Russia following Iran’s playbook on how to skirt sanctions
The price cap will allow non-EU countries to continue importing Russian seaborne crude but will prohibit the shipping, insurance, and re-insurance companies from handling cargoes of Russian oil unless it is sold for less than the price cap.
The decision is aimed at balancing two conflicting goals: limiting the energy revenues of Russia while still allowing Russian crude onto global markets.
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Once the deal was struck, Washington underlined that a cap on the price of Russian oil would restrict Russia’s revenues for its “illegal war in Ukraine”. European Commission President Ursula von der Leyen, reiterating the same message, said the price cap would significantly reduce Russia’s revenues.
Ukraine, however, is skeptical. The office of Ukrainian President Volodymyr Zelenskyy called on Saturday for a lower price cap, maintaining the one adopted by the EU and the G7 didn’t go far enough. “It would be necessary to lower (the cap) to US$30 to destroy the enemy’s economy faster,” Andriy Yermak, the head of Zelenskyy’s office said, staking out a position also favoured by Poland – a leading critic of Russia’s war on Ukraine.
Russia was swift with its reaction.
Mikhail Ulyanov, its permanent representative to international organizations in Vienna, warned the cap’s European backers that they would come to rue their decision. “From this year, Europe will live without Russian oil,” Ulyanov posted on Twitter. “Moscow has already made it clear that it will not supply oil to those countries that support anti-market price caps. Wait, very soon the EU will accuse Russia of using oil as a weapon.”
Kremlin spokesperson Dmitry Peskov said Russia needed to analyze the situation before deciding on a specific response, but he emphasized it would not accept a price cap. The Russian Embassy in Washington insisted that Russian oil “will continue to be in demand” and criticized the price limit as “reshaping the basic principles of the functioning of free markets.” A post on the embassy’s Telegram channel predicted the per-barrel cap would lead to “a widespread increase in uncertainty and higher costs for consumers of raw materials.”
Senior Russian politician Leonid Slutsky told the Russian Tass news agency that the EU was jeopardizing its energy security with the cap.
The billion-dollar question, however, is: Will the price cap work?
First, the cap may not hurt Russia much. Russian Urals crude was trading at around US$70 a barrel Thursday afternoon. The cap is also not much lower than the levels Russia has been selling its crude to its major buyers. Market reports say that Russia has already been selling crude to its major buyers at somewhere around US$60 a barrel.
Second, China, the largest market for Russian crude, is not much concerned with the price cap. It stands by its deal with Russia on the price of crude imports. The hint that China is striving to relax its zero-tolerance COVID policy also means Beijing’s crude uptake could go up. That is good news for Russia.
Third, India and other Asian markets also seem open to imports from Russia. Only last week, Pakistan sent a delegation to Moscow to explore the possibility of importing crude from Russia at discounted prices.
Furthermore, the Wall Street Journal reports that shipping companies have snapped up dozens of second-hand oil tankers this year, paying record prices for ice-class ships that can navigate frozen seas around Russia’s Baltic ports in winter. According to sources familiar with the deals, a driving force behind the purchases is to get Russian oil to market through the Baltic once the sanction falls into place.
The energy sanctions against Russia have also led to Moscow achieving its second-ever sail of a crude tanker east through the Arctic Circle toward China, a route dubbed the ‘Arctic Silk Road’. This could one day revolutionize energy trade flows from Russia to Asia because it takes about half the time of shipping via Russia’s Baltic ports through the Suez Canal, Oilprice.com reported in early November.
Russia will have an advantage via the Arctic during warmer periods of the year in sending crude and crude products to Asia in an expedited fashion, ZeroHedge reported.
Moscow has reportedly been taking a leaf out of Iran’s sanction-skirting playbook and has worked over the last nine months to set up a new offshore logistics network featuring ship-to-ship transfers and crude-blending operations to ensure its crude keeps flowing to global consumers.
The Organization of Petroleum Exporting Countries and its allies, including Russia, are still evaluating the impact of the western cap on Russian crude exports. By opting to keep their output target as it is, they have opted for a ‘wait and see’ policy.
The game is on!
Toronto-based Rashid Husain Syed is a respected energy and political analyst. Energy and the Middle East are his areas of focus. Besides writing regularly for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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