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The U.S. and EU-applied price cap on Russia’s oil have “sharply” reduced the Kremlin’s income, U.S. Treasury Secretary Janet Yellen said on Thursday at the G20 meeting in India.
“We’ve continued to see emerging markets negotiate deep discounts on Russian oil which keeps oil in the global market but sharply reduces the Kremlin’s take. The way I see it, our sanctions have had a significant negative effect on Russia so far. While by some measures, the Russian economy has held up … Russia is now running a significant budget deficit,” Yellen said.
The price cap on Russian crude oil, which went into effect on December 5, was designed to reduce Russia’s oil revenues while allowing crude oil to keep flowing to prevent a spike in prices. Two months later, on February 5, another price cap went into effect—on Russia’s crude oil products such as diesel.
Critics of the price cap argued that the price cap would be largely ineffective, with Russia’s crude oil merely changing destinations from Europe to India and China—two countries not abiding by the price caps.
The crude oil price cap was set at $60 per barrel, although the Russian Urals grade traded at less than $50 in January, so Russia’s crude was already selling well below the price cap.
In December, Russia’s President Vladimir Putin banned the supply of Russian crude oil and crude oil products to any company abiding by the price cap as of February 1, 2023.
Yellen has been a staunch support of the oil price cap mechanism. “The caps we have just set will now serve a critical role in our global coalition’s work to degrade Russia’s ability to prosecute its illegal war. Combined with our historic sanctions, we are forcing Putin to choose between funding his brutal war or propping up his struggling economy. And, we are disrupting Russia’s military supply chains, making it harder for the Kremlin to equip its troops and continue this unprovoked invasion,” Yellen said earlier this month in a statement.
By Julianne Geiger for Oilprice.com
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Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.
One reality is that Russian oil exports which hit in January 8.2 million barrels a day (mbd). This was higher than both its average 7.8 mbd exports in 2022 and its pre-Ukraine exports of 8.0 mbd by 5.1% and 2.5% respectively. This trend is continuing so far in 2023.
The second reality is that Brent crude oil price today at $82 a barrel is 15.5% higher than when the cap was launched on 5 December.
A third reality is that Russia had managed in 2022 to raise its oil production above 11.0 mbd, LNG production by 8% to 46 billion cubic metres (33.0 million tons) and gasoline and diesel production by 4.3% and 6.0% respectively. This enabled Russia to achieve a current account surplus of $228 bn and trade balance surplus of $290 bn in 2022.
A fourth reality is that according to Goldman Sachs Russia may have been receiving more for its crude exports than the quoted prices suggest. Despite preferential prices Russia has been offering its loyal customers, these prices are only few dollars less than the Brent crude price prevailing at the time. Therefore, the claim by the US Treasury Secretary that the cap has sharply reduced Russia’s revenues is false. It aims to give the impression that Russian oil exports and revenues are being adversely affected by the cap.
If anything, the cap has confirmed that Russian crude oil and petroleum products are irreplaceable for the foreseeable future.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert