“Reshapes the principles of free markets”: the EU imposed an embargo and a price ceiling on Russian oil

On Monday, December 5, a partial embargo on oil imports from Russia came into force in the countries of the European Union.

The corresponding restriction was approved at the beginning of summer as part of the sixth package of EU sanctions against Moscow.

Now the EU states cannot buy Russian oil transported by sea, and from February 5, 2023, the ban will also apply to oil products.

This decision was taken by the authorities of the association to reduce their energy dependence on the Russian Federation and to put pressure on Moscow in connection with the events in Ukraine.

It is assumed that the embargo will affect approximately 90% of all oil supplies from Russia to Europe.

However, there are exceptions for some EU countries.

Thus, Bulgaria will be able to receive oil and oil products from the Russian Federation by tankers until the end of 2024, and Croatia will be able to buy vacuum gas oil from Moscow until the end of 2023.

It should be noted that back in the spring, the United States announced a ban on the supply of energy resources from Russia.

According to the White House at the time, Washington could afford to take such a step thanks to the country's strong energy infrastructure.

Moreover, the share of Russian oil products accounted for only 8% of US imports.

However, some time after the introduction of the embargo, consumers in the United States faced a rush increase in fuel prices and, as a result, a record acceleration of inflation in 40 years.

To combat rising prices, the US authorities had to use their strategic oil reserves, which by now have been depleted by about half.

Nevertheless, following the United States, the United Kingdom, Canada and Australia announced an embargo on the import of Russian hydrocarbons, and in June the European Union also decided to join the sanctions.

However, the EU was not ready for a sharp reduction in purchases, since oil from the Russian Federation provided more than a third of all the fuel needs of the region.

Against this background, Europe decided not to renounce pipeline supplies, but to introduce a transitional period of six and eight months, respectively, to ban the transportation of oil and oil products by sea.

According to the analytical agency Argus, over the past six months, most EU countries have already stopped buying tanker oil from Russia.

Meanwhile, some states of the association, such as Italy and Bulgaria, on the contrary, significantly increased imports in anticipation of the embargo, TASS writes.

Moscow, meanwhile, continues to redirect energy exports from the West to the East.

“We are actively redirecting oil transportation flows to Asia, primarily to China and India.

So, already in October 2022, Russia delivered 34% more oil to India by sea than to all EU countries, ”Natalia Milchakova, a leading analyst at Freedom Finance Global, said in a conversation with RT.

According to her, Turkey, Pakistan and a number of other states are also active buyers of Russian oil today.

Meanwhile, for the complete replacement of the European market, Moscow may need some more time, the analyst believes.

A similar point of view is shared by Igor Galaktionov, an expert on the stock market at BCS Mir Investments.

“A significant part of the supplies has already been redirected from the EU to Asia, but even up to 1 million barrels per day remain in limbo.

Most likely, Russia will have to cut production somewhat for the time being.

In Europe, our oil will replace raw materials from other suppliers, but the loss of Russian supplies may threaten the EU with increased fuel costs, ”RT’s interlocutor suggested.

As Natalya Milchakova recalled, in previous years, the EU has significantly reduced investment in oil production and actively promoted the abandonment of fossil fuels in favor of a transition to green energy.

Along with this, the EU joined the energy embargo against Iran and Venezuela.

As a result, now, after the almost complete withdrawal of Russian raw materials from Europe, the countries of the region will buy less oil and at higher prices, the expert is sure.

“It is practically impossible to refuse oil from Russia and not experience problems at the same time - not because our raw materials are irreplaceable, but because in general there will be less oil on the world market now.

OPEC countries will undoubtedly be ready to increase supplies to Europe, but prices will also be higher.

Saudi Arabia, the UAE and other Middle Eastern states will now begin to compete more actively with Russia in the Asian market, so it’s not worth expecting that OPEC will fully provide Europe with oil and prices will fall,” the expert explained.

Ceiling of discord

Simultaneously with the ban on tanker transportation, on December 5, the European Union introduced a ceiling on oil prices from Russia.

This measure is provided for by the eighth package of sanctions against Moscow, approved in early October.

As part of the initiative, European companies will be prohibited from insuring and transporting raw materials from the Russian Federation by sea to third countries at a price higher than $60 per barrel.

As in the case of the embargo, from February 5, 2023, a similar restriction should come into effect in relation to Russian oil products.

Brussels' innovation has a transitional period of 45 days for sea-supplied Russian oil.

We are talking about ships loaded before December 5 and unloaded at the port of destination before January 19.

In turn, the ceiling price is planned to be reviewed every two months and set at least 5% below the market price.

“The price ceiling acts as an addition to the European embargo.

In fact, the EU introduces this restriction not for itself, but for the world market.

This restriction limits the work of insurers and carriers.

That is, now they must have a certificate in their hands that the oil was bought below the ceiling, and they have the right to transport and insure it, ”Igor Yushkov, a leading analyst at the National Energy Security Fund, explained to RT.

• RIA News

• © Vitaliy Timkiv

Note that the idea of ​​a price ceiling also belongs to the United States.

For the first time, the corresponding proposal was announced in May by the head of the US Treasury, Janet Yellen.

As the minister explained, the establishment of the marginal cost of raw materials will limit Moscow's excess profits from the sale of hydrocarbons and will have a positive impact on the entire global energy industry.

