Western Price Cap on Russian Oil Will Hurt Europe But Benefit China and India, Industry Experts Say

Moscow’s response to the western-imposed price cap on Russian oil exports took effect on Wednesday, banning sales to nations that require buyers to abide by the cap.

The price cap limits the price of Russian crude oil to no greater than $60 per barrel. It was originated by the United States and imposed on the European Union, Group of Seven, and Australia.

Russian state-owned gas firm Gazprom has said that such caps are breaches of contract, and President Vladimir Putin has condemned them as anti-market interventions.

The cap is the latest effort to undermine the Russian economy and compel Moscow to end its special military operation in Ukraine, which began in February 2022. The operation is aimed at turning Ukraine into a neutral state and preventing the stationing of NATO weapons on Ukrainian soil, which Moscow has called a security red line. NATO states have rushed to support Kiev, funneling them billions of dollars and weapons in an effort to reverse Russian progress in the conflict.

Thierry Bros, a professor at the Paris Institute of Political Studies and contributor to independent specialized website Natural Gas World, told Sputnik on Wednesday that it was part of “the balance of sanctions” that the two sides would try to hurt the other side.

“It takes time for those two strategies; it takes time. I mean, if you go back to oil and gas in 2022 – the Russian budget did benefit, in fact, from higher prices. So this is where we are. I think it's going to further hurt us, not so much in the oil because with the oil we've managed to balance. I mean, the Chinese and the Indians are in fact reaping the profits of this. They are buying Russian oil at a discount and selling us the products,” he said.

Bros predicted that the loss of Russian diesel fuel would hurt Europe the most.

“I think this is where we are more into unknown territories, uncharted waters, because we continue until now to import Russian diesel as Europeans because we have too many diesel cars and the refineries aren’t producing enough diesel. And yes, diesel is a fungible product. So we could see the same thing as in oil, i.e. diesel moving to India and China, and India and China reselling their own diesel to Europe and making a profit. But we can also have some unexpected changes in Russia, and this is what I would call ‘the uncertainty principle.’ I mean, the Kremlin is fully aware that diesel is going to be a bit of a problem and if the Russian diesel export starts to be reduced, then the diesel price in Europe is going to skyrocket.”

Thierry Bros

Professor at the Paris Institute of Political Studies and contributor to independent specialized website Natural Gas World

The expert noted that while the impact on European industry has perhaps not been as great so far as Moscow might have hoped, thanks in particular to a mild winter thus far, the energy shortage will become more severe over the longer-term. Europe is “not going to reindustrialize,” he said.

“If you're a German chemical industry, does it make sense to build your new plant in Germany where energy is expensive, since they don't have any cheap Russian gas and where labor is expensive? Maybe not. And so I think on the longer term, this will have greater complications on both sides. I mean, we will be less well-off on both sides. But that's the outcome of sanctions. So, the balance of the power - energy on one side, money on the other side, is quite balanced. But we are hurting ourselves on both sides,” he said.

Earlier this week, the International Monetary Fund (IMF) predicted that Russian exports would “not be significantly affected” by the price cap, since it can simply sell to other nations not abiding by the cap. Bros said he agreed with that conclusion, but pointed out that “it’s the Chinese and the Indians that are going to benefit from this.”

“Russia is going to find itself de-facto facing a monopoly buyer, which is going to be China and India. And this monopoly buyer, or duopoly buyer, whatever you call it, is going to ask for a huge discount. And the huge discount will be more or less the level of the cap… So industrialization is going to be in Asia or in other parts of the world, but not in the EU.”

Dr. Mamdouh G. Salameh, an international oil economist and a global energy expert, told Sputnik that he also agreed with the IMF’s assessment, noting in particular that Russia’s sizable fleet of oil tankers would allow it to pick its customers.

“It neither needs western shipping nor western insurance for its oil cargoes,” he said. “If more tankers are needed, it could avail itself to Chinese, Indian and other Asian tankers with customers insuring their cargoes given the preferential oil price they are receiving from Russia.”

Salameh said that western attempts to hurt Russian energy exports had “failed miserably” so far, since the global market has effectively rejected the cap.

The proof is that when the cap was introduced on 5 December 2022, the Brent crude oil price was $71 a barrel. Today, Brent Crude’s price is $85.36, or 20% higher. This means that the global oil market has already rejected the price cap.

Dr. Mamdouh G. Salameh

International oil economist and a global energy expert

“President Putin's decree that Russia won’t export crude oil to countries complying with the cap with effect from today is a retaliation against the cap and could lead to shortages in the oil market. This will be followed later by another ban on the sale of Russian petroleum products to countries applying the cap. Countries complying with the cap will have to look for alternatives to Russian crude but in so doing they will have to pay far higher prices to get them,” Salameh predicted.

“Russia’s crude exports aren’t affected in any shape or form since they are being sold quickly to China, India and Asian countries as well as Asian oil traders,” he noted. “China and India alone bought on average 1.9 million barrels a day (mbd) and 1.7 mbd, respectively, of Russian crude exports, with Russia displacing both Saudi Arabia and Iraq, respectively, to become the largest supplier to these two countries. The rest of Russian oil and products are being bought by other Asian countries. On average, Russia exported 7.8 mbd in 2022 only 200,000 barrels a day (b/d) less than the pre-Ukraine figure of 8.0 mbd.”

Salameh said that as a result of this position, Moscow “holds the stronger hand” in the brewing fight over energy between Russia and the West.

“Its oil and gas exports are irreplaceable to the global oil and gas markets. Oil and gas drive the global economy and will continue to do exactly that throughout the 21st century and probably far beyond,” he said.

“The economies of western countries applying the price cap and banning Russian crude oil can’t do without oil and gas and will therefore be forced to pay higher oil and gas prices thus inflicting extra financial burden on their economies. Their sanctions, bans and price cap have failed to undermine Russia’s economy. The proof is that Russia’s current account surplus in 2022 hit 228 billion dollars while Russia’s trade balance surplus reached a record of $290 billion, according to data from Russia’s Central Bank. Moreover, Russia’s trade with China in 2022 rose from $13 billion in 2013 to $190 billion in 2022.”