President Vladimir Putin announced a ban on supplying Russian oil to importers that agree to apply the price cap set by Western governments. The measures are scheduled to take effect on February 1 and will remain in place until July 1.
“The delivery of Russian oil and petroleum products to foreign legal entities and individuals is prohibited if the contracts for these supplies include or imply the use of a price cap mechanism. The ban covers all stages of delivery to the final buyer”, states the presidential decree.
Putin has warned in the past that the Russian Federation will not participate in manipulating market prices, calling any ceiling unacceptable.
During the decree signing, Putin suggested that the price of oil could “spike” as a result of these restrictions.
He also asserted that Russia would not suffer from the cap and would become for the West “a path to the destruction of global energy” and a symbol of colonial legacy.
How will the decree operate?
Under the decree, oil exports are banned starting February 1, while Russian petroleum products will be prohibited from a date set by the Russian government, but not earlier than the decree’s entry into force. The government is expected to set a deadline and publish relevant regulations soon. The president reserves the right to permit deliveries that are otherwise banned under special orders.
The Ministry of Energy of the Russian Federation will monitor the ban, and the ministry will issue official statements on its implementation in cooperation with the Ministry of Finance.
Ceiling price
Deputy Prime Minister Alexander Novak suggested that Russia could produce at least 490 to 500 million tons of oil in 2023. He believes demand for both oil and petroleum products will persist despite the restrictions.
“I do not rule out risks of a production dip at certain points in 2023. It could be a 7 to 8 percent drop at the peak, but overall we expect output of 490 to 500 million tons per year. A lot will depend on logistics”, Novak told TASS in an interview.
Novak added that Europe has yet to figure out how to replace Russian oil products and asked what decisions they will ultimately make.
Some EU countries may seek exemptions. Berlin and Warsaw, which already announced plans to fully end imports of Russian oil, have asked for 2023 delivery allowances.
Vitaly Isakov, investment director at Otkritie Management Company, believes Russian oil prices could rise in the near term. “Demand will stay strong for oil, which remains a cornerstone of world energy for decades. At the same time, supply could tighten as investments in future fuel production lag”, Isakov noted.
Other growth factors include the exhaustion of U.S. strategic oil reserves and the easing of Covid restrictions in China.
Vyacheslav Mishchenko, head of the Center for Strategy and Technology Analysis at the Gubkin Russian State University of Oil and Gas, believes Russia will build alternative routes to markets that do not support sanctions. “Alternative routes are expanding. Large buyers of hydrocarbons remain in markets that do not back sanctions, including India, China, and other Southeast Asian nations. They are key priorities for us”, Mishchenko said.
Analysts surveyed by RIAMO in 2023 expect oil prices to stay within a band, with forecasts around 110 dollars per barrel as a ceiling. Andrey Maslov of FG Finam warned that Brent prices are unlikely to drop below 75 dollars, or rise far above 110 dollars, barring major geopolitical or economic shifts. The outlook remains sensitive to geopolitics, global recession risks, shifts in energy demand in China, and the impact of ongoing price barriers. The market is not expected to slip much as long as demand holds steady [cite: RIAMO report, 2023].