Russian Energy Policy Wriggles Under a Hard Ceiling

The enforcement of the price ceiling for Russian oil transported by sea enacted on December 5 is not a surprise, as this measure was being discussed by the Unites States and its key partners as early as September 2022. It is, nevertheless, important proof of the Western coalition’s undiminished resolve in undercutting Russia’s ability to sustain its all-out aggression against Ukraine. Commentators in Moscow had been keenly following the protracted debates in the European Union on the exact figure of this ceiling, hoping that it would be set high enough to render the measure merely symbolic (Valdaiclub.com, October 30; Nezavisimaya gazeta, November 21). Yet, these expectations were disappointed as the agreed mark of $60 per barrel is well below the average price on the Russian Urals brand for 2022 and is set to preclude sharp spikes to the statistically notable level of $100 per barrel, as was the case in mid-June (RBC, December 2).

In recent weeks, Russian officials had to stick to the guideline set by President Vladimir Putin, who declared that no oil would be exported to the countries that approve the price-ceiling measure (Forbes.ru, November 30). The pretense that Moscow defends the rules of free market trade is too obviously false, but what truly makes Putin’s instructions senseless is the painstakingly measured EU decision to stop all imports of Russian crude oil, diesel and other products (Kommersant, November 28). Russian companies have shifted about half the traditional deliveries to Europe from the terminals near St. Petersburg toward India, but the high transportation costs and the rising demand for discounts preclude further reorientation (Neftegaz.ru, November 24). Opportunities for selling above the price ceiling might still emerge, but only the “grey fleet” of tankers hastily assembled by Sovcomflot could carry this oil. Additionally, the risks related to operating these antiquated ships without proper insurance are too high for most customers (Forbes.ru, November 3).

Moscow assumed that the disruption of its exports and threats to cut production would trigger new turmoil on the global oil markets, so much so that Western economies, already affected by high inflation, would suffer a new squeeze, perhaps too painful for maintaining their political solidarity (Izvestiya, December 3). Uncertainty in the oil markets is indeed disturbingly high, but in anticipation of the new sanctions on Russian exports, these worries have been trending down rather than up, primarily due to the assessments of demand in China as influenced by the recent wave of protests against Beijing’s extremely rigid “Zero COVID” policy (Kommersant, December 2). Russia had reasons to expect that this contraction of demand would prompt the OPEC+ arrangement (Organization of the Petroleum Exporting Countries, the “plus” format includes Russia) to cut down production quotas hoping to push prices up, but caution has prevailed over the greed that commonly influences such decisions (RBC, December 3). Saudi Arabia, the most influential party in this cartel, may be less inclined to offer Moscow a lifeline as it finds the expansion of military cooperation between Russia and Iran even more disagreeable than Israel does (Nezavisimaya gazeta, November 24).

The progressive shrinking of export volumes and revenues will have a profound impact on the Russian oil industry, which must shut down many production assets this winter and has lost access to those technologies and services necessary for rehabilitating the old oil fields and for exploring new ones (The Bell, October 27). The medium-term impacts of sanctions could seriously degrade the Russian energy industry, but the immediate effect of the new measures will distort Russia’s state budget, which calculates revenues on the assumption of oil prices at the level of $70 per barrel for 2023 (Svoboda, November 29). The expenditures in the officially approved budget are only slightly above the revenues, but the costs of mobilization and many other war-related demands for funding have not been included in these estimates (Novayagazeta.eu, November 29). Delays in the payments of generous compensations to the hundreds of thousands of mobilized men and their families since September 2022, which Putin solemnly promised, are causing growing discontent and protests. And these amounts are set to increase as traditional salaries and household incomes continue to shrink (The Moscow Times, November 30).

The inevitable contraction of petro-revenues has prompted the Russian leadership to search for new export channels, and Putin surprised Kazakhstani President Kassym-Jomart Tokayev with the proposal for a gas alliance, which would also involve Uzbekistan (Rosbalt.ru, November 30; see EDM, December 1). Tokayev politely promised to give the initiative due consideration, implying that Astana is not going to experiment with breaching the sanctions regime, which effectively shifts all investment-heavy projects into an indefinite and uncertain future (Kommersant, November 29).

The real purpose of this attention-grabbing proposition, which was also the case with Putin’s earlier idea to organize a gas hub in Turkey, is to signal to anxious Europe, particularly Germany, which has just begun to feel the early winds of winter, that Moscow is working on alternative energy export options and is happy to leave its traditional customers in the cold (The Moscow Times, December 2). This threat has been reinforced by the campaign of missile strikes on Ukraine’s energy infrastructure, which is aimed not only at weakening Kyiv’s will to resist Russian aggression but also at accentuating the feelings of energy vulnerability in Europe (The Insider, November 24). Ukraine, nevertheless, is arduously working to rebuild its electricity grids. As such, Moscow has found it useful to hint at a possible withdrawal of troops from the Zaporizhzhia Nuclear Power Plant, primarily to remind the nervous Europeans about the nuclear dimension of the Ukraine war without making any explicit nuclear threats (Meduza, December 2).

Yet, all this maneuvering and posturing will not alter the reality of Russia’s deepening failure in its energy policy, which was supposed to augment its military might but has instead become a major vulnerability. Moscow used to perceive itself as an indispensable energy power, which could instrumentalize its oil and gas exports for eroding the unity of the Western alliance, and struggles to comprehend the fact that energy-deficient Europe is capable of turning import cuts and price ceilings into instruments of pressure on the aggressor state. Ukraine has taken the initiative on the battlefield from the under-supplied and thoroughly demoralized Russian troops, and every tightening of Western sanctions ensures that Moscow will not be able to rebuild the capabilities necessary for another spring offensive in 2023. The pattern of Russian defeat has gained an additional feature with the introduction of a reasonable and adjustable oil price cap, and the Kremlin has no way of knowing which extra straw will break the back of its corrupt dictatorship.