Three options: How can Russia respond to the West on oil ceilings?

Moscow is deciding how to respond to the G7 and the EU’s cap on Russian oil imported by sea – there are three options. Vedomosti writes about it, citing sources.

According to the publication, the draft presidential decree is being discussed with the government by his administration.

“The first option is a complete ban on the sale of oil to states that support the restriction, including purchasing raw materials from Russia, not directly, but through intermediary countries and even chains,” two sources close to the cabinet told Vedomosti.

It is explained that we are talking about the final buyer. If it is a G7 member country, the fuel supply will be blocked.

The second option, as stated by the media interlocutors, provides for “prohibition of exports under contracts with a ceiling price condition, regardless of which country the buyer is from”.

The third variant of the ban refers to the determination of the maximum discount for the Urals (Russian export brand of oil blend) based on the Brent reference grade. If you try to increase the discount, the sale will be prohibited.

Russian President’s Press Secretary, Dmitry Peskov, commented on the media reports about three scenarios for Russia’s response to the introduction of an oil price ceiling. According to him, various options are being evaluated and the final decision will be made public.

One of Vedomosti’s sources said Russia’s response to Western restrictions will be discussed at a meeting with the president on Tuesday (December 6th) in the presence of oil industry representatives. But while none of the options are confirmed, perhaps alternatives will be offered.

Another interlocutor of the publication said that it is unlikely that the third option will be used.

As for the first and second options for Moscow’s response, BCS World of Investments stockbroker Evgeny Mironyuk believes that there is nothing new in them. He argues that the adoption of such resolutions formalizes Russian officials’ previous statements that Russian companies will not export oil to countries with fuel price ceilings.

The third option, according to Mironyuk, will not be accepted as fixing the maximum discount would imply a non-market stance in oil price determination in relation to “friendly” importing countries. In a comment to Vedomosti, the expert added that if the discount were determined by any formula, disputes would arise, which would lead to a reduction in the volume of oil exported.

Sovcombank chief analyst Mikhail Vasilyev believes that Russia’s most likely response to Western sanctions would be the latter option. In his opinion, this action plan is the most flexible, it allows Russian oil to continue its presence on the world market.

The expert noted that both consumers and manufacturers are interested in establishing such supply chains. According to him, this will prevent oil prices from rising in conditions of the winter heating season and high global inflation.

The analyst also acknowledges that some increase in fuel prices is possible in the short term due to possible local shortages in the market until supplies adjust.

Alfa-Bank senior analyst Nikita Blokhin also believes that the second option is the most realistic. In addition, Russian Deputy Prime Minister Alexander Novak and Russian President Vladimir Putin’s press secretary Dmitry Peskov warned their Western partners about such a response.

On December 6, Novak said that introducing a “ceiling” would lead to a rise in world oil prices. According to him, Russia can cut fuel production, but not much.

“Such interventions to market instruments, of course, affect the work of our companies and the sale of products to export markets. However, I would like to emphasize that Russian oil is in demand in the world markets and will find buyers.

Novak said Russia is engaging with smaller traders and using new oil supply insurance schemes.

Yes, more difficult conditions have come but we will still continue to sell and sell oil, we will use new tools, new insurance mechanisms, inter-company interactions, transportation.

On December 4, that is, on the eve of the West’s price ceiling for Russian oil, Novak warned that Russia would supply its fuel only to countries that reject the Western initiative.

Deputy Prime Minister, “Although we have to cut production a little bit, we will sell oil and petroleum products to countries that will work with us under market conditions.”

The government believes that setting the maximum price for Russian oil is a non-market instrument. Novak added that such measures are contrary to the principles of the World Trade Organization.

Sergei Kondratiev, Deputy Head of the Economics Department of the Institute of Energy and Finance, in an interview with, suggested that Russia has three options for the Russian Federation to limit oil prices to 60 US dollars per barrel. .

First, “to formalize a ban on the sale of oil to companies from the European Union, USA, Canada and Australia supporting the price ceiling.”

Kondratiev recalled that the same countries put a ban on oil purchases from Russia: “Their logic is clear – to prevent the Russian budget from receiving additional oil and gas revenues.”

According to the economist, Russia will have to decide whether to supply fuel to Japan and Bulgaria. “They officially supported the ceiling. However, oil supplies to Japan were withdrawn from below the price ceiling by the G7 countries. As an EU country, Bulgaria supported the ceiling price while withdrawing from EU sanctions,” he said.

According to the second scenario, Moscow may limit the supply of sensitive raw materials and materials such as nuclear fuel to make it harder for the EU, USA, Canada and Australia to work in other energy markets.

The third option suggests that Russia could impose a price ceiling on the supply of such raw materials above the market level.

The limit of $60 per barrel for Russian oil has been in effect since December 5. This measure of limiting Russia’s income was implemented by EU countries, the G7 and Australia. Restrictions do not apply to Hungary, Bulgaria, Slovakia, Czech Republic and Croatia. Russia also directed its exports to other country markets. The largest exporters are China and India.

Western countries also reserved the possibility of adjusting the price ceiling depending on the development of the situation. The correction will be made bimonthly from January 2023. The indicator will change to be at least 5% lower than the current Ural export price.

Based on sources, Vedomosti writes that the Kremlin has considered three possible Russian responses to the ceiling prices set by Western countries for Russian oil. Putin’s spokesman said the country’s administration is considering various scenarios. The final decision will be made public. Meanwhile, experts are guessing which option the authorities will choose.

Source: Gazeta


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