Russia Leaves Options Open for Tougher Response to Oil Cap

Russia Leaves Options Open for Tougher Response to Oil Cap
The Kremlin has left itself room for a tougher stance.

On the face of it, Vladimir Putin’s response to the G-7 cap on Russia’s oil prices looked in line with his previous pledges and did nothing to disrupt global crude supply. But the Kremlin has left itself room for a tougher stance.

The decree, signed on Tuesday, bars supplies of nation’s crude and fuels to foreign buyers that adhere to the threshold in their contracts. At this stage, it seems a symbolic act given that countries that signed up mostly stopped purchasing already.

But the decree applies to supply contracts that are “directly or indirectly” using the mechanism — language that can be interpreted widely. It applies to existing deals as well, if they contain reference to the cap, according to Kremlin’s spokesman Dmitry Peskov. 

Putin ordered his cabinet of ministers to prepare “legal acts aimed at implementing the ban” as well as set “the procedure of monitoring the implementation.” 

Given that presidential restriction on Russian crude exports will begin on Feb. 1 and Russia’s winter-holiday break is set to last until Jan. 9, the government has a few weeks to consider further retaliatory steps. The cabinet of ministers will also have to determine a date for the ban on oil products to start as well as the list of those products.

The government will watch the oil market in the first quarter before deciding whether to take any further retaliatory measures such as a price floor for its crude, people familiar with discussions said earlier this month. 

Risky Decision

Whatever it might do though, for it to have impact, Russia may need to weigh up cutting its own production against the potential for extra revenue from higher prices. It’s a risky decision.

The “Russian response to the oil price cap and imports ban will be largely symbolic” amid its dependence on petrodollars to fund imports and thus keep inflation in check, according to Alexander Isakov, Russia and CEE Economist for Bloomberg Economics. 

Cutting the nation’s crude production could push the breakeven oil price even higher — from $95-100 a barrel this year compared with $60’s last year — thereby “making Russia’s fiscal system that much more fragile,” he said. 

In 2023, oil and gas revenues are expected to make roughly a third of Russian budget revenues. 

Nevertheless, it’s worth remembering that shipping and trading companies already faces a lot of hassle in shipping Russian oil because of western sanctions. There have already been signs of an impact on the nation’s exports. 

For some of those firms, this is just another small reason to be a little wary.


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