The G7 group of leading industrialized countries, the European Union and Australia have introduced a price ceiling for Russian oil this week.
Also on December 5 in the EU entered into force (you switch to another service) import ban on Russian seaborne oil.
Economic sanctions may have far-reaching consequences for Russia’s economy and the country’s ability to wage an illegal war in Ukraine.
Read below what the sanctions on Russian oil mean for the Union, Russia and the world.
It is economic sanctions against Russia
The EU and the G7 countries believe that economic sanctions on oil will help limit Russia’s main source of income, which Russia uses to finance its illegal war in Ukraine.
At the beginning of December, the G7 group, the European Union and Australia set a price ceiling for Russian oil of 60 dollars per barrel, i.e. around 57 euros.
The price cap and oil import ban apply only to crude oil imported from Russia and transported by sea. The EU import ban does not apply to pipeline oil.
In the agreement between the EU, the G7 countries and Australia, the price ceiling defines the maximum price for the price of Russian oil that shipping and insurance companies are allowed to transport and insure.
The companies in the field are mostly Western, so the effects of the price ceiling are assessed (you switch to another service) to be extensive.
Not all EU countries agreed on how high the price ceiling should be. The Baltic countries and Poland supported a stricter price ceiling of $30, while the Mediterranean countries that earn from oil transport wanted a higher price ceiling.
Russia does not accept oil sanctions
Russia could respond to the sanctions by circumventing them, setting a price floor for its oil, or stopping trade with Western countries altogether.
The price ceiling does not prevent Russia’s oil trade with the West, but thanks to the price ceiling, Russia receives less oil income.
It is also estimated that Russia will acquire decommissioned old oil tankers, which it would use to transport crude oil in order to circumvent the import ban imposed by the Union.
It has also been estimated in the West that Russia might retaliate against the EU by blocking some EU countries’ access to the oil passing through the Družba oil pipeline.
Russian Vedomosti magazine (you switch to another service) according to Russia is considering three options for how it would respond to the West’s price ceiling.
At least the first item on the list seems to be fulfilled.
President Vladimir Putin said on Friday that Russia will not sell oil to countries that adhere to the “stupid” price ceiling. According to him, Russia is also considering cutting oil production because of the price ceiling.
Regardless of which option Russia chooses, it will likely lose its oil revenues.
Oil sanctions may show up in Russia’s war chest
According to Russia, the oil price ceiling does not affect Russia’s ability to maintain its military operations in Ukraine. The EU oil import ban may have more significant effects than the price ceiling.
Ukraine criticize the price ceiling (you switch to another service) to be too high. President Volodymyr Zelenskyi said that the $60 price ceiling is not a price ceiling in the first place, because Russia is currently selling its oil for even $50 a barrel.
Oil is Russia’s most important source of income, and a third of Russia’s budget funds come from the oil trade.
With the current price ceiling, Russia would earn about 10–15 billion euros per month from oil.
Relative to the costs of the war, this would mean that Russia would not be able to finance its illegal war in Ukraine with oil revenues alone.
According to Russia, it is now looking for new partners outside the Western countries and plans to increase its oil sales to China, India and Turkey, for example.
However, sales to these countries would not be enough to compensate for the losses due to the end of sales to EU countries, because Russia should be able to sell 1.1 million barrels per day to China, India and Turkey.
In addition, China, India and Turkey could negotiate a favorable price for themselves, since there are only a few buyers of Russian oil on the market.
Oil-producing countries benefit, EU citizens lose
The $60 price ceiling reduces Russia’s oil revenues, but keeps Russian oil production still profitable. This again means that oil producing countries cannot push oil prices up.
The production of Russian oil is expected to decrease due to the price ceiling and import ban. At the same time, the demand for oil produced by other oil-producing countries is increasing.
The oil producing countries (OPEC) are not increasing oil production for now.
Most likely, OPEC countries expect the price of Brent crude oil to rise to $90 per barrel. OPEC may even reduce oil production in order to increase oil prices.
Laura Solanko, a senior adviser at the Bank of Finland, has been interviewed for the story. The source is also the news agency Reuters.