December 5 is approaching and together with it introduction of a system of marginal prices for Russian oil by the G7 and the European Union. And the countries introducing this system will not use it. This is an «export product». Besides it is a part of the big projected line which already received a modest working title «cartel of buyers».

Sometimes the other name «anti-cartel» is also tested. However, there is nothing behind this name. Although some potential participants are already fantasizing about how they will manage not only Russian, but all oil, mercifully keeping it in an «affordable and profitable» range.

«The new legislation entered today (on November 3) will not allow the countries using services of Great Britain for transportation of the Russian oil if only it is not bought at the level of the limit price (or below it) established by the coalition as a part of the G7 and Australia». These simple, but at the same time great words the press service of the government of Great Britain made public at the beginning of November. So amazed public was presented with the first participant of the wide coalition of buyers who since December 5, 2022, not only will get the right to use services in sea delivery of the Russian oil (including insurance, broker activity and transportation) but will also receive the most favorable prices of black gold.

The pleasure from formation of the wide coalition was saddened with only two facts. The first: Australia following the results of 2021 accepted 0.11% of the Russian export of crude oil. The second: there is no one else in the wide coalition. However, it does not mean that the situation will never change. Such powerful players as New Zealand and Norway can also join the coalition. And South Korea also allegedly thinks of the participation.

To explain the marginal oil prices, the prospects for a coalition of buyers and the reasons why our wonderful Western partners hope for Russia’s participation in this clowning, we will have to start in the spring of this year.

Burden of forecasts

Mario Draghi, who held the post of Prime Minister of Italy at that time, was the first to introduce marginal prices for Russian hydrocarbons in April of this year. The speech, however, went about gas. But in May representatives of the European Union, making the sixth package of sanctions, discussed opportunity to enter limit prices of oil, got in the Russian Federation. However the idea did not get support as it was not clear how to limit the income of our country and at the same time to force it to sell energy resources at the prices established by Europe. Therefore EU countries decided to enter embargo: at the beginning of December, 2022 — on oil and at the beginning of February, 2023 — on oil products.

And that the Russian companies could not redirect fully the energy carriers on other markets, in the same terms the ban on rendering of services on sea transportation is imposed. Earlier the same measure was already coordinated by the USA and Great Britain. The ban has to capture all range of the European and American companies participating in shipping — from insurers to ship owners.
Thus, the UK, according to the leadership of this country, accounts for 60% global services in the field of key insurance P&I (Protection and Indemnity). And according to the Ministry of Finance of the United States, the European Union and the G7 provide 90% of global insurance of navigation and they provide the majority of financial and payment services for trade in oil. Thus, restrictions of these countries could concern about 3-3.5 million barrels of the Russian oil and oil products.

The decisions made by the western countries looked quite reasonably. Dynamics of falling of production of the Russian black gold in March-April testified to efficiency of the embargo entered at that time from the USA and also confirmed earlier heard forecasts of the International Power Agency (IPA). At that time it expected a collapse of production in the Russian Federation on 3 million barrels per day following the results of 2022.

Dependence of the European Union on the Russian deliveries nevertheless was much higher than at the USA, therefore EU member states were given more time for search of alternative suppliers. Thus some countries in connection with «lack of viable alternative deliveries» received different exceptions which touch on about 0.3-0.35 million barrels per day (total daily supply of crude oil to Europe from Russia in 2021 made 2.4 million barrels). So, exceptions were received by Hungary, Slovakia and the Czech Republic which appeared in uncontested dependence on pipeline deliveries from our country.

Other states counted not simply on search of alternatives; they counted on replacement nearly 30% of the Russian deliveries with volumes from other sources.
We summarize: all key decisions on embargo of the European Union country and the G7 accepted in the conditions of falling of production in Russia and great expectations on other exporters who had to occupy quickly the market niche lost by our country. Due to this replacement the western companies providing services in the field of shipping of black gold should not have experienced noticeable difficulties at all. After all they should switch simply from one big customer to another, not less large. But in June something went wrong.

