G-7 price cap and EU bans have curbed Moscow’s energy revenues without creating shortage

Georgi Kantchev, Andrew Duehren and Joe Wallace, WSJ

BERLIN/WASHINGTON/LONDON
EnergiesNet.com 02 23 2023

A Western oil gambit aimed at Russia appears to be working.

In recent months, the Group of Seven rich nations imposed a novel price cap on the global sale of Russian crude and refined products, while the European Union banned most Russian oil imports. Both moves, working in concert, were aimed at curbing Moscow’s energy revenue without choking off global supplies and sending prices soaring.  

So far, early data on Russian energy exports and pricing suggests the two measures are keeping the oil flowing and global prices stable, while pinching Moscow’s coffers.

Earlier this month, Russia said it would cut production by about 5% in March in response to the sanctions. Analysts have been torn over whether the move was aimed at trying to prop up prices or an acknowledgment that Moscow was struggling to find buyers.

What mattered most to Western officials and oil market experts: It wasn’t a big enough cut to boost global oil prices. 

“You can criticize overall Western sanctions quite easily,” said Henning Gloystein, energy director at consulting firm Eurasia Group. “But the oil sanctions were aimed at both capping Russian revenues and not disrupting the market. So far, that has worked.”

The price cap works by barring Western insurers, financiers and shippers that underpin much of the world’s oil trade from handling seaborne Russian crude—unless it is sold below $60 a barrel. The experimental sanction was the product of months of haggling between U.S. and European diplomats. It faced steep skepticism from oil-industry analysts and officials about how it would work in practice.

Much can still go wrong. Global oil prices have retreated recently on worry about economic growth in Europe and the U.S. Both are showing signs that things might not be so bad after all. Meanwhile, China has cast aside most of its Covid-19 restrictions, which could jump-start its own economy and boost demand for crude. 

Russian production, meanwhile, may also start to fall faster than the West intends, pressuring prices. Separate sanctions on technology imports are hampering extraction and field maintenance, according to analysts. Russia has vowed not to sell oil to buyers who honor the price cap.

So far, though, Russian crude exports are holding up. In January, they rose to 5.1 million barrels a day compared with December’s 4.8 million barrels a day, according to the International Energy Agency. A report published this week by a group of Russia-focused economists analyzing customs data found that Moscow was able to redirect crude oil exports from Europe to alternative markets.

The researchers also found that export earnings were curbed substantially, though they questioned whether Russian oil was trading as cheaply as many believe. 

Last year, a windfall from high-priced energy exports cushioned the economic blow from other sanctions imposed on Moscow after its invasion of Ukraine. This year, things are starting out differently.

Russian oil and natural gas revenues fell 46% in January from the same month last year, according to data from the Russian Ministry of Finance published earlier this month. Government spending, driven by military purchases, meanwhile, jumped by 59% from last January. 

The West more recently has imposed a similar set of price caps and a Europe-wide embargo on Russian refined oil products. High-valued products such as diesel are capped at $100 a barrel and cheaper ones such as fuel oil are capped at $45 a barrel. That mechanism, which hasn’t been in place as long as the crude sanctions, could still dry up markets faster than Western officials desire, threatening sharp global price swings for those fuels.

European diesel prices leapt to record highs last year out of concern over potential shortages. But they have tumbled more recently, after traders stocked up on the fuel.

Livia Gallarati, senior analyst at Energy Aspects, said preliminary data suggest refined-product output in Russia fell to 5.5 million barrels a day in the first half of February, down about 200,000 barrels a day compared with January. Ms. Gallarati expects Russia will struggle to find new buyers for a third of the diesel it used to export to the EU.

Russia has been able to reroute some of its product exports to Turkey, North Africa and Latin America. European buyers, meanwhile, front-loaded purchases of Russian oil products, creating a significant buffer, while also switching to alternative suppliers from the Middle East and from the U.S. 

“The measures have not so far caused significant disruptions of crude or product flows that may trigger extreme price spikes or even regional fuel shortages,” Eurasia Group’s Mr. Gloystein said. 

Western officials are expected to debate next month whether to lower the crude price cap from $60 a barrel.

Broadly, the U.S. has taken a relatively relaxed approach to actively enforcing the price cap, which only applies to shipments of Russian oil that rely on Western maritime services. Much of Russia’s post-invasion oil trade now takes place via a so-called shadow fleet that doesn’t rely on such services and is effectively outside the jurisdiction of the U.S. and its allies. 

Some critics of the oil-price cap say the shadow fleet that has grown up largely to subvert it poses its own risks. Moving so much Russian oil on older tankers with non-Western insurance can heighten the danger of accidents or spills, some shipbrokers and oil traders say. The opaque ownership and control of such tankers makes it harder for analysts and officials to track how much money is making its way back to Moscow.

U.S. officials have said that they are unbothered by the shadow fleet trade, arguing that the market dynamics created by their sanctions have already significantly lowered Russia’s prices. And they have noted that Russia has been forced to spend further resources creating new insurance and shipping systems to facilitate the export of more of its oil without Western help. 

“From my point of view this is working out very nicely for the Western world,” said David Wech, chief economist at commodities data firm Vortexa. “I think basically what has been targeted has been reached.”

Write to Georgi Kantchev at georgi.kantchev@wsj.com, Andrew Duehren at andrew.duehren@wsj.com and Joe Wallace at joe.wallace@wsj.com

wsj.com 02 23 2023