Increased revenues in the budget will allow the relaxation of restrictions and ease the Russian ruble
The ceiling on the price of Russian oil clearly no longer has an effect, according to data from the Ministry of Finance of Russia for October. According to them, the revenues from the sale of oil and natural gas in the Russian budget during the month reached 1.63 trillion. rubles ($17.7 billion) compared to 740 billion rubles ($8.03 billion) in September.
The average price of Russia’s Urals grade is $81.52 per barrel, compared to just over $91 for Norwegian oil produced in the North Sea, according to data from the Russian ministry. The average price of Russian oil for the 10th month of the year was $61.84 per barrel. According to Argus Media data cited by The Wall Street Journal, most of Russian oil traded at around $74 a barrel over the past month.
In December 2022, the G-7 countries, the European Union (EU) and Australia introduced a ceiling of $60 per barrel of Urals, and the measure was generally observed in the first months of 2023. But lately, Russia has managed to found “gaps” in the system – using ships without insurance or buying old tankers, and thus gradually managed to overcome this Western sanction.
Now the G-7 countries and the EU will try to tighten controls, EC President Ursula von der Leyen promised during a briefing with Ukrainian President Volodymyr Zelensky in Kyiv. Over the weekend, she also promised a 12th package of European sanctions against Russia – mainly for individuals who help conduct military operations, are responsible for the deportation of Ukrainian children and spread Russian propaganda. It is also expected that the rules will be tightened so that sanctions cannot be easily avoided.
Already at the end of the year, Kiev commented that the ceiling was too high – the production costs for the extraction of Russian oil for some of the clansmen were only about 20 dollars per barrel. But the goal of the West was, on the one hand, to reduce the income for the Russian budget, and on the other hand, to leave Russian oil on the market, so as not to get too big a deficit.
Russia and Saudi Arabia voluntarily cut production and the measure will last until the end of the year, which led to a rise in the price of oil, and with the discounts offered by Russian companies, the Urals variety became in demand on the market.
In September, the US imposed the first sanctions for non-compliance with the rules imposing a ceiling on the price of Russian oil. Now in Kyiv, Ursula von der Leyen has also promised a tougher attitude towards compliance with this sanction. However, Russia has found a legal way around it – creating its own fleet of tankers, often registered to unknown companies, for which there is no one to check whether the rules are followed, and whether sanctions are imposed – is irrelevant. Close half of Russian oil exports are managed by such companies – newly established or with no history in trading in energy resources.
According to WSJ sources, the U.S. and EU are already looking for ways to stop violations of Russian energy sanctions, including how to apply the rules to Russian tankers. Analysts comment that the flotilla that Moscow bought is so large that it covers most of the exports. According to recent calculations less than 1/3 of Russian oil supplies are now under Western sanctions. Analyzes by the Kyiv Economic Institute show that Russia currently has 180 tankers at its disposal, which it uses to transport oil to its customers. The three largest – China, India and Turkey – do not comply with the G-7 and EU sanctions.
Thanks to rising oil revenues, the Kremlin is likely to be able to cover its budget deficit and stay within the 2% target. While the cap was operating, forecasts were that 2023 would end with a budget deficit of around 5-6% for the Russian budget.
With the reduction of the deficit, some of the financial requirements will be eased and there will be no need to issue government securities, which in the current situation will be an expensive undertaking for Russia. With the increase in oil revenues, the balance on the current account also improves, and accordingly, the free fall of the ruble, which in recent days has stabilized against the dollar on the foreign exchange markets, stops.
A World Bank report published a few days ago showed that the cap on the price of Russian oil is not working, and with the proceeds from the trade, Moscow is now able to finance the war it is waging in Ukraine and stabilize its economy. This will allow the Kremlin to increase its military spending to a record $100 billion in Russia’s post-Soviet history.
In Russia they are already celebrating the victory. “I hope that now everyone has understood that the tool is simply ineffective and the end users suffer from it,” said Deputy Prime Minister Alexander Novak, quoted by “Interfax”.
The US Treasury Department is not so convinced. Sources told the WSJ that the cap has forced Russia to buy old tankers, spend more on cargo logistics and offer deep discounts to attract buyers.
The US has sent recommendations to port authorities around the world that would also make it more expensive to supply Russian oil, such as requiring cargo insurance. It is not very clear whether the port operators will comply with these recommendations, adds the financial publication.
According to the G7 and EU measure, cargo carried by ships registered in the territory of the two organizations and insured in companies from these countries must comply with a ceiling of $60 per barrel for Russian oil. The price is certified by the ship owner to the insurers or ship owners. According to S&P Global, less than half of Russian oil cargoes are insured with a Western company. In January, about 35% of Russian shipments were covered by non-Western insurance.