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Russian Oil Cap Unlikely To Drastically Affect Economy

Russian Oil Tanker

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The much-anticipated embargo on Russian seaborne oil products to Europe went into effect Monday. Additionally, on Friday evening, the European Union (EU) agreed on a price cap for Russian oil, expanding on the restrictions already in place. Companies in China and India will be expected to honor the price cap if they are to continue working with shipping and insurance services in Europe.

According to The Bell, Russia leads the world in oil exports and is third in global oil production. Roughly one-third of the country’s revenue comes from oil and gas sales. Due to Russia’s reliance on revenue from its oil exporting industry, the oil embargo and price cap are seen as essential ways to hinder Putin from financing the war in Ukraine.

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While the restrictions will limit who Russia can sell oil to and how much it can charge, the rising energy prices caused by the war will allow Russia to easily compensate for any decrease in revenue the embargo causes. Russia’s Finance Ministry released figures showing that the country’s oil and gas revenues have increased 34.2% in the first 10 months of this year.

Australia and the G7 countries have agreed to impose a price cap of $60 on Russian oil. However, it will not drastically affect Russia as the budget rules that will take effect next year were already set to cap the price at that exact amount. The cap will be reviewed every 2 months by the G7 countries and Australia and is required to be kept at an amount at least 5% below the average market price for Russian oil.

While many Russian observers believe that the country is using energy revenues to fund its war in Ukraine, the leading concern becomes how much will the embargo and price cap limit Russia’s oil and gas revenue. As former NATO General Secretary Anders Fogh Rasmussen said earlier this year, “If we’re buying Putin’s oil, we’re paying for his war crimes.”

Despite an embargo on Russian oil being imposed in the spring by the U.S., the UK, and Canada, energy prices increased, thereby increasing Russia’s profits. To fill in the gaps in the effectiveness of the embargo that the energy increase caused, on December 5, the EU instituted not only a ban on Russian oil imports by sea but also implemented restrictions that prevent European companies from insuring or transporting Russian oil. The G7 countries and Australia also agreed on the price cap to prevent price increases.

According to the Director of the Institute of Energy and Finance, Marcel Salikhov, Russia could lose $20 billion in oil exports annually between the price cap and a 2 million barrel daily reduction in oil production. Salikhov downplayed the potential decrease in revenue, saying, “However, this is not some kind of huge loss that will stop all exports.”

While it remains unclear just how big the discounts Russia will have to give China and India are going to be, it is predicted that the discounts will not be catastrophic to Russia’s energy revenue.

The price cap was not only put in place to hinder Russia’s ability to finance its war in Ukraine but was also essential to allow European shipping companies to keep transporting oil. Currently, shipping companies based in Europe serve 50% of the global market. Russia is looking for alternative ways to work around the restrictions, with the Financial Times reporting that Moscow is putting together a “shadow fleet” comprised of old tankers, while Salikhov has said that Russia could offer state guarantees to insure not only the tankers but also their cargo. The insurance concerns don’t, however, affect China or India.

While NATO and its Western allies hope to hinder Russia’s energy revenue and Putin’s ability to fund the war in Ukraine with the embargo and price cap, it seems premature to assume that the restrictions will have a large impact on the Russian economy. In fact, with rising energy prices and demands increasing, it’s unlikely that Russia will feel much of an impact if any.

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