Statistics came from Russia, which, despite the forecasts, showed: a drop in production stopped, recovery began. Together with it large exporters to which Americans and Europeans addressed, spoke about impossibility to replace Russia in the world market. And fallen in price was in April because of the anti-covid restrictions in China oil continued to rise in price.

Actually at the moment when the sixth package of sanctions came into force, the Russian oil paved the way in east direction, and the western companies-carriers risked to appear without a share of the market, significant for them. The EU and the USA needed to change the principle of punishment, but thus it was politically shortsighted to cancel at least part of earlier imposed sanctions. In other words, the idea which realization would limit the income of the federal budget of Russia was necessary and would remove risks from the western companies. The system of marginal prices became such an idea.

Wide coalition of buyers

In 2021 the income of the federal budget of the Russian Federation made 25.3 trillion rubles. In this sum oil and gas provided 9 trillion rubles. It is expected that in the current year these indicators will make 27.7 trillion rubles and 11.67 trillion rubles respectively. Also, according to the existing forecasts published by Audit Chamber in 2023 the income of the budget will make 26.13 trillion rubles and their oil and gas part – 8.94 trillion rubles.

If we consider the corrected forecasts of IPA and estimates of OPEC, much less panic in relation to our country, the high level of receipts next year will look more than expected. And the formal essence of the majority of the sanctions imposed against Russia consists in provoking a sharp collapse of the income of the state. Besides it can happen so, as the next year will not bring normalization of energy costs. Then the income of the federal budget can be even higher than is predicted today. From the point of view of the USA and the European Union, it is inadmissible. But the fact is that production in Russia after a collapse recovered to a mark of 9.9 million barrels per day. And, despite discount, average prices of the Russian black gold remain at high level. That is, on the one hand, sanctions work as considerable discount is observed. On the other hand, it did not turn out to lock significant volumes of black gold in Russia and to crush production.

At the same time the United States persistently pressed on the market to lower oil quotations. Since the end of 2021 the USA has been selling strategic reserve. First to the market1 million barrels per day, 50 million barrels were injected, and in March 2022 it was decided sell another 130 million barrels (in the fall, an auction of unprecedented generosity was decided extend). Since the end of the third quarter of 2021 on the end of the third quarter of 2022 the reserve was reduced from 612.541 million barrels to 399.792 million barrels (the minimum volume since 1984). Though the USA tried to solve internal political problems with this sale, reduction of the world prices could make impact on receipts in the Russian budget. But during the American interventions on the market the prices only returned to very high rates of the end of February. And anti-covid restrictions in China continue to make bigger impact to the world market. On this background an idea about system of the limit prices seemed very attractive. And in summer the G7 countries and the EU coordinated basic principles of this system. First, it was decided to make a start from the sixth package of the European sanctions, having tied start of system to introduction of embargo to the EU. Secondly, earlier accepted restrictions were not cancelled — respectively, neither the USA, nor Europe (apart from the exceptions specified in the sixth package) will buy the Russian oil at the limit prices established by them. Thirdly, it was necessary to create the wide coalition of buyers which had to include the countries wishing to get further energy carriers from the Russian Federation but at lower prices.

Fourthly, the answer to the main question was found: how to force Russia to sell black gold at the limit prices. The Russian enterprises which will be ready to work within system of the limit prices, will acquire the right to use all services in shipping of the American and European companies. Thus it was decided to establish limit prices at the level which guaranteed receiving profit by the Russian side. Simply the profit should not have been excessively high. Explanations followed for the Western public, which was excited by the actual abandoning the policy of ousting Russian oil from the world market. Isn’t it a capitulation? No way! The G7 and the European Union are simply slipping in deep crisis care a lot of the poor countries. After all, they would be disproportionately affected with further actions to prevent the export of Russian oil. It’s obvious that United States and Europe are not affected by any shortage and soaring energy prices! The experience of 2021–2022 convincingly proved this thesis. U.S. authorities and the EU did not call concrete levels of price limit. But, according to information from open sources, the speech originally went about $40-60 for barrel. And so proceeded up to the moment when the countries which signed the agreement of OPEK+ decided to reduce by November-December, 2022 production quotas on 2 million barrels per day.

