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Are Russian oil exports resilient to sanctions and price caps?

On the 4th of February, the European Union – together with the international G7+ Price Cap Coalition – have adopted further price caps for seaborne Russian petroleum products (such as diesel and fuel oil), following the price cap for crude oil in force since December 2022.

“We are making Putin pay for his atrocious war,” said Ursula von der Leyen, President of the European Commission. “Russia is paying a heavy price, as our sanctions are eroding its economy, throwing it back by a generation. Today, we are turning up the pressure further by introducing additional price caps on Russian petroleum products. This has been agreed with our G7 partners and will further erode Putin’s resources to wage war. By 24 February, exactly one year since the invasion started, we aim to have the tenth package of sanctions in place.”

Concretely, two price levels have been set for Russian petroleum products: one for premium-to-crude petroleum products, such as diesel, kerosene and gasoline and the other for discount-to-crude petroleum products, such as fuel oil and naphtha, reflecting market dynamics. The maximum price for premium-to-crude products will be 100 US dollars per barrel and the maximum price for discount-to-crude will be 45 US dollars per barrel.

Moreover, the price cap, entered into force on 5 February, includes a 55-day wind-down period for seaborne Russian petroleum products purchased above the price cap, provided it is loaded onto a vessel at the port of loading prior to 5 February 2023 and unloaded at the final port of destination prior to 1 April 2023.

The price caps will be continually monitored to ensure their effectiveness and impact.

Are price caps really effective?

Indeed, some might fear that these sanctions are not working and they are not hitting Russia’s revenues. The International Monetary Fund (IMF) is expecting a growth of Russia’s GDP up to 0.3 per cent in 2023 and 2.1 per cent in 2024. And, as reported by the Economist, Russia’s oil exports amounted to 3.7 million barrels per day in January, a higher level than in any month of 2021. Of course, due to the several packages of sanctions adopted by Europe and its Western allies, most of it went to Asia, notably China and India.

Also the International Energy Agency (IEA) reported that Russian oil exports have so far proved resilient to sanctions, import embargoes and buyer boycotts. By October 2022, crude oil exports to India had increased by 965,000 barrels per day (kb/d), to 1.1 million barrels per day (mb/d); China by 225 kb/d to 1.9 mb/d; and Turkey by 320 kb/d to 540 kb/d. Shipments to unknown or yet-to-be-identified destinations have also risen.

However, after the new EU embargo, an additional 1.1 mb/d of crude oil and 1 mb/d of oil products currently going to EU countries will have to find new destinations and the IEA expects that export losses and production shut-ins will increase. Thus, the price cap might be actually working, just not fast enough. After all, its main goal is to cut revenues to Russia while avoiding a global disruption and even if Russia is finding new markets, the prices will not be the same as before the war.

“We have already seen early progress toward those objectives through the price cap on crude oil exports,” commented the US Secretary of the Treasury Janet L. Yellen. “Senior Russian officials have repeatedly admitted that the crude oil price cap is cutting into their most important source of revenue and has darkened the Kremlin’s already troubled fiscal outlook. Global energy markets have also remained well-supplied and public reports indicate that crude oil importers are using the price cap to drive steep bargains on Russian oil imports.”

Nonetheless, these statements must be taken with a grain of salt. The lack of transparency of Asian agencies when it comes to prices and quantities of oil exported from Russia could also point to a very different situation from our expectations.

Anyhow, only time will tell us if price caps are working or not. In the words of Edward Fishman, Senior Research Scholar at Columbia’s Center on Global Energy Policy, “sanctions, in general, are more like a marathon than a sprint.”

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