Brussels intends to lower the price ceiling for Russian oil: what are the threats of new restrictions

The European Union intends to propose to the members of the international club G7 to reduce the price "ceiling" on oil exported by our country from $60 to $45 per barrel, introduced three years ago. Such a reduction in the cost of the Russian "barrel" will not become a serious problem for the domestic budget, but it can significantly accelerate oil prices. Which, in turn, can lead to a global deficit of energy resources on the world market.

Oil under the "ceiling"

So far, the initiative to further limit the price of Russian oil has only been agreed upon at the latest meeting of G7 finance ministers, which took place on May 20-22. As Reuters reports, at the meeting, the European Union proposed to the other G7 members to reduce the price of Russian seaborne oil from $60 to $50. The communique published following the summit noted the importance of reducing Moscow's income from the sale of energy resources used to support the Russian military-industrial complex and limiting the expansion of our country's production capacity in the future. The authors of the document stated that they "will vigorously seek to comply with the oil price ceiling <...> and decisively respond to violations of the approved regime by buyers and other entities that allow sanctions to be circumvented." A day after the meeting in Canada, as Bloomberg reports, EU authorities began consultations within the union regarding lowering the cap to $45.

The current "ceiling" on the cost of "black gold" supplied by Russian producers abroad came into force at the turn of 2022-2023 after the European Union introduced an embargo on seaborne hydrocarbon supplies from our country. According to the G7 decision, the maximum cost of raw materials exported by Russia was limited to $60 per barrel. Western companies were prohibited from issuing insurance policies, and shipowners were prohibited from transporting raw materials exported at prices above the proposed level. At first, such a sanction turned out to be very effective. According to the Finnish Center for Research in Energy and Clean Air CREA, Russia's daily losses from the introduction of the limiting price amounted to about $175 million. In turn, the International Energy Agency (IEA) calculated that in January 2023, Russia's income from the "ceiling" fell by 30% or $8 billion in annual terms.

But after several months, the situation changed dramatically. Russia was able to form a so-called "shadow fleet" consisting of both its own tankers and ships of those international ship owners who were not afraid to transport "toxic" raw materials from our country. At the same time, energy consumers, primarily from the Asia-Pacific region, came to the conclusion that purchasing cheaper Russian raw materials than from other suppliers was much more profitable than refusing our hydrocarbons due to fears of secondary sanctions that the West threatened to impose. Moreover, even some representatives of Europe decided to resume importing Russian oil in previous volumes. Accordingly, the export revenue of the Russian budget began to recover.

Feeling that the introduced restrictive measure had ceased to have the desired effect on Russia's income, the EU members have repeatedly tried to tighten the "ceiling", but it never came to any real decisions. The leaders of the Old World have always been worried by forecasts that additional restrictions on the export price cap would cause a global deficit of raw materials on the world market and a rapid increase in energy prices. Now, it seems, such concerns no longer displace Brussels, unlike Washington, which has called the reduction of the price "ceiling" a useless and meaningless exercise.

Calculation of losses

According to financial analyst Igor Rastorguev, formally lowering the ceiling to $45 per barrel could reduce foreign exchange earnings from Russian oil exports, especially if the mechanism is strictly observed. However, in practice, significant losses may not occur.

"Our country has long been focusing on alternative markets, and key buyers - such as India, China and Turkey - do not participate in the sanctions coalition and conduct settlements using bilateral schemes, often in national currencies," the expert explains. "At the same time, we should not forget that large buyers of Russian Urals export oil are already receiving a discount on raw materials, which compensates for possible logistical or legal risks. Therefore, additional pressure on such importers from the EU or the G7 does not particularly impress them and is unlikely to force them to give up cheap and accessible raw materials."

Russia will still refuse to export oil under Western price “ceilings,” says Natalia Milchakova, a leading analyst at Freedom Finance Global. “It is possible that discounts will have to be made to preserve the existing circle of energy importers and sell raw materials with a relatively small premium to the “ceiling.” However, lower oil and gas revenues in 2025 are expected due to lower market quotations for “black gold” and have already been included in the budget. The share of Russian supplies on the world market is still high. According to earlier forecasts by the Ministry of Economic Development, oil exports from Russia in 2025 will decrease by 3% to 230 million tons. It is quite possible that if a stricter price “ceiling” is introduced, then shipments of raw materials from the Russian Federation abroad will decrease by another 2-3%,” the expert believes.

According to economist and top manager in financial communications Andrey Loboda, it is obvious that in conditions when the quotes for the North Sea Brent brand fluctuate around $63-64, and the cost of the Russian export grade Urals, taking into account the traditional market discount, barely reaches $50-52, lowering the price cap by an additional $10-15 will not be a painful blow to the federal budget. Moreover, external revenues from the hydrocarbon sector of Russia have already been adjusted downwards. It can be assumed that the flagships of the European Union are trying to act proactively, anticipating the upcoming sharp rise in the price of a barrel by 20-30%. Then changing the parameters of the price "ceiling" will really become a productive and extremely tough sanction measure against Moscow. However, in this case it turns out that EU officials do not listen to the forecasts of their own analytical centers, which do not expect quotes to increase to at least $80 per "barrel" in the foreseeable future. In their latest quarterly reports, Western commodity giants ExxonMobil, Chevron, Shell, TotalEnergies and BP, most of which represent the interests of the European mining industry, promise stock investors and their shareholders that they will be ready to operate successfully and pay dividends even if the benchmark Brent brand falls to $40.

"However, it cannot be ruled out that the Europeans, having ignored the possible emergence of an oil deficit, will nevertheless decide to lower the ceiling to $40 or even $20," the expert believes. "Then the domestic budget will no longer be saved from a large deficit by growing non-oil and gas revenues. However, let us hope that the personal relations between Vladimir Putin and Donald Trump, which are improving every day, will not allow the US, as a member of the G7, to agree to such an overly ill-considered initiative of the European Commission."