Price cap for Russia: how new EU restrictions will affect kremlin policy

Currently, several EU countries are demanding that the limit be set at a level that would be higher than the current average price of Russian oil.

This week, as millions of Ukrainians are left without electricity, heating and internet due to Russia’s brutal missile attacks targeting critical infrastructure, the EU is considering a decision that could significantly weaken the Kremlin’s position and hit federal budget revenues.

It is about introducing, together with the G7 countries, a price limit for Russian oil transported by sea around the world.

Russia is now more dependent than ever on revenues from oil exports.

As other tax revenues fell due to the impact of sanctions on the economy of the aggressor country, revenues from natural gas exports also declined due to the suspension of supplies for economic pressure and blackmail attempts.

But at the same time, more than half of Russian oil is transported by tankers owned by European companies or insured in the EU and G7 countries. Therefore, the West has all the means to “screw” the flow of oil dollars to the Kremlin – by introducing a price limit (price cap) for sea supplies.

When the selling price of Russian oil approaches the cost of production, the supplying companies have no profits left for the Kremlin to tax and use to finance war.

Therefore, along with the ban on imports into the EU, which will take effect on December 5, limiting the prices of Russian oil on world markets is the most effective way to reduce the money flows that make war possible.

Currently, several EU countries are demanding a cap at a level that would be higher than the current average price of Russian oil.

In this case, the effect of reducing Russian income will be insignificant or even close to zero, and the EU will show its weakness and inability to give a timely and tough rebuff to Russia with economic instruments.

This is infuriating, because it is clear that the main risk for the world economy, for Europe and, above all, for Ukraine is to allow the war to drag on with half-measures.

It is in the interests of the EU and the entire democratic world to help Ukraine defeat Russia as soon as possible and as decisively as possible.

Since the start of the full-scale invasion, Russia has cut supplies to use fossil fuels as a weapon, leading to rising prices and energy poverty in the EU. Despite the drop in oil and gas exports, Russia continued to receive surplus profits.

This could have been prevented if the EU had previously introduced carefully calculated sanctions against Russian energy carriers. Only in October did Russia’s oil and gas export earnings begin to decline to levels lower than 2021 sales.

Now Ukraine’s closest allies – Poland and the Baltic states – are demanding a strict price limit close to the marginal cost of oil production in Russia. Currently, there is an urgent need for more countries to support this position and demand a further gradual reduction of the price cap from the initial level.

Other partner countries, in particular Germany and France, should also take this position in internal discussions in the EU. European leaders must overcome their fear and do what is necessary to cut off the terrorist country’s key source of income.

The long-term price limit for Russian oil should be $30-40 per barrel, but it is advisable to start with $50 and reduce the price cap in the following months. At current levels of taxation in the Russian Federation, production is likely to be unprofitable for oil companies at a price below $50.

The idea is that the price cap should force Russia to lower tax rates for oil and gas companies and, accordingly, revenue for the treasury.

Instead, a price cap at the level of $60, which is the average price of Russian oil over the past 10 years, would also be a step forward in limiting revenues to Russia’s federal budget, albeit a small one. But a gradual reduction of the price limit from the initial level should be established in any case.

The current opportunity for a significant strengthening of sanctions should be used to the maximum.

We know that no arguments other than force, including economic ones, work against a terrorist state. If the EU countries really want to stop the war, they should set a strict price limit on Russian oil.