The G7 oil price cap puts Putin under pressure
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Europe is looking for a rooftop deal on the price of Russian crude oil. The logic of the measure wanted by the United States is to reduce the revenues with which the Kremlin finances the war in Ukraine, but without removing the Russian barrels from the market. According to experts it will work, even if China and India do not join
Like the Ukrainian counter-offensive in the Donbas and Kherson regions on military terrain, likewise also on the economic level Western pressure against Russia is intensifying. September 28th Ursula von der Leyen announced the eighth package of sanctions, which includes the legal basis for introducing a price cap on Russian oil for third countries, as agreed at the beginning of September in the framework of the G7. The negotiation is still ongoing, and it is not easy, because countries like Malta, Cyprus and especially Greece which have the fleets of oil tankers that in recent months have continued to transport Russian crude. But with some form of compensation, it should be possible to close the deal.
Greece had already managed to remove the ban on shipping from the sixth package of sanctions, which since December has prohibited EU operators from securing and financing the sale of Russian oil. This time, shipping should also be included, to avoid loopholes in the imposition of the price cap. But once the agreement is found, the European Union will also have to review previous sanctions which completely prohibit services and insurance. Because the logic of the price cap, pushed by the United States and in particular by the Secretary of the Treasury Janet Yellenis different from that of the total block. The objective of the cap proposed by the G7 is to reduce the revenues with which the Kremlin finances the war in Ukraine but without throttling the global supply of oil, which would significantly increase the price (as is happening with gas). Russian crude should therefore continue to be sold, but only below a maximum price threshold.
The level has yet to be set and Washington hopes it will be agreed at least a month before the European embargo enters into force in early December. In any case, the price ceiling must be fixed in a range that is situated above the marginal cost of production of Russian crude and below the pre-pandemic oil prices: in this way Moscow would maintain the economic incentive to produce and sell, but with much lower profits. This band, according to estimates by S&P Global Commodity Insights, would be between 48 and 55 dollars a barreljust over half of the current Brent prices and well below the average price of the Urals which in the budget for 2023 Moscow expects to be 70 dollars.
The price cap should not apply to the G7 countries, which on their own will implement a total embargo on Russian oil (apart from a few marginal temporary exemptions in Europe for pipelines), but should be applied to third countries through the insurance and financial services companies of the G7 which in 95% of cases cover ship transport of Russian oil in the world. This would result in a great economic benefit for buyers. According to an analysis by the US Treasury, cited by the Financial Times, the G7 price cap could produce a annual savings of $ 160 billion for the 50 largest emerging economiesfrom Africa to Asia.
It is precisely by working on incentives that Washington intends to expand the coalition of the countries adhering to this sanction against Russia. Obviously there are many uncertainties about the success of the operation. In the first place, Russia has already announced that it will not sell oil to countries that will impose the price cap on its exports, thus collapsing global supply. Secondly the mechanism is difficult to enforce and could be bypassed through various loopholes. Finally several countries like China, India and Turkey, which are the main buyers, are unwilling to join to the G7 mechanism.
On the first point, in reality, Moscow doesn’t have many levers: blocking the export of its main source of tax revenue (oil weighs much more than gas) is not very credible. Moreover, its budget for 2023 already shows how the European embargo and the infrastructural difficulties (global shortage of oil tankers, longer journey times, etc.) will reduce revenues from oil & gas (from 42 to 34% of GDP) due to a contraction in both production and prices. According to theInternational Energy Agency (Iea)following the EU embargo which represented its main market, Russia in February 2023 will produce 1.9 million barrels per day less than in 2022 (-17%). As for the effectiveness of a complex and unprecedented mechanism, experts do not seem to have many doubts: in a survey by the University of Chicago Igm forum, which interviewed the most successful economists in the world, it emerges that for 69% it will work while only 8% disagree (the rest is uncertain).
Finally, few have any doubts that too countries that do not adhere to the G7 ceiling, such as China and India, will use the price cap as a negotiating lever to get discounts greater than those they already get. On the other hand, just look at the behavior of some Putin’s “friends” in recent days: Viktor Orbán’s Hungary got a deferral of payments from Gazprom and also Erdogan’s Turkey he asked to postpone part of the gas payments to 2024. It is difficult to imagine that Putin’s interested “friends” will not use the price cap to obtain further economic benefits.
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