Russia’s President Vladimir Putin signed a decree banning crude oil supply from February 1st for five months, and imposing sanctions on countries that do not comply with the ban.
Australia, the European Union, and the Group of Seven largest powers agreed to this month a $60 per barrel price cap for Russian seaborne crude oil starting Dec. 5. This was in response to Moscow’s “special Military Operation” in Ukraine.
This cap is very close to what Russian oil costs today, but it’s well below the price Russia could sell this year. That helped to offset any financial sanctions against Moscow.
Russia, after Saudi Arabia is the second-largest oil exporter in the world, would suffer severe consequences for the international energy supply.
This decree was published by the Kremlin and on a government portal. It responds to the United States, foreign states, and international organizations that have joined them with “acts that are hostile and inconsistent to international law”.
The decree said that Russian oil and products cannot be delivered to individuals or entities outside Russia, provided that a price-fixing mechanism for maximum prices is explicitly and directly envisaged in these contracts.
The established ban is applicable to all supply stages up to the final buyer.
This decree includes a clause that permits Putin to overrule the ban on special cases. It states: “This…comes into force February 1, 2023 and will apply until July 1, 2023.”
Exports of crude oil will be prohibited starting February 1, however, the Russian government will determine the exact date and it could occur after February 1.
This price cap was not seen in Cold War times between the West, Soviet Union, and West. It is intended to cripple Russian state coffers as well as Moscow’s military effort in Ukraine.
Analysts have stated that there will be no immediate effect on the oil revenues Moscow currently earns.
Anton Siluanov, Russia’s Finance Minister, stated Tuesday that Russia could have a larger budget deficit than the 2% GDP it had in 2023. The oil price cap and the reduction in export income are putting a damper on Russia’s fiscal situation. This is a problem for Moscow, which has been spending heavily in its war in Ukraine.
Russia had been promising to reply officially for several weeks. The final decree basically confirmed what the officials had publicly stated.
Non-EU nations can continue to import seaborne Russian crude oil from the G7, however, it prohibits shipping and insurance companies from transporting Russian crude across the globe.
Separately, EU nations have implemented embargos that prevent them from buying seaborne Russian oil.
Russian Urals oil was traded at $56 per barrel Tuesday. This is below the cap price.
Brent crude oil rose a bit on the news, rising 1.4% to $85.1 at 1743 GMT.
