“In reality, it will not be respected”: the EU approved the introduction of a price ceiling for Russian oil

On Thursday, October 6, the European Union approved the eighth package of economic sanctions against Russia.

This is stated in a statement published on the website of the Council of the EU.

“We are hitting Russia's war economy even harder, limiting its ability to import and export, and are moving at an accelerated pace towards becoming free from dependence on Russian energy,” said Josep Borrell, head of European diplomacy.

Restrictions, in particular, provide for the creation of a legal framework to limit the cost of Russian oil.

As part of the initiative, it is planned to ban European companies from transporting raw materials from the Russian Federation by sea to third countries at a price above a certain limit.

The price ceiling itself has not yet been unanimously approved by all EU countries.

Nevertheless, from December 5, the corresponding transportation ban should come into effect in relation to Russian oil, and from February 5, 2023, it should also apply to petroleum products.

“The price limit will sharply reduce Russia's revenues from the sale of oil ... Also, the restriction will help stabilize world energy prices,” the EU Council believes.

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Recall that earlier the EU states, following the United States and Great Britain, decided to impose a ban on the import of Russian oil.

It is assumed that the restriction will fully enter into force on December 5, but will only apply to sea shipments, and not pipeline shipments.

Nevertheless, on the eve of the embargo, Europe has already significantly reduced the volume of oil purchases from Russia.

Thus, in the first eight months of 2022, the export of raw materials from the Russian Federation to the EU countries and the UK fell by more than 34% - from 2.6 million to 1.7 million barrels per day.

This is evidenced by the materials of the International Energy Agency (IEA).

At the same time, Moscow continued to receive a high volume of income from the sale of oil due to increased prices for raw materials and the reorientation of supplies to friendly countries.

According to the Ministry of Finance of the Russian Federation, from January to September 2022, Russia earned 7.57 trillion rubles from the export of oil and petroleum products, which is 49% more than in the same period of 2021.

As a result, back in the summer, European countries, together with the United States, thought about limiting the cost of Russian oil.

However, according to the government of the Russian Federation, such actions violate all market mechanisms and risk turning into an even greater rise in fuel prices on the global market.

“If you want to create a shortage in the world market of one or another product, for example, oil, oil products, then be sure to introduce a price limit ... Today, unfortunately, politics prevails over the economy, and such inefficient decisions lead to the fact that there will simply be a rise in prices and the consumers of these countries will pay for it,” Russian Deputy Prime Minister Alexander Novak said on October 5 following the results of the OPEC + negotiations.

A similar point of view was previously voiced by Russian President Vladimir Putin.

In his opinion, attempts to limit prices have no prospects, since Moscow is not going to trade according to the rules imposed on it and sell oil at a loss.

Against this background, the head of state urged Western partners to come to their senses.

“Absolutely stupid decision.

If someone tries to implement it, it will not lead to anything good for those who make this decision... We will not supply anything if it is contrary to our interests, in this case, economic ones.

We will not supply gas, nor oil, nor coal, nor fuel oil - we will not supply anything ... Those who impose something on us are not in the position today to dictate their will to us, ”Putin warned in September at the Eastern Economic Forum.

Curiously, in Europe itself, the big energy business is skeptical about plans to limit the price of Russian oil.

For example, the head of the French company TotalEnergies, Patrick Pouyanne, considers the EU initiative unsuccessful, writes Bloomberg.

“I think it's actually a bad idea.

In essence, this is a way to return leadership to Vladimir Putin, and I would never do that,” Pouyanne said on October 5 at the Energy Intelligence Forum in London.

"There are many ways to get around"

As Mark Goykhman, chief analyst at Teletrade, told RT, the price ceiling has never been used in world trade before and it will be almost impossible to implement this decision.

The new restrictions do not apply to the EU countries themselves, since the EU plans to completely abandon the purchase of Russian oil.

Meanwhile, other states - consumers of raw materials are unlikely to support this initiative, the expert believes.

“The main alternative buyers of Russian oil, in particular India and China, do not express their readiness to participate in such plans.

At the same time, the OPEC countries oppose the price ceiling for Russia, as they fear that similar measures may be taken against other exporting states in the future,” Goykhman explained.

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Moreover, according to the expert, today companies from Greece, Cyprus and Malta occupy leading positions in sea transportation of oil, and after the price ceiling is set, Moscow can completely refuse their services.

In this case, all three European countries risk losing a significant source of income.

“Most likely, in reality, the price cap will not be respected by companies.

If European carriers begin to adhere to the new EU requirements, their profits will gradually begin to pass to companies from other countries - Asia, Latin America and Russia itself.

It is extremely problematic to control compliance with the terms of the agreement, there are many ways to bypass them explicitly or implicitly,” Mark Goykhman added.

The very decision of the European Union to refuse to buy oil from Moscow, experts interviewed by RT, also consider it risky for the EU.

As Freedom Finance Global analyst Vladimir Chernov explained, many refineries in Europe can only work with Russian raw materials due to the peculiarities of its composition, and re-equipment of enterprises is costly.

“In addition, after the embargo is introduced, the cost of oil may rise, and various ways to circumvent sanctions will still allow the Russian Federation to earn super profits.

With increased world prices, Moscow can increase the discount for other buyers and still remain in the black.

So, for example, India, due to the discount, can significantly increase the volume of oil purchases from the Russian Federation and, after processing it at its refineries, resell it to the same EU countries, but already at market prices, ”Chernov explained.

According to Mark Goykhman, sanctions against Russia in the energy sector can lead to an increase in the price of raw materials on the world market from the current $93-94 to $130-140 per barrel.

This, in turn, will lead to an even greater acceleration of inflation in the EU, an increase in the costs of business and the population, which will be a blow to the region's economy, the specialist is sure.

Mountain of prohibitions

In addition to the oil price ceiling, the new package of sanctions includes a ban on imports to the EU of a range of Russian products worth €7 billion. Restrictions, in particular, apply to steel, timber, paper, equipment, cigarettes, plastics, cosmetics and jewelry industry.

At the same time, there is a ban on the export from Europe to the Russian Federation of coal, chemicals, equipment for the aviation industry, as well as electronic components used in Russian weapons.

In addition, EU citizens are no longer allowed to hold senior positions in state-owned companies in Russia, and European businesses are prohibited from providing financial, engineering, architectural, legal and IT services to the Russian Federation.

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Along with this, the European Union has banned all operations with the Russian Maritime Register of Shipping.

Also, Russians are no longer allowed to own crypto wallets in the EU.

“Of all the above restrictions, most likely, the sanctions regarding the supply of solutions for the IT industry to our country have the greatest negative impact on Russia.

For example, in the mining and exploration sector, about 90% of our equipment and technologies are imported.

However, for other areas - the financial sector or retail - these sanctions will not be so tangible, since we have our own analogues, ”said Artyom Deev, head of the AMarkets analytical department, in a conversation with RT.

According to the expert, another challenge for Russia may be a ban on the export of metallurgy products.

In this case, companies will have to reconsider their logistics and redirect metals and metal products to other markets.

However, the demand for these products in the world remains high, so the Russian business will eventually be able to completely replace European buyers, Deev is sure.

“As for the ban on the use of crypto wallets, this year they were used more actively to circumvent sanctions, when foreign payment systems ceased to operate in the Russian Federation and sanctions were imposed against Russian banks.

However, these restrictions will affect only a small stratum of the country's population," the expert concluded.