In early autumn, the initiative was supported by all the G7 countries (USA, Canada, France, Germany, Italy, Japan and the UK), and later Australia and the European Union decided to join the restriction.

At the same time, it is curious that the parties could not agree on the price ceiling itself for a long time.

So, if the majority of EU members were in favor of a limit in the range of $65-70 per barrel, then, for example, Poland insisted on reducing the figure by more than half - to $30.

Ultimately, on December 2, the EU, the G7 and Australia announced plans to introduce a price ceiling of $60 per barrel.

It is noteworthy that in Ukraine they were dissatisfied with this decision and called it frivolous, but in the United States they considered the restriction fair.

“The price is set at a level that Russia has historically considered acceptable: that is, it is higher than the cost of production and is comparable to the prices at which Russia sold (oil. -

) before the conflict in Ukraine,” the US Treasury explained.

According to the agency, companies from the G7 countries now control 90% of the shipping market.

In this regard, Russia has two options, the ministry believes: either sell oil within the approved limit through G7 service providers and remain on the world market, or turn to third-party conductors, who are allegedly less reliable and more expensive, limiting sales volumes.

"We are working on the mechanisms"

Earlier, the Russian authorities have repeatedly stated that, regardless of the level of the price ceiling, the country will not sell oil to those who support the restrictions.

On December 4, Deputy Prime Minister Alexander Novak confirmed that Moscow's position on this issue remains unchanged.

“This instrument is non-market, inefficient… contrary to all the rules – the same WTO, for example.

In our practice, we are not going to use tools related to price cap (price ceiling. -

).

To do this, we are now working on mechanisms to prohibit the use of the price cap tool, regardless of what level will be set,” Novak said on the air of the Rossiya 24 TV channel.

Attempts to limit the cost of raw materials could further destabilize the global oil and gas industry, he said.

Russia, in turn, will sell raw materials only to those countries that work on market conditions, even if they have to cut production somewhat, the Deputy Prime Minister added.

• RIA News

• © Pavel Bednyakov

As early as September, President Vladimir Putin warned of halting oil supplies to countries imposing price restrictions.

As the head of state emphasized, Russia is ready to fulfill its contractual obligations to energy buyers, but if the political decisions of the West contradict the agreements and interests of Moscow, the trade in raw materials will stop.

“Absolutely stupid decision.

If someone tries to implement it, it will not lead to anything good for those who make this decision ... Those who impose something on us are not in the position today to dictate their will to us, ”Putin warned.

Later, the Russian leader said that Moscow would not act to its own detriment and pay for someone else's well-being at its own expense, and the initiatives of the West would only worsen the investment climate in the world energy sector and provoke an increase in the global oil shortage.

As confirmation of his position, the President cited the words of the famous American economist, Nobel Prize winner Milton Friedman.

“If you want to create a shortage, for example, of tomatoes, then you just need to pass a law that retailers cannot sell tomatoes for more than two cents a pound.

You will immediately get a shortage of tomatoes.

It's the same with oil or gas," Putin quoted Fridman as saying.

• RIA News

• © Mikhail Metzel

As stated in the Russian embassy in the United States, by introducing a price ceiling, the West is "reshaping the basic principles of the functioning of free markets."

The result of such steps will be a widespread increase in uncertainty and an increase in costs for consumers of raw materials, the diplomatic mission is sure.

According to diplomats, Russian oil will continue to be in demand on the world market anyway.

At the same time, the European continent is now starting life without the supply of hydrocarbons from the Russian Federation, as stated by Russia's permanent representative to international organizations in Vienna, Mikhail Ulyanov.

“From this year Europe will live without Russian oil.

Moscow has already made it clear that it will not supply oil to those countries that maintain an anti-market price ceiling.

Just wait.

Very soon the EU will accuse Russia of using oil as a weapon,” he wrote on Twitter.

Workaround

According to Igor Yushkov, if Russia reduces production, there will be less oil on the global market, and world prices will rise.

As a result, Europeans will have to buy raw materials at an even higher cost from other suppliers.

In addition, some companies in the EU will suffer serious losses, as they previously earned on the transportation and insurance of Russian oil, the expert noted.

“Russia will not agree to a ceiling, even if it is high.

Everyone understands that the West can promptly revise the limit: today it is $60 per barrel, and tomorrow it will be $40.

If we make concessions at least once, other export goods may also fall under such regulation, ”added Yushkov.

In his opinion, Russia still managed to partially prepare for the oil price ceiling from the West.

So, according to the Financial Times, Moscow could buy more than 100 tankers to send raw materials to China, India and Turkey.

The main intrigue now is whether Russia already has enough tankers, the expert believes.

In addition, according to him, the country needs to agree with oil buyers that the raw materials will be transported by ships that do not follow Western sanctions, and Russian companies will insure the cargo.

“Of course, importers of our oil may demand an additional discount for inconvenience and risks.

However, there will be no mass rejection of Russian raw materials and a catastrophic collapse in exports.

Nobody is interested in this,” Yushkov explained.

A similar point of view is shared by Natalya Milchakova.

According to her, the key consumers of Russian oil represented by China, India and Turkey have already refused to join the price ceiling.

“The most important thing now is to create a new shipping infrastructure oriented to the East.

Most of Russia's oil terminals have so far been in the Baltic Sea.

This means that we will have to invest in the construction of terminals in other export directions, alternative to the western one,” Milchakova concluded.