A price cap and European Union embargo on most Russian oil have cut into Moscow’s revenue from fossil fuels, but the Kremlin is still earning substantial cash to fund its war in Ukraine because the US$60-per-barrel cap was “too lenient,” researchers said Wednesday.
The combination of the cap by the Group of Seven major democracies and the EU ban are costing Russia an estimated 160 million euros (US$171.9 million) per day, the Helsinki-based Centre for Research on Energy and Clean Air said in a study of the first weeks of the sanctions, which took effect Dec. 5.
But the group’s figures showed that Russia was still taking in 640 million euros a day from fossil fuels, down from one billion euros daily from March to May 2022 just after the country invaded Ukraine on Feb. 24.
Russia would lose an additional 120 million a day starting Feb. 5, when the EU bars imports of refined oil products such as diesel fuel, for which Russia is a major supplier. That would drop Moscow’s earnings to 520 million euros a day by February.
The group said Russia still managed to make 3.1 billion euros in revenue shipping oil under the price cap, reaping two billion euros in tax income. Lowering the cap to US$25-US$35 per barrel would almost completely eliminate the tax income by putting the price much closer to Russia’s cost of production.
The current price cap is above the market price for Russian oil and remains in the range of what Moscow needs to balance its budget.
Western governments have struggled to find a way to cut into the fossil fuel income that is the main funding source for Russia’s government budget and its war against Ukraine. Early rounds of sanctions mostly avoided blocking oil and natural gas shipments. That’s because the European Union had been heavily dependent on Russian fossil fuels to run its economy and because sharply higher energy prices early in the war helped send inflation through the roof in Europe and the United States.
The Group of Seven major democracies came up with the price cap as a solution to keep Russian oil flowing to other parts of the world and avoid sharply higher energy prices while still cutting into the Kremlin’s income. The cap is enforced by barring insurers, mostly based in the West, from handling Russian oil shipments priced above the cap. The EU oil embargo blocks the bulk of Russian oil – that coming by tanker.
Lowering the cap could have unpredictable effects because President Vladimir Putin has said Russia will not sell oil to countries obeying the cap, a threat which has not materialized because the cap is above the market price.
Oil markets, however, are now less focused on a potential loss of Russian oil than on weak demand from a slowing global economy, and prices have fallen.
The research center compiling the estimates called for restrictions on the sales of old tankers to prevent Russia, its allies and related traders from assembling a replacement fleet to circumvent the oil price cap and to strengthen penalties for dodging the cap by increasing penalties.