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The Western price matching of Russian crude could have a catastrophic effect on Vladimir Putin’s finances and force the pariah state to impose austerity measures this year.
The price of the “Urals” benchmark grade of crude oil exported from Russia has fallen steadily since the cap went into effect on December 5. At that level, production can continue, but at a level closer to extraction costs. thus greatly reducing Russia’s profits.
“Urals crude oil prices have fallen sharply against Brent since the start of the G7 cap,” written by Robin Brooks, chief economist at the international financial industry lobby group IIF. “That’s good, because Putin has very little money to fight his war.”
Last year, the average price for the benchmark grade of “Urals” in Russia was $76.09 per barrel, the country. ministry of finance said last week.
The price dropped in December, however. In the first month of the cap, it fell to an average of just $50.47 per barrel, nearly a third from the same period last year.
Worse for Moscow, Urals crude oil recently traded at $38 —below the $40 threshold that many believe Russia’s production costs.
“The Ministry of Finance confirmed that everything about the prices in the Urals is not just bad, but very bad,” Cetrocredit Bank economist Yevgeny Suvorov. spoke to Times of Moscow. “$40 per barrel would be a real disaster for the budget and the economy… If it is clear that $45-50 is the new normal, the finance ministry should switch to an austerity regime this year .”
European problems
One of the problems facing Europe is how to end its reliance on Russian imports that fund Putin’s war effort at a time when the invasion itself is raising global energy prices and filling the Kremlin’s coffers.
An oil embargo effectively imposed by the EU did not help, as it was believed that Europe was importing crude oil from ships flying under neutral third country flags-or even the EU like Greece- which may have secretly mixed their shipments with millions of barrels of Russian oil for sale. of a war premium.
With Europe starving its economy of precious energy while Russia lines its pockets thanks to higher global prices, many critics argue that Western economic sanctions are back on.
Enter the price cap reached in the United States, Canada, France, Germany, Italy, Japanthe UK—as a whole, the G7 group of countries—as well as Australia.
It is designed to eliminate these sanctions backfire by allowing Russia to legally export oil via tankers operated or financed by western alliance companies—as long as it pays a maximum of $60 for per barrel. Importantly, the dominant shipping insurers are based in the G7 and Europe, which makes it extremely difficult for third countries to avoid this measure.
A separate price cap that applies to all refined petroleum products will begin on February 5, about three weeks before the anniversary of Putin’s invasion. This cap is expected to put more pressure on the Russian treasury.
“Fiscal policy will be difficult in 2023,” warned Natalia Orlova, chief economist of Russia’s Alfa Bank, in Times of Moscow.
However, not all experts agree that the price cap is the main reason for the sudden drop in the price of the Urals.
Janis Kluge from the German Institute for International and Security affairs argues that the EU’s oil embargo makes it more difficult for Russia to find sufficient replacement demand for its exports.
“Diverting the first million barrels per day of oil from the EU is possible,” he wrote, “but moving the second million barrels per day is more difficult.”
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