RUSSIAN OIL VS SANCTIONS

BLOOMBERG - Jul 12, 2023 - Russia’s flagship Urals crude oil breached a price cap set by the Group of Seven, a blow to western sanctions efforts and arguably an economic win for Moscow.

According to price reporting agency Argus Media, Urals crude topped $60 a barrel on Wednesday, climbing above the cap that the Group of Seven set last year in an attempt to restrict revenue to Moscow’s war machine. The idea of the ceiling was to stop Russian oil being transported on western ships — and with western insurance — unless it was priced under the threshold.

The latest data represents a victory of sorts for Moscow, which has assembled a shadow fleet of ships big enough to transport its crude to buyers with less need for services from companies in G-7 countries, and relies heavily on hydrocarbon revenue. It’s a setback to Europe and the US, which designed the policy to keep enough oil flowing to the global economy to prevent an inflation shock — while trying to crimp profits for Russia.

For some buyers of the Russian flagship crude, the breaching of the cap poses an immediate headache. This is especially true in India, a market that has sustained Russian exports but where some purchasers are still reliant on key Western services to keep imports coming.

“It’s problematic,” said Vandana Hari, founder of Vanda Insights. “Indian banks have been extra cautious in the last few months for fear of sanctions, requiring the refiners to show that the free-on-board price of their cargo was below $60 in order to put the payment through.”

There may be a knock-on effect for Moscow too, Hari added. “Russia might have to offer steeper discounts in order to keep enticing buyers in Asia,” she said. “Or the middlemen will need to take a cut on their profit margins.”

The move indicates that Russia will have to rely more on its own tankers and services, or those of so-called friendly nations, according to Vivek Dhar, director of mining and energy commodities research at Commonwealth Bank of Australia. Still, there will be a point at which the OPEC+ producer may struggle to replace Western provision of these tankers and services, he added.

At present, it’s not clear where Russian cargoes are getting insurance from when Western insurance is being denied. Shipping experts have long warned that one of the unintended consequences of sanctions is the growing risk of environmental disaster, with no one to cover the cleanup cost.

“We are monitoring the market closely for potential violations of the price cap,” the US Treasury said in a statement. “It is worth noting that trades above $60 that do not use Coalition services are not in violation of the price cap and a substantial proportion of Russian oil trades, though, still use Coalition service providers.”

Urals prices rose to $60.78 a barrel at the Black Sea port of Novorossiysk on Wednesday, Argus Media data show. The pricing agency’s figures are closely monitored by European Union and US policy makers and have also been used by the Russian government. In the broader oil market, prices are rising as OPEC+ cuts supplies, tightening global inventories. Russian exports are also starting to decline, putting further pressure on prices.

The price cap was always designed with a pragmatic approach. It was also meant to be revised periodically — with some EU states pushing for a tighter approach — but those reviews have quietly been shelved.

According to the State Department, Russian government oil revenues in the first five months of 2023 were down nearly 50% from a year prior. 

-----