Russian oil price cap, EU ban aim to limit Kremlin war chest
FRANKFURT, GERMANY >> Major Western measures to limit Russia’s oil profits over the war in Ukraine took effect Monday, bringing with them uncertainty about how much crude could be lost to the world and whether they will unleash the hoped-for hit to a Russian economy that has held up better than many expected under sanctions.
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 $60 per barrel on Russian exports to other countries.
The impact of both measures, however, may be blunted because the world’s No. 2 oil producer has so far been able reroute much of its European seaborne 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 programs, said Chris Weafer, CEO and Russian economy analyst at consulting firm Macro-Advisory.
“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,” he said. “And that depends not only on the willingness of Asian buyers to continue buying Russian oil, but also what is 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 the inflation plaguing economies and hurting consumers worldwide. They could later agree to 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% to $83.40 a barrel Monday.
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 $60 cap, if enforced, would already push Russia to lower per-barrel tax, he said, calling it “by far the biggest step to date to cut off the fossil fuel export revenue that is funding and enabling Russia’s barbaric invasion of Ukraine.”
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.”
The U.S., EU and allied countries have hit Russia with a slew of sanctions aimed at bank and financial transactions, technology imports and regime-connected individuals. But until now, those sanctions have for the most part not directly gone after the Kremlin’s biggest moneymaker, oil and natural gas.
Europe was heavily dependent on Russian oil and natural gas before the war and has had to scramble to find new supplies. Previously, the EU banned imports of Russian coal, and the U.S. and the U.K. halted their limited imports of Russian oil, but those steps had a much smaller economic impact.
Even as Western customers shunned Russian oil, the higher prices driven by fears of energy shortages helped offset lost oil sales, and Russian exporters have shipped more oil to Asian countries and Turkey in a major reshuffling of global oil flows. Russia’s economy has shrunk — but not by as much as many expected at the start of the war almost 10 months ago.
One unknown is how much of the oil formerly sold to Europe can be rerouted. Analysts think many, but not all, of the roughly 1 million barrels covered by the embargo will find new homes, tightening supply and raising prices in coming months.
The Biden administration doesn’t expect that Russia’s threats to cut off countries observing the cap and slow production would “have any impact long term on global oil prices,” National Security Council spokesman John Kirby said.