en months after the Ukraine war broke out, Western countries led by the U.S., the EU, and the UK decided to limit Russian oil and gas revenues to weaken its war machine. On December 2, the G7 and Australia agreed on a $60 per barrel price cap on Russian seaborne crude oil. And on December 19, the EU energy ministers enacted a gas price cap. The decisions were argued hard as the former directly targeted Russia while the latter did not explicitly do so. What is a price cap, and what do the G7 and the EU aim to achieve through it? What are the prospects of the EU’s objectives, and will they be successful?
The price cap is a mechanism that sets a maximum price that oil and gas suppliers are able to charge their consumers. The aim here is to regulate suppliers, not hydrocarbon producers, the EU argues. Yet, in the Russian case, it is the Kremlin acting as the producer and the supplier of oil and gas. Thus, Russia’s hydrocarbon revenues are the target. The price cap applied by the G7 and Australia allows operators from participant countries to transport Russian oil to third countries if the price remains below the $60 per barrel cap. Although the EU previously banned the maritime transport of Russian crude oil as of December 5, 2022 and oil products as of February 5, 2023 to third countries, the new decision permits shipowners and insurance companies to continue to earn money from shipping Russian oil. Undoubtedly, Greek shipowners benefit the most in this case since they conduct more than 50 percent of Russian oil shipments, while Russians and Chinese follow the Greeks with lesser shares, 20 percent and 6 percent respectively.
The energy ministers of EU member states agreed on a gas price cap on December 19. The cap will be triggered when gas prices on the Dutch TTF exceed €180 per megawatt hour for three consecutive working days and if they are higher than global gas prices by more than €35 per megawatt hour for the same period. Their aim was to control prices while ensuring the security of the gas supply. Undoubtedly, harming the Russian budget via gas revenues to stop the Ukraine war is also an unspoken desire since the EU is also importing LNG from Russia. Starting on February 15, 2023, the mechanism will be valid for a year. The Czech presidency led the process, and Poland, from the very beginning of the war, pushed hard to convince other EU members to take measures against the Russian aggression.
Yet, whether the price cap mechanism fully prevents the imports of Russian oil in Europe or elsewhere in the West remains a big question. As Moscow started to discount the Urals and its other benchmarks, Asian countries’ appetite for oil began to be fed by cheaper Russian crude, and they became the leading beneficiaries of Western sanctions. Before the Ukraine war broke out, from January 2021 to February 2022, China, for instance, imported about 590,000 barrels of Russian crude oil per day – between March and December 2022, the imports increased to 857,000 barrels per day.
India, another example, has been importing Russian crude at record levels and then processing it in refineries to procure petroleum products. These products are not only sold to the domestic market, but there are also buyers from Western countries. According to the data from market insiders, after the beginning of the Ukraine war, India began to import higher amounts of Russian crude. Although the imports were zero in February 2022, they reached almost one million barrels a day in June and continued so.
In December 2022, about 25 percent of India’s crude oil imports were from Russia, and in January 2023, India’s imports of Russian crude reached more than 1.5 million barrels a day. No one thinks that all the imported oil is marketed at the national level. This is similar to what Iran and Malaysia do. The U.S.-sanctioned Iranian oil is marketed through Malaysian refineries: they buy Iranian crude and then sell it as petroleum products to the world markets after refining.
Moreover, the Kremlin’s decision to limit gas flows to Europe in response to the EU’s ban on Russian coal and crude has pushed European importers to buy more Russian LNG. In 2022, European countries imported around 17 million tons of Russian LNG, which was 20 percent more than the 2021 volumes.
Still, indicators show that Russian oil revenues are going down, especially since June 2022. Although Russian oil is still flowing through the global market, the Kremlin is making less money from its oil due to its compulsive discounts. The Russian oil export revenues hit the highest for 2022 at $21.5 billion in March and then recorded the lowest in December at $12.6 billion. The most marketed Russian benchmark, Urals, was traded at around $50 per barrel when Brent was above $75.
Meanwhile, revenues are predicted to decrease more as the G7 and the EU have been discussing another price cap for Russian petroleum products compatible with the bloc’s ban starting on February 5. Yet, it is commonly believed that neither Europe nor Russia would be the real victims of the energy war between the West and Russia. Rather, the import-dependent and less-developed countries are expected to hurt the most as prices fluctuate more. Meanwhile, Russia continues to sell its oil to non-European markets, and Western countries began importing their oil needs from the Middle East and the Americas.