Between 40 and 60

Level of $40-60 is quite explainable. It corresponds to a stop-out price. And the leaders of our state for 2020-2021 declared desirable and sufficient price of oil for Russia about $55 for barrel. Respectively, $40-60 had to satisfy the Russian producers completely, especially taking into account opportunity to increase deliveries to the level registered in quotas.

The oil output (without gas condensate) by the end of summer lagged behind the quotas registered within OPEK+ approximately on 1.1 million barrels per day. However and the mix Urals rose in price from $71 in April to $90 in June, though in July and August it became cheaper, having fallen to the minimum mark in an early autumn ($68.61 for barrel). But nevertheless the USA and their allies considered that Russia will agree, though the country leaders absolutely accurately designated a position: there will be no oil, if a ceiling of the prices is introduced.

Participation of our country in this system not simply would strike on our economy (at first slightly but who will prevent to lower this stretch ceiling below?). Participation of our country would create precedent: so it is possible to work and it is so possible to arrive with any large exporter of black gold. The transaction of OPEK+ would crack and then would break up at all. By the way, our partners in this transaction, most likely, understand that if their hands now crush Russia in the world market, the same focus can be turned with any of the remained noticeable players.

However in September the United States diligently radiated optimism. So, Deputy Minister of Finance of the USA Walley Adeyemo, making explanations about system of the limit prices of the Russian oil during his speech at the Brookingsk Institute (Washington) declared the following: «The widespread objection which I heard is that Russia will not sell oil at the limit prices or below and instead will simply refuse export. We think that it will not occur because the limit has been set. Russia can storm and declare that will not sell below the established price, but the oil production control economy simply does not make sense: restriction of the prices creates obvious economic incentive for sale below restriction».

What will happen if the coalition of buyers who want to risk and play the Russian oil roulette, does not take place? There is a risk of deficiency because of restrictions of access to the western infrastructure of sea transportation. But it is possible to parry it, having created services independent or by means of east partners. But even this consideration the US Deputy Secretary of the Treasury prepared an objection: “We clearly understand that Russia can go and find service providers outside the G7 and other members our coalition to replace maritime services blocked by the EU ban. But these alternative services will be expensive and less reliable than the services provided by the G7. <…> Creation of an ecosystem of services outside the coalition will cost Russia too much that will help to reduce even more the income of the Kremlin». To build own infrastructure is expensive and to use services of those who steal someone else’s property and imposes sanctions is cheap and reliable. Fine argument! However the Minister of Energy of the Russian Federation Nikolay Shulginov noticed the following: «We study a possibility of use of a number of local insurance companies from friendly countries. Other option is creation of a new insurance company, but then it is necessary mutual recognition by the countries of this organization».

In reply our excellent western partners just in case specified that «in case the vessel under the flag of the third country transported the Russian crude oil or oil products acquired at the price exceeding the limit price it has to be forbidden to provide it technical assistance, broker services, financing or financial aid, including insurance, connected with any transportations in the future by this vessel of crude oil or oil products».

Members of the coalition G7 and the European Union were not in time to coordinate finally the basic principles of system of the limit prices, the EU did not manage to implement these principles in the legislation as OPEK+ began to reduce quotas. For a start quotas for October decreased on 100 thousand barrels and then by 2 million barrels per day for November and December.
It did not mean that production will be reduced by 2 million barrels, after all some countries did not take up their quotas. It meant that no additional volumes replacing the Russian oil will definitely exist. There will be no them neither during elections in the USA, nor at the time of introduction of embargo on the Russian black gold in Europe.

Then an idea to raise a ceiling came to someone’s bright head.

It is a little for 60

Some misunderstanding of the basic principles on which the system of the limit prices will be under construction is observed in many world and Russian mass media. So, there can be an impression that our beloved western partners will impose sanctions on all buyers of the Russian black gold if those do not use this system.

