This month, special presidential coordinator to President Joe Biden Amos Hochstein stated that the Group of Seven’s oil price cap is working “so far so good”. The cap was introduced on 5th December to reduce Russia’s oil export revenues, putting greater pressure on the state’s economy. Hochstein explained: “As oil prices have come down, there’s no doubt that the price cap has, so far, and there’s a long way to go, as we sit today, achieved our interest, which was to have continued supply of oil on the market to support economic growth while limiting the value that oil makes for Putin.”
Countries across the EU adopted new sanctions on Russian oil and gas in December after member states spent months gradually easing their reliance on Russian energy. The price cap means that importers of Russian crude outside of the G7 that use Western maritime routes, insurance, and financing must pay no more than $60 a barrel for seaborne Russian oil. All seaborne Russian oil product exports will be banned by the EU from 5th February.
Russia’s President Putin has responded by placing a ban on the purchase of Russian crude and petro-products for five months from any country obeying the cap. But the wide adherence to the price cap is thought to already be hitting Russia’s economy hard. The Finnish Centre for Research on Energy and Clean Air (CREA) estimates the cost of these caps to amount to a total of around $172 million a day. This counters initial criticism of the cap scheme by several politicians, including Former U.S. Treasury Secretary Steve Mnuchin who thought the scheme cap was “not only not feasible”, adding “I think it’s the most ridiculous idea I’ve ever heard.”
The price cap increased pressure on Russia’s economy, adding to the pre-existing sanctions on Russian crude. CREA believes that the combined cost of the price cap alongside sanctions could equate to $172 million per day. The group’s analysis showed that Russia’s fossil fuel export revenues decreased by 17 percent in December, the lowest level since its initial invasion of Ukraine. However, Russia is still achieving significant earnings from its oil and gas, with revenues of around $691 million per day from exported fossil fuels, a decrease of around a third from earlier this year.
The cost of the ongoing conflict in Ukraine and the knock-on economic effect of energy sanctions has led Russia to borrow money. Russia’s budget deficit increased to a record level in December, following the introduction of stricter sanctions on Russian energy from the US and EU. The fiscal gap rose to approximately $56 billion, with overall spending for 2022 rising by around a third compared to pre-war predictions. This amounts to an annual total of around 2.3 percent of the country’s GDP.
And it’s not only limitations on energy sales that are posing a threat to Russia’s economy in 2023, with expectations for a decrease in other exports. The country’s car sales fell by 58.8 percent in 2022, according to the Association of European Businesses (AEB), following Western sanctions on Russia. This led many Russian car manufacturers to suspend production, particularly as supply chains were heavily disrupted, reducing the availability of parts. Due to the difficulties faced in the manufacturing process, car prices have soared in Russia over the last year, making consumers reluctant to spend on a new vehicle. In fact, car sales fell from 1.6 million in 2021 to just 687,370 last year. Additionally, several major European automakers left the Russian market in response to the Ukraine conflict.
High oil and gas prices at the beginning of 2022 helped fund Russia’s war efforts before it felt the pinch of mounting international sanctions on Russian energy. President Putin has cut and delayed the country’s non-war spending and is considering higher taxes on larger companies to boost revenues. Russia has also been led to borrow significant funds at domestic debt auctions over the last few months to fill the gap, although neither the recent price cap nor energy sanctions appear to have been devastating to the Russian economy to date.
While Russia’s economy remained resilient in 2022, the ongoing pressure from the West will be felt across several industries in 2023. As countries across North America and Europe wean themselves off Russian energy and other products, cutting ties with the country and causing disruptions to its supply chains, we can expect its invasion of Ukraine and subsequent responses from major world powers to have an immense impact on Russia’s economy.
By Felicity Bradstock for Oilprie.com