executive and Russian economy analyst at consulting firm Macroadvisory.
“At this price level, that outlook really doesn’t change much. But what is key is how much volume Russia would be able to sell. And that depends not only on the willingness of Asian buyers to continue buying Russian oil, but also the physical ability of Russia to shift that oil.”
Western leaders are walking a fine line between trying to cut Russia’s oil income and preventing an oil shortage that would cause a price spike and worsen inflation worldwide. They could later lower the price cap to increase pressure on Russia, which says it will not sell to countries that observe the limit.
That could take oil off global markets and raise energy costs, including for gasoline at the pump. International benchmark Brent crude rose before falling 2.5 per cent to US$83.40 a barrel yesterday.
To seriously cut Russian revenue, the cap must be lowered “quickly and progressively”, said Lauri Myllyvirta, lead analyst at the Finland-based Centre for Research on Energy and Clean Air. Even the US$60 cap, if enforced, would already push Russia to lower per-barrel tax, he said.
Russia has been living off the huge windfall from higher oil prices earlier this year and will be more vulnerable in the next several months when that money is spent, Myllyvirta said.
Kremlin spokesman Dmitry Peskov, asked in a conference call how the oil price cap might affect the war, said, “The economy of the Russian Federation has the necessary potential to fully meet all needs and requirements within the framework of the special military operation, and such measures will not affect this.”
—AP