Russian Oil – Will Lowering Its Price Be an Effective Tool to Pressure the Kremlin?
Oil has long been the main driver of Russia’s economy, providing a significant portion of its budget revenues. Following Russia’s full-scale invasion of Ukraine, the international community could not remain indifferent and began actively seeking ways to weaken the Kremlin’s financial flows. One such tool was the introduction of price caps on Russian oil and oil product exports, implemented by G7 countries in 2022.
However, despite the heavy sanctions, Russia continues to profit from oil sales, albeit not at the same pace as before. According to CREA, Russia has earned over €744 billion from oil exports since the war began, with countries like China and India purchasing Russian oil at substantial discounts. Oil trade remains a major source of revenue for the Russian budget.
So, what’s being proposed now? Currently, there is a growing debate among policymakers and experts about further reducing the price cap on Russian oil. Suggestions for a new price range between $30-$50 per barrel (currently $60). Experts believe this initiative would hit the Russian budget hard, as the production cost of oil in Russia ranges between $10-$15 per barrel. But will this really deal a blow to the Kremlin significant enough to alter its aggressive policies?
An analysis by Uppsala University shows that lowering the price cap would benefit all oil consumers, including major markets like India and China. Russia would suffer the biggest losses, but there’s a risk that, even with low production costs, the Kremlin might reduce exports, even at the expense of its own interests.
A reduction in oil exports could lead to a global market shortage, causing prices to rise. This would negatively impact importing countries that are striving to secure their energy supplies.
Experts suggest that the most effective strategy for the coalition of countries would be a phased reduction of the price cap. Initially lowering it to $50, and later, if conditions remain stable, reducing it further to $30 per barrel.
Recommended Plan of Action:
- Set the price cap at $50 per barrel to further cut Russia’s revenues.
- If no market imbalances occur, reduce the price cap to $40 after six months.
- The final step would be setting the price at $30 per barrel, maximizing Russia’s losses while maintaining the necessary supply volume on the global market.
This scenario would allow for weakening the Kremlin’s revenue while preserving balance in the global market.
A more detailed assessment of the impact on Russian revenues and the optimal price cap levels is available in an analytical report by DiXi Group.
However, the effectiveness of this strategy will depend not only on the price caps but also on strict enforcement of the sanctions. Russia is actively using a “shadow fleet” to circumvent the restrictions. Only a comprehensive approach, including sanctions against violators and continued pressure on Russia, can yield results.
Thus, the future of sanctions against Russian oil looks promising, but it remains complex and will depend on global political decisions and market reactions.
