Russia managed to push through the western oil price ceiling

By Olga Samofalova

Russia has been selling its Urals grade crude oil above the sanctions price ceiling for two months now. However, the West it appears is in no hurry to adjust their sanctions policy, although it initially threatened to do so every two months. The US and Europe are not silent for a reason. Its that they do not want to admit that their sanctions against Russia again are not working. How does Russian oil manage to get around these bans and still replenish the Russian budget?
Since July, Russia has been selling its oil, as well as fuel oil and diesel, above the sanctions price ceiling, but the US and the G7 are silent about this and appear are in no hurry to adjust the ceiling.

Four people familiar with G7 policy told Reuters that the US and G7 members have no immediate plans to change the sanctions scheme. Although some EU countries were interested in a revision, but the desire of large Western economies, of course, is more important. The lobby of the upcoming UN General Assembly later this month could serve as an informal price negotiating platform, the agency said.

However, analysts doubt that the West will change anything further. When Western countries introduced their price ceiling for Russian oil and oil products, they promised to study the dynamics every two months and revise the price ceiling in order to prevent Russia from earning from their oil sales.

In December 2022, the European Union and the G7 countries introduced a price limit for oil from Russia - it cannot be sold above $60 per barrel. However, in July 2023, the average price of Russian Urals grade crude was higher - $64.37 per barrel, and in August it reached $74 per barrel, the Finance Ministry said . “The grade of our ESPO oil and Sakhalin grades have never been below $60 per barrel even during the ceiling. That is, the sanctions have never worked against this grade of oil,” notes Igor Yushkov, a leading analyst at the Russian Financial University and the National Energy Security Fund.

“The sale of Urals oil above the price ceiling is possible due to the significant increase in world oil prices, in principle, which is largely due to the actions of Saudi Arabia and Russia within OPEC+ to reduce oil exports. And also by solving most of the problems with oil transportation, which can be seen from the significantly reduced freight rates,” says Philip Muradyan, senior director for corporate ratings at the Expert RA agency.

The West thought its sanctions would work like this: the world fleet would not carry Russian oil, which costs more than $60 a barrel, so Russia would have to adhere to a price ceiling and its export earnings would fall. However, in practice, everything got out of the West's 'control.

“The world fleet just split. Now a part of the world's fleet transports Middle Eastern, African, American and any other legal oil, and does not transport Russian oil at any price. They are simply afraid of inadvertently falling under sanctions. The sanction documents say that the owner of the vessel and the insurance company must request documents at the time of loading onto the tanker: how much this oil costs. The documents may contain a “legal” price – conditionally $59 per barrel, but they cannot verify that the deal will actually go through at that price. Therefore, they simply do not undertake to transport Russian oil,” says Igor Yushkov.

But at the same time, a second segment of the fleet was formed on the market - the so-called shadow, twilight or grey fleet. “This is a fleet of tankers that transports only sanctioned oil - Russian, Iranian and Venezuelan. These are quite large volumes, for the transportation of which they pay higher rates,so some ship owners have moved into this business segment. They understand that their tankers will be subject to sanctions, but they have no business in the US and Western countries, they do not trade in dollars, so they have nothing to be threatened with, nothing can be done to them for violating Western sanctions. They know that until the end of the life of their tankers they will carry sanctioned oil. Due to this, the following picture emerges: no matter how much Russian oil costs, it is transported by a “gray” fleet that ignores sanctions,” says Yushkov.

As for the maintenance of ships, now instead of going to European they do it in Asian harbors. A new segment of the market was also formed in the insurance market. Here, Turkish and Asian companies quickly realized that they could make good money on insurance for the transportation of Russian oil.

The West is hardly satisfied with this state of affairs, but any changes are pointless. “When the West introduced the price ceiling, it promised to review it every two months. The price ceiling revision formula is as follows: the average price of Russian oil minus 5%.

Now the average price of Russian oil is such that the West needs to increase the price ceiling. Naturally, they do not want to do this, because it will look like an easing of sanctions against Russia. On the other hand, lowering the price ceiling to $50-$55 s, when it does not work even at $60, is pointless.

Therefore, Western politicians generally talk little about the price ceiling now, otherwise questions will begin - and they will have to say that the price ceiling does not work, ”concludes the FNEB analyst.

At the same time, the West also does not want to introduce a full-fledged embargo against Russia, as in the case of Iran and Venezuela. Because Russia remains a key player in the world oil market, and its withdrawal from the market will provoke an uncontrollable wave of growth in world oil prices. “Further on, this will lead to another acceleration of inflationary processes, an increase in base interest rates in the world and a recession in individual economies. It is difficult to block Russian exports without a loss to the rest of the world,” says Vladimir Evstifeev, head of the analytical department at Zenit Bank.

Analysts are confident that world oil prices will continue to rise (as OPEC+ cuts are likely to be extended this year) and could easily rise from the current $90 to $100 per barrel. This means that the price of the Russian brands of oil will also increase.

“The discount for Russian oil may also be reduced from the current $16-18 per barrel to $10-12 per barrel as logistics is further optimized. The price of Russian oil may reach $75-80 per barrel this year, but this requires a revival of demand from China, as well as the absence of a recession in the largest developed economies,” Evstifeev said.

Russia has already begun to receive additional income from oil exports - and they will continue to grow. This is yet another argument that Western sanctions' plan to deprive Russia of income has failed.

“Against the backdrop of an increase in the cost of Russian export oil, revenues from its sale began to grow. By the end of August, MET revenues to the budget increased by 30%, to 874.9 billion rubles, and the MET for oil increased by 34.47%, to 745.8 billion rubles. Against this background, according to the results of the third quarter, the budget of the Russian Federation may again become a surplus, as the President of Russia also spoke about, ”says Vladimir Chernov, an analyst at Freedom Finance Global.

“In the second half of 2023, a recovery in demand for oil products in China is expected, as well as a continued reduction in oil exports and oil production by OPEC+ countries, so we expect global oil prices to recover in the range of $87-$100 per barrel Brent. After that, Russian oil will continue to rise in price and increase budget revenues from its exports,” concludes Chernov.
This article originally appeared in Russian at vz.ru and was translated and edited by Rhod Mackenzie