While it is budgeting for a 2 per cent surplus this year – based on a forecast of $US70 a barrel for its oil — that would be eliminated if its oil continued to fetch current prices.
The G7 sanctions are backed by the withdrawal of insurance and financing from tankers carrying oil sold above the $US60-a-barrel cap. When they were implemented last month, Russia said it would refuse to sell its oil to anyone who observed the cap, or even referenced it in their shipping documentation.
Given the paucity of buyers and, it would appear, the paucity of ship owners willing to transport Russian crude even within the cap, for fear that they might get caught up in the sanctions, that’s not much of a threat.
More potent would be the potential, which Russian energy officials have floated, for Russia to cut its production.
There have been suggestions by those officials that it could remove 500,000 to 700,00 barrels a day from the global market, which would conventionally have a very material impact on international prices. It has also mooted putting a floor price on its exports.
How effective responses like those would be is difficult to assess, given the uncertainties surrounding the outlook for the global economy.
If China is able to negotiate its current wave of COVID-19 infections and reopen its economy successfully, that would help demand for Russian oil. With the World Bank cutting its forecast for global growth this year from 2.9 per cent to 1.7 per cent, however, the global economic outlook is grim, with flow-on consequences for demand for oil and oil prices.
Gas prices in Europe, which soared in the aftermath of the invasion, are now back to pre-invasion levels,
Russia has said it would monitor the oil market this quarter before deciding how to respond to the price cap.
It is conceivable that it might seek to enlist the support of the OPEC+ cartel (of which it is a member) to try to increase the impact of any production cuts of its own.
It has said any measures it takes would be in line with market-based principles, which presumably means responding to weak demand by withdrawing supply.
There had been those within the G7 discussions who argued for a much lower cap than the $US60 a barrel settled on, and the level of the cap will be reviewed regularly.
At this early stage, however, it would appear that the combination of the chilling effect of the sanctions – ship owners will be fearful of transporting oil without insurance and the UK, US and Europeans have a stranglehold on that market – and the weakening global economy and oil prices have made any discussion about lowering the cap irrelevant.
Russia’s other big energy export, gas, also isn’t faring well. Between Russia throttling supply and the Europeans (who were reliant on Russia gas before the invasion) slashing their purchases, those revenues have also been severely reduced.
An unusually mild winter so far, gas storage at almost full capacity and a desperate scramble by the Europeans to secure LNG, virtually regardless of price, has — with measures to reduce consumption — blunted the political and economic threats posed to Europe by its willingness to continue supporting Ukraine and its former reliance on Russian gas.
Gas prices in Europe, which soared in the aftermath of the invasion, are now back to pre-invasion levels, and the Europeans are expressing confidence that, not only will they get through this northern winter without an energy crisis-inspired meltdown of their economies but they will be in a good starting position for winter 2024.
That would undercut Russia’s leverage and its hope that energy shortages and the social and political pressures they might generate would undermine Europe’s military and financial support for Ukraine.
The myriad sanctions the West imposed on Russia last year were always going to take quite some time to have material impacts, given their nature and the progressive way they were rolled out and the fact that Russia started the war with very strong financial foundations. The effects were always going to be attritional rather than immediate.
Russia got through last year, with the help of strong oil prices and revenues, in relatively good shape even though the effects of the West’s measures began to show up late in the year. This year might be rather more challenging.
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