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| The high price of Russian oil is beyond the wishes of the Group of Seven (G7) leading industrialized nations. (Source: CNN) |
This past summer, there was a “curve of hope” that many Western countries were looking towards. For weeks, the ruble continued to fall. But at the same time, another “curve” took a new turn. That was the price of crude oil on the world market, or more precisely, the price of Russian Urals oil.
In June 2023, the price of this oil on the world market was still fluctuating between $54 and $56 per barrel. But now it has reached $74 per barrel. The price increase of about $20 per barrel will make a big difference in income for Moscow. The country has earned about $37 billion this year.
Why is the price of Russian oil so high? Experts explain that this is beyond the wishes of the Group of Seven (G7).
Russian oil rises sharply
Last winter, the group decided to cap the price at which Russian crude oil could be sold on world markets. Western shipping and insurance companies were barred from transporting and insuring Russian oil unless it was trading below $60 a barrel.
The regulation would limit Russia's income from crude oil sales, but would not cause the price of this important raw material to skyrocket uncontrollably on world markets.
For a while, it seemed to work. Prices for Russian oil shipments via the Baltic and Black Seas fell sharply. On these routes, Moscow was forced to sell oil for roughly $40-45 a barrel.
The “black gold” mainly goes to buyers in India or elsewhere in Asia. Russia’s tax revenue from oil has also plummeted, to the point where the government has had to cover significant budget deficits.
But according to economist Benjamin Hilgenstock of the Kiev School of Economics, now the price of Russian oil at the ports of Primorsk on the Baltic Sea and Novorossiysk on the Black Sea has risen to more than $60 a barrel.
"After the West imposed the regulation, Russia's actual oil export prices actually fell. But this result was not due to the oil price cap," said Hilgenstock.
Almost simultaneously with the imposition of the oil price cap, the Europeans decided to use a second tool to limit Russia’s oil revenues. Specifically, the European Union (EU) imposed a sweeping import ban on Russian oil transported by sea.
In an instant, Russia’s biggest traditional customers – those who buy oil from the ports of Primorsk and Novorossiysk – suddenly disappeared. At that time, Moscow tankers were forced to divert from the Baltic Sea to India, where new customers demanded higher discounts for each barrel of Russian oil. This forced the country’s oil prices to fall.
"The fall in oil prices has nothing to do with the Western oil price cap, but governments can still say it's a success. The main problem is that Russia's oil revenues are falling," said Hilgenstock.
Recently, Saudi Arabia and Russia jointly decided to cut oil exports. This pushed up prices on the world oil market and pushed the price of Russian Urals oil above $60/barrel.
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| The G7 has decided to cap the price of Russian crude oil on the world market. (Source: Shutterstock) |
"Good news in bad news"
The weaknesses of the Russian sanctions have long been known. Hilgenstock and his team have been sounding the alarm since last spring.
For a long time, they have been monitoring the development of export oil prices at Russia's most important ports. In addition to Primorsk on the Baltic Sea and Novorossiysk on the Black Sea, Moscow also has the Kosmino port on the Sea of Japan. Traditionally, other important customers have always received oil from here.
A few months ago, researchers discovered that a large amount of Russian oil was still being shipped from this port at prices above $60 a barrel. Notably, about half of the ships calling at this Far Eastern port either belong to Western shipping companies or are insured by Western companies.
The same pattern can now be seen on routes across the Baltic and Black Seas.
According to data from the Center for Research on Energy and Clean Air (CREA), about half of the tankers in the port of Primorsk recently were linked to Western shipping and insurance companies. In the port of Novorossiysk, the proportion was even higher.
This is “good news amid bad news,” Mr Hilgenstock said. Moscow remains dependent on Western suppliers for its oil exports – despite its efforts to create a “shadow tanker fleet”.
"In principle, the mechanism for applying price ceilings remains intact," the expert said.
Until now, the EU has only required shipowners and insurers to provide a “certificate”, which shipping companies must use to ensure they comply with the oil price cap.
However, it is still unclear whether and to what extent the G7 governments have checked these certificates. If there have been violations, how many have been identified? How will these violations be handled?
The European Commission (EC) spokesperson said that the competent authorities in EU member states are responsible for this. At the same time, no EU member state has announced the initiation of proceedings against those violating the sanctions.
Hilgenstock and his colleagues calculate that if the price ceiling is strictly controlled, Russia will earn only $144 billion from oil sales in 2024. If the G7 countries lower the price ceiling to $50 a barrel, the country will earn only $64 billion from Urals and other oils.
"On the contrary, if regulations are not strictly enforced, the oil export sector could bring Russia up to $188 billion in 2024," Hilgenstock revealed.
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