As Bloomberg points out, Russian crude is selling at less than half international prices – and well below the cap set by the G7 – as a result of sanctions targeting the Kremlin’s crude revenue.

Urals crude, by far Russia’s biggest export, was trading at $37.80 a barrel in the Baltic Sea port of Primorsk on Friday, according to data provided by Argus Media.

Brent, the global benchmark, traded at $78.57 a barrel on the same day. It should be noted that there is a small difference in quality between Urals and Brent, which in normal times is a difference of 1-2 dollars per barrel.

The destructive influence on Russia remained in the hands of a few buyers

The current price difference is a devastating blow to Russia, which needs as much revenue as possible to finance the war in Ukraine.

An even more dramatic drop in the price of its oil exports could force Moscow to respond by cutting output, an idea it has discussed in the past cannot be ruled out.

A key factor in the fall in Urals prices is likely to be the loss of the European market, as this has left Russia at the mercy of a small group of major buyers, including China and India.

And with tankers having to travel thousands of extra kilometers to transport cargo from western Russian ports to these buyers, shipping costs have skyrocketed. Therefore, Russia is forced to lower prices to make the price per barrel competitive with Middle Eastern supplies.

How Putin reacted to oil price restrictions

President Vladimir Putin responded to Western price caps on Tuesday by signing a decree banning the supply of crude oil and petroleum products from February 1 for five months to countries that adhere to the restrictions, Reuters reported.

The G7 major powers, the European Union and Australia agreed on a maximum price for Russian offshore oil of $60 per barrel from December 5 due to Moscow’s “special military operation” in Ukraine.

The cap is well below the extremely high price at which Russia was able to sell last year, which helped offset the impact of financial sanctions imposed on Moscow.

At the time of writing, around 4:30 p.m. Tuesday, Urals was quoted on financial markets at $52 a barrel, a third cheaper than Brent, which was around $80 a barrel.

It should be noted that the price level of $52 on international trading platforms does not reflect possible discounts for those who remained a client of Russian oil. Russia is the second largest oil exporter in the world after Saudi Arabia.

Putin’s order on Tuesday was presented as a direct response to the “unfriendly and inconsistent actions of the United States and accompanying foreign countries and international organizations.”

“Supplies of Russian oil and oil products to foreign legal entities and individuals are prohibited if the contracts for these supplies directly or indirectly provide for the use of the maximum price fixing mechanism. The established ban applies to all stages of delivery to the final buyer,” the decree reads.

The decree, which includes a clause allowing Putin to lift the ban in special cases, said: “It … shall enter into force on February 1, 2023 and remain in effect until July 1, 2023.”

Moscow knows that difficult times are coming

The price cap, unprecedented even during the Cold War between the West and the Soviet Union, is aimed at paralyzing the flow of Russia’s state budget and Moscow’s military efforts in Ukraine.

Some analysts have estimated that initially the restriction will have little effect on the oil revenues that Moscow currently receives.

However, Finance Minister Anton Siluanov admitted last Tuesday that Russia’s budget deficit could be higher than the planned level of 2% of GDP in 2023 as the oil price cap would reduce export revenues, an additional fiscal burden for Moscow as it spends heavily on her military campaign in Ukraine.

The G7 price cap allows non-EU countries to continue importing Russian crude by sea, but prohibits shipping, insurance and reinsurance companies from handling shipments of Russian crude around the world unless it is sold at a price below the maximum price. EU countries have separately imposed an embargo that prohibits them from buying Russian oil transported by sea.

(article photo: © Dmytro Melnikov | Dreamstime.com)