From, Dec. 5, 2022, Excerpt:

Starting today, Dec. 5, restrictions on the price of Russian oil will come into force. The European Union’s decision was published in the official journal of the EU. The day before, the Group of Seven countries and Australia had also managed to agree on a price cap for supplies by sea at $60 per barrel. However, after Jan. 15, the limit will be regularly reviewed to make sure that the price of oil offered to Russia by international buyers will be at least 5% lower than the market price.

The market – this word was mentioned by Russian officials more often than usual during the week when commenting on the prospects of an oil embargo. “We will work according to the market,” Deputy Prime Minister Aleksandr Novak stressed before a final decision was even made. The former head of the Energy Ministry, who in March warned of catastrophic consequences for the world market if hydrocarbons from Russia were refused (according to his estimates, world prices in this case would shoot into the stratosphere, exceeding $300 per barrel), this time confidently stated that Moscow itself will stop supplies even if the export price cap is higher than the current price level. On a Sunday, [Dec. 4,] broadcast on Rossia 24, Novak insisted on repeating this thought:

“We believe that this tool is nonmarket, inefficient, grossly interferes with market tools, and violates all the rules, such as those of the [World Trade Organization], for example. We are not going to use price cap tools in our practice. To this end, we are now working on mechanisms to prohibit the use of the price cap tool, no matter what level it is set to. We will sell oil and petroleum products to those countries that work with us on market terms, even if we have to reduce production somewhat.”

Such speeches are a bit dissonant with [Russian] President Putin’s October declaration that “We will not act to our own detriment.” How could we not? That’s exactly what we’re preparing to do.

Meanwhile, Russian diplomats also wished to speak out on the topic of the day. For example, Mikhail Ulyanov, Russia’s permanent representative in Vienna, wrote with a mixture of bombast and sarcasm on his Twitter account:

“Starting from this year #Europe will live w/o Russian oil. #Moscow has already made it clear that it will not supply #oil to those countries that support an antimarket price cap. Just wait. Very soon, the #EU will accuse #Russia of using oil as a weapon.”

The emphasis is being put where it should be: Europe will live without Russian oil, and Russia will live without what was once its largest market (in a November report, the International Energy Agency calculated that the EU’s share of Russian oil exports, which was 50% before the “special operation” [in Ukraine; see Vol. 74, No. 8, pp. 9‑13], decreased to 31% in October 2022, while its share of oil products fell from 50% to 35%).

As Foreign Minister Sergei Lavrov stated, Russia is not interested in the specific parameters of price restrictions as a principle: “We will negotiate directly with our partners. And the partners who continue to work with us will not pay attention to these caps and will not give any guarantees to those who introduce these caps illegally.”

The belligerent bravado of comments by Putin’s officials does not cancel out the fact that the artificial reduction in the profitability of Russian export sales is capable of undermining, but hardly likely to crush, the commodity-based Russian economy – at least for the foreseeable future. The Kremlin clearly intends not only to boycott the new reality, but also to work to reduce the effectiveness of the embargo, including by using the diplomatic levers that are still at its disposal.

It is noteworthy, for example, that following talks at the EU level, Hungary, according to that country’s foreign minister Peter Szijjarto, who discussed “energy cooperation” with Lavrov in November, defended its rule of not complying with the new rules: “During the negotiations on the oil price cap, we fought hard for Hungary’s interests, and in the end, we succeeded: Hungary has been exempted from the oil price cap.”

Major Western insurers have stopped insuring ships carrying oil from Russia at a price above the established ceiling. So the upcoming difficulties in transportation are unquestionable, but this issue is also in the process of being resolved. This week, Britain’s Financial Times, citing estimates by the shipping broker Braemar and the energy consulting company Rystad, wrote about the creation of a “shadow fleet” by the Kremlin. Even if the ships that Russia buys are 12 to 15 years old and will soon be decommissioned, they will help with the Kremlin’s short-term goal of overcoming the blockade to some extent.

However, according to experts, in the first months after the introduction of the price ceiling, Russia will still suffer from a lack of ships for transporting oil, which will reduce its exports and increase prices on the market ahead of Feb. 5, when the EU embargo on the sea supply of Russian oil products will come into effect. In short, we have a fascinating continuation of the once-popular talk at the top that the country has passed the worst stage in the sanctions confrontation with the West, and passed it with dignity. Let’s not be too hasty.