Actually sanctions will be imposed only on those countries which will formally introduce price celling but will continue buying Russian oil on the same (market) conditions. From the point of view of the G7 countries and the European Union, such a situation looks as attempt to use services in shipping of the Russian raw materials in circumvention of sanctions. The corresponding explanations were made by both American and European officials.

That is remarkable: they made these explanations during the same period when tried to shine brightly optimism, inviting large buyers like China and India in the «wide coalition». If you join how favorably and absolutely safely it is, as Russia has no place to disappear, from where do these threats and suspicions to potential partners come from? Why do they need to buy Russian oil more expensive in absolutely safe and favorable conditions established ceiling? Is there an element of hypocrisy here and is there vile deception attempt by the G7 and the EU? Of course not and how we could think so!

Anyway, the management of the G7 and the EU came to a conclusion that risks of the termination of deliveries from Russia and the deficiency going after it very much and are very real. In the hearts of leaders of progressive mankind the concern on destiny of the unfortunate small countries with weak economy prevailed again. Therefore, according to Bloomberg, at the end of October Biden’s team decided to finish the plan of restriction of the prices of Russian oil.

The essence of completion is difficult and fundamental: Biden and his team decide whether to establish the level of the limit prices over $60 for barrel. As notes Bloomberg, «Putin declared that Russia will not sell oil to anybody who participates in restriction of the prices. The threat <…> now considered as viable».

Most likely, level from $60 to $70 that is much closer to the real average price is considered at which during the current autumn the mix Urals is on sale. By the way, the embargo entered by Europe most concerns it. Thus, if information of Bloomberg is right, our remarkable western partners decided to strengthen economic incentives which have to move Russia to join system of the limit prices, having refused earlier these promises not to deliver black gold to the countries which use a price ceiling.

For example, considering the September level of average prices of Urals $68.61 for barrel and quotas of 11,004 million barrels per day, Russian companies could increase deliveries to 1.1 million barrels and earn about 15% more if they had to sell raw materials at $60 within system of the limit prices. But quotas were reduced to 10.478 million barrels per day, and the prices of the main Russian export mix grew to $71.91 for barrel. Economic incentives to deliver black gold at the prices not above the ceiling became really smaller. And the United States is counted, most likely, on the Russian participation in this show due to the verified economic incentives.

Own ecosystem

The problem for our country is that the ceiling of the prices can be reconsidered. There are no restrictions which would be registered in the limit prices regulating system acts. Today you agree to sell, for example, black gold at $65, and tomorrow you will inevitably force to sell already at $45. Benefit will not block tomorrow’s losses today. Thus we speak only about economy and we do not concern such important component as reputation losses.

From the point of view of the United States and its allies, additional half million barrels that our country if gives in on arrangements can throw to the world market and will join in system of the limit prices, are extremely necessary as they will put pressure upon the world prices. In any case, it makes sense until China keeps anti-covid restrictions and constrains demand for black gold. However in October this country increased import of oil by 7.2% in comparison with September (to 10.5 million barrels per day). Though following the results of the first 10 months of year this indicator was 2.7% less than for the similar period of 2022.

Such a low activity of the People’s Republic of China allows Saudi Arabia to transfer part of the volumes to American market.

Actually, the factor of China was and remains the main one in the world market of oil. This country annually increased average daily demand for black gold for 0.4-0.5 million barrels. Return to former growth rates though is doubtful in the conditions of world crisis which we observe now, but huge domestic market and high rates of motorization of the population allow to look at the oil future with optimism and to count on the further growth of the Russian deliveries to the People’s Republic of China.

And for ensuring these deliveries and also for expansion of our presence in the other friendly markets we need to develop not only pipelines but also to build a full-fledged ecosystem of shipping: from insurance to shipbuilding, as well as to develop the Northern Sea Route.

It is impossible to tell that these tasks did not exist last years. But now the accelerated rates and full devotion are necessary. The energy companies understand it. Now it is turn of shipbuilders and state.