Europe is still struggling to get its members to sign on to a complete ban on Russian oil products as many countries are still highly dependent on Russian crude oil supplies.
The oil embargo was supposed to be the main punishment in the sixth package of sanctions recently approved, but the measures recently adopted have been eased and Hungary, Bulgaria and Slovakia have received waivers.
Moreover, even if the European Union bans Russian imports of oil completely, there is a significant leakage with the oil being placed in other markets in Africa and Asia that do not participate in the sanctions regime.
China and India currently receive half of Russia’s exports in unprecedented quantities, even if the total volume of Russia’s exports has significantly decreased.
The other problem is that restricting Russian exports will increase demand for non-sanctioned oil and inflate prices to the point where Russia can actually make more money from its reduced volumes than it did before the war at “normal” prices.
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Russia is currently running the largest ever currency account surpluses despite sanctions, self-sanctions, and a 30% discount on Ural oil blends. Implementing an already strict European oil embargo will almost certainly raise oil prices further.
To get around these problems, there are calls for a new strategy that does not have the unrealistic goal of blocking Russian exports altogether, but will instead attempt to lower the price of oil to hurt the Russian budget and also drain some of Russia’s profits.
He will earn in a fund, which will encourage the Kremlin to end the war and agree to pay reparations.
Despite the Russian invasion, oil exceeds $100 a barrel
On June 14, Naftogaz CEO Yuriy Vitrenko called for a price cap on Russian exports that would bring the market back to normal.
“In addition to the controversy surrounding the risks and benefits of various options for energy sanctions against Russia, I would suggest considering a new, or slightly modified, option of a ‘conversion cap’,” he said at a government hearing.
This mechanism will allow transfers in euros from European contractors to Russia only within a specified cap, and the difference between the full amount paid by traders and funds transferred to Russia will be frozen until Russia withdraws from Ukraine and pays compensation.
It should be set at a level that covers the opportunity costs of Russian producers, and is expected to be well below market prices.
We may see market trends opposite to current levels but positive for Ukraine and the free world as a whole. Russia will have to offer more to global markets while getting less than now because of the transfer cap; Vitrenko concluded that market prices will fall due to oversupply.
Recently published budget data from Russia’s Ministry of Finance indicates that Moscow will struggle to cover the increasing costs of the war, with military spending increasing nearly 130% in May alone to 630 billion Russian rubles ($10.2 billion), or 6% of annual GDP over the past year. Professional account.
Russia’s oil and gas revenues are increasingly important, and raising prices in the short term with an incomplete oil embargo will actually benefit the Kremlin, because it needs more money now to fund the fight.
If revenues are cut within 6-8 months, as is the case in the Sixth Package, the war may already be over by then and the Kremlin will be able to cut spending to counteract this.
The cost of a barrel of oil is $120 at the time of writing, well above the budget assumption of $42, and the Kremlin has earned quite significant excesses — magnified by the fact that imports have been cut in half, also due to sanctions.
However, recent budget data showed that Russia ran a fiscal deficit of more than 260 billion rubles ($4.7 billion) in April, or 2.5% of GDP, Gurev says.
Russia has been selling its oil at a huge discount – having accepted $70 a barrel of Urals in recent weeks, 30% below the market price – while overall production is set to fall by 10% this year.
Meanwhile, non-hydrocarbon revenue has fallen, leaving oil and gas taxes accounting for more than 60% of fiscal revenue, compared to less than 40% a year ago. In theory, cutting Russia’s ability to export oil should hit Moscow where it hurts.
The problem is that the embargo will help Putin in the short term. Just announcing that has already caused oil prices to rise which is why Europe must supplement its oil embargo with immediate additional measures.
