Moscow to Ban Oil Exports to Nations That Impose Price Cap

Russian President Vladimir Putin takes part in the launch ceremony of the Kovykta gas condensate field via videoconference in Moscow, on Dec. 21, 2022. Mikhail Kuravlev/Pool Photo via AP

Moscow will follow through with its threat to ban oil exports to countries that agree to impose a price cap on Russian oil. President Vladimir Putin announced his government’s long-awaited response to a Western-backed price cap on his nation’s crude exports on Dec. 27.

The Russian leader signed an order banning the supply of oil and oil-related products for five months to countries that impose the cap and will be in effect from Feb. 1 to July 1, 2023.

“The supply of Russian oil and oil products to foreign legal entities and individuals is prohibited, provided that the contracts for these supplies directly or indirectly provide for the use of a price-fixing mechanism. The established ban applies at all stages of supplies to the final buyer,” according to the presidential decree on TASS, the Russian state news agency.

“Deliveries of Russian oil and oil products to foreign entities and individuals are banned, on the condition that in the contracts for these supplies, the use of a maximum price-fixing mechanism is directly or indirectly envisaged.”

The Kremlin said that its move was a direct response to the “unfriendly and contradicting international law actions of the United States and foreign states and international organizations joining them” and for the purpose of safeguarding Russian national interests.

Crude oil exports from Russia will be banned beginning Feb. 1, but the date for the ban would be determined by the Russian government and may be enforced after the February deadline.

“This document comes into force on February 1, 2023, and is valid until July 1, 2023,” said the decree, but it included a clause that allowed for Putin to lift the ban under special circumstances.

A Western-Backed Price Cap on Russian Oil Comes Into Effect

After months of negotiations, the G-7, the European Union, and Australia agreed this month to impose a $60-per-barrel price cap on maritime shipments of Russian crude in response to its war against Ukraine.

The agreed upon level was made effective from Dec. 5 onward and imposed penalties on any maritime insurance or shipping firm that violated the price limits on Russian oil exports.

Companies in the the United States, the EU, and the United Kingdom have been banned from providing transport, financial, and insurance services to tankers carrying oil from Russia at a price above the $60 cap.

The $60 price cap was conceived by Western leaders as a way to weaken Moscow’s finances during its war against Ukraine, while making sure that Russian oil would continue to supply the global market.

The export cap was introduced alongside an EU-wide embargo on seaborne deliveries of Russian crude and was conceived as a way to ensure that the Kremlin could not bypass the European ban by selling its oil to third countries at higher prices.

However, some critics of the price caps and EU crude ban have said that it would have little immediate impact on Moscow’s current state oil revenues, according to Barron’s.

European countries were already suffering from high energy prices due to the loss of most Russian natural gas imports.

Russian Officials Believe They Can Withstand Export Restrictions

Some Russian officials are confident that the cap will not affect its military operations in Ukraine and have expressed confidence it would find new buyers.

However, Finance Minister Anton Siluanov said that Russia’s budget deficit could be larger than 2 percent of GDP projected for next year due to the price cap on oil export revenues and the increases in military spending for the campaign in Ukraine, Barron’s reported.

Russia is expected produce 535 million tons of oil by the end of 2022, Vice Prime-Minister Alexander Novak told Rossiya-24 TV channel last week, reported Bloomberg,

Meanwhile, in an interview with TASS on Dec. 25, Novak repeated last week’s estimates that his country would produce at least some 490–500 million tons of oil next year.

Russia may increase its crude oil exports if the EU ban results in a lower output, Novak said. “If there are problems with the sale of petroleum products, oil refining to some extent can be replaced by additional volumes of oil exports.”

The Russian cabinet minister added that there is a possibility that the EU ban may barely even have an effect on Russian refinery output.

That is the equivalent to some 9.84–10.04 million barrels per day, based on the 7.33 barrel-per-ton ratio, according to Bloomberg.