Russian President Vladimir Putin signed a decree forbidding oil trade with countries that supported imposing a price restriction on Russian crude and petroleum products.
The order will be in force beginning on February 1 and last until July 1, 2023.
Russian revenues dropped due to Western sanctions
For the first time in public, Russian authorities acknowledged on December 26 that Western sanctions and the price cap had hurt the country’s oil exports.
Alexander Novak, a former energy minister and deputy prime minister claimed that Russia has problems with the insurance of oil-exporting vessels, the Russian state agency Tass reported.
Russian oil price ceiling approved by the EU
The price ceiling of $60 per barrel agreed by the European Union, G7 and Australia came into force in early December and sought to restrict Russia’s revenue while ensuring Moscow keeps supplying the global market.
The sale of Russian oil above the cap will deprive western firms of the possibility to render services accompanying the export of the commodity, such as the insurance of ships, financing deals, ship chartering, consulting, and numerous others.
What restrictions does the Russian decree apply?
The restriction applies to “supply contracts that directly or indirectly use the mechanism of setting a price cap,” the presidential decree said. “The ban is in force at all stages until the final buyer.”
The general guidelines avoid extreme measures that the market feared would further upend trade, such as designating a minimum price for its crude or bans on specific countries from buying Russian oil.
Most trade can proceed regardless of the restriction
The market price for Russia’s flagship crude is already trading below the $60-a-barrel threshold set by the European Union and G-7, meaning most trade can proceed regardless of the restriction. The US and the European Union have already halted purchases, suggesting the decree’s initial impact may be limited in scope.
“The decree is too vague,” said Viktor Katona, an analyst at Kpler. And it “does not include any of Russia’s signaled countermeasures, like setting a minimal price differential.” It mainly serves as a framework document, he said.
Russian President Putin’s decree charges the government with preparing further legal acts to counteract the Western price cap.
Russia will watch developments in the global oil market in the first quarter of 2023 to see the impact of the price cap before deciding whether to take any further retaliatory measures, such as a price floor, people familiar with discussions said earlier this month.
The market has been waiting for Moscow’s response to the $60-per-barrel cap since December 5., when the Group of Seven industrialized nations’ limit on Russian seaborne crude exports came into force.
Oil price restrictions aim at stopping Russia’s war
The price cap means anyone wanting to access an array of vital western services, especially insurance, can only do so if they pay $60 or less. The step was aimed at curtailing revenue the Kremlin is using to fund its war against Ukraine and, at the same time, keep the crude flowing to the global market. The price level will be reviewed every two months.
Russia has said the cap would not affect its military campaign in Ukraine and expressed confidence it would find new buyers.
In mid-December, reports revealed that the average price of the Urals, the primary grade of Russian oil, fell below the cap established by the Western coalition. From November 15 to December 14, 2022, the average price of Urals oil was $57.49 per barrel or $419.7 per ton.
The cap on Russian oil prices came into effect on December 5, 2022. This means the Western coalition has already achieved its expected result: Russian oil is sold at $2.51 cheaper than the established threshold.