Andrey Maslov: ‘Russian oil supplies to the EU will technically continue’

“Russian oil will find buyers in the West, but at a modest price”

The price ceiling and the embargo on Russian oil have been on the agenda for a long time and have been in the headlines since the summer. However, precisely because of the long discussion and the general fatigue of investors and analysts from the promises of the G7 and the EU, the price ceiling and the embargo on oil from Russia supplied by sea failed to lead to a serious impact on the oil market. An important role here has been played by the decision of OPEC+ to reduce the production of black gold, which supported oil prices. The Russian currency has been still under some pressure after December 5, but the fall was not so serious.

We also recall that, although Russia uses sea routes for the delivery of energy carriers, pipeline supplies absolutely dominate over any other means of delivering energy resources (this applies to both oil and gas). Therefore, one cannot expect much damage to the Russian economy from the embargo on Russian oil supplied by sea — rather, it is just another pressure factor, which is certainly unpleasant, but still not critical.

Even if Russia creates a “shadow fleet”, it is problematic to fight

With regard to the price ceiling from the Group of Seven, Australia and Norway, everything is more complicated here. The countries have agreed on quite serious fines for those who violate this ceiling. This can really lead to that the countries that have agreed to the price ceiling will comply with the conditions. However, there are two main problems that can lead to a significant decrease in the effectiveness of this measure. The first is the shadow supply of Russian oil, which continues and increases, since it is quite problematic to trace the origin of oil on the open sea. It is banal to pump black gold from a tanker to a tanker in the ocean (the undertaking is, of course, risky, but quite feasible), turn off the tracker, mix oil with producers from other countries, and use other vulnerabilities in the maritime supply system. Now many media outlets are saying that Russia is creating a “shadow fleet”, but even if this is the case, it is extremely problematic and costly to deal with such a phenomenon.

The second and, perhaps, at the moment the main factor, is the price itself. It is too high for Russian oil and does not make sense, since Urals is trading at a level close to $55 per barrel, which is already below the established ceiling of $60 per barrel. Given the huge discounts for buyers of Russian oil of 20-40%, in reality, black gold from Russia is sold for $40 per barrel. Although this cost is almost 2 times less than the market price of the same Brent, WTI or Arab Light, it is still higher than the cost price for many companies and will continue to bring money to both Russian mining corporations and the Russian budget.

If we talk about figures, the following prerequisites are laid down in the federal budget for 2023 — the price of Urals oil is about $70/bbl, production volumes are about 10 million barrels/day, average annual dollar exchange rate is 68,3 rubles. At the same time, the oil and gas revenues of the budget should amount to 8,9 trillion rubles, which is by 23% lower than the expected oil and gas revenues of the current year. The planned budget deficit next year is 2,9 trillion rubles (about 2% of GDP). A decrease in the oil price from $70/bbl to $60/bbl, while maintaining the same production volume, may lead to a reduction in oil and gas budget revenues by about 1 trillion rubles. The expansion of the budget deficit in this case can be financed by an increase in borrowing and/or an increase in the expenditure of the NWF, this can be considered as a pro-inflationary factor that will negatively affect the ruble exchange rate.

In general, we will find out the effect of the embargo and the ceiling on Russian oil prices, most probably, in the second quarter of 2023, when it becomes clear how much oil production in Russia has fallen in numbers and how much less petrodollars have been received by the country. Still, there are some oil producers for whom the price of about $40 per barrel is already critical, and some drilling rigs may start to be put on standby from this level, and not all of them can be restarted.

We would note that other countries that continue to buy Russian oil can take advantage of the current situation (or have already taken advantage of it), since the embargo and the price ceiling provide leverage on Russian suppliers. Turkey has recently announced that it expects discounts on Russian oil by 25%, and although no statements were made from India and China, most likely these countries will also blackmail Russia by refusing to supply oil from Russia without additional discounts. In general, this may lead to a serious “shortage” of petrodollars in the Russian budget in 2023, but too much now depends on diplomacy and decisions of specific individuals regarding the geopolitical situation.

Russia's dangerous countermeasures

In conclusion, we can separately mention the “countermeasures” that can be taken in Russia and which can also hit the country's economy. Three possible options are currently being discussed:

1. Complete ban on the sale of oil to states that supported the restriction, including if they purchase raw materials from Russia not directly, but through intermediary countries. This option is not economically profitable and unlikely, but still important for the “image” component of the Russian Federation.
2. Determination of the maximum discount on Urals to Brent reference grade. In an attempt to increase the discount, the sale will be prohibited. This is also a working option for building a trade. Its advantage can be attributed to that buyers from “friendly” Asia will not get leverage on Russia and will not have opportunity to demand even greater discounts. However, not to put pressure on the Asian partners themselves, this option is also less likely.
3. The ban on exports under contracts where the price ceiling condition is included, regardless of which country is the recipient, is a very moderate topic, since any cautious definitions can be written in contracts.