Anna Kemerova: What is known about how the price cap will operate?

Marcel Salikhov: For now, the idea is to purposefully decrease the price at which Russia will be able to sell oil for export to third countries (outside of the EU — editor’s note). Western countries’ companies won’t be able to provide transportation, insurance, financing services, etc., if the price of Russian oil is above a certain level. This applies only to maritime transportation — around a third of all Russian deliveries. However, it’s unclear how this restriction will work in practice. Who will be responsible, who will be administering all of this? The price cap is also unknown. So for now, it’s impossible to say for certain how it will work.

Furthermore, the embargo on Russian oil deliveries to the EU will come into effect soon. How will these two measures affect each other?

When the US had introduced an embargo on Russian oil in the spring, it became clear that it was quite an ineffective mechanism. Russia didn’t take long to find other delivery routes, and by June, it had re-established February’s level of production. So, these measures were recognised as ineffective. They started discussing alternative restrictions, which is how the price cap mechanism came about. I think that Western countries will observe whether this mechanism works — and depending on the political situation, come up with other ways [of restricting Russian oil deliveries].

It’s assumed that both the embargo and the price cap will be enforced on third-country deliveries. I think that’s not the best of ideas, even from the European point of view. Let’s say, the European Commission can control its own shipping and insurance companies, seeing as they’re in its jurisdiction, but it’s hard to control the deliveries to third countries. In these cases, there are many ways to bypass [the restrictions]. And moreover, the embargo will still be in effect. So, Europe declines to continue buying Russian oil. They’ll have to look for alternative suppliers, and this will create big problems for Europeans themselves.

Will the export of Russian oil to the EU eventually decrease to zero?

Theoretically, it should reset to zero due to the embargo. But unofficially, some volumes will continue being delivered. One can make a lot of money if they buy Russian oil for cheap, refine it, and then sell it at world prices. Accordingly, it’s hard to estimate whether the EU will be able to control deliveries to third countries, for example China or India. I think that they most likely won’t be able to. In any case, it will lead to a bigger discount on Russian oil, seeing as the buyers of Russian oil and the companies providing services — for example, they are a part of the transportation process — become subject to secondary sanctions.

Are there examples of such schemes that would allow to bypass sanctions?

For example, India has been increasing purchases of Russian oil and shipments of oil products. We are not talking about big volumes, but nevertheless. In the last months, India exported oil to, let’s say, Europe. Then one can say that India is buying Russian oil, refines it, and sells it to Europe. But one can say the same thing in a different way too: India uses Russian oil for domestic use only; the oil it refines and sells to Europe is some other oil. One can’t mark every barrel of oil and say: “Oh, this one is Russian!” This is how, for example, Venezuelan and Iranian oil are often sold through Malaysia. They mix everything together and then say: “This is our Malaysian oil.” And then they deliver it to some place. Such schemes exist.

The OPEC+ countries announced steep oil production cuts just a day before the new sanctions against Russia. Are these events connected?

I think so. In a chronological order, OPEC+ decreased the production, and then the EU announced the price cap. In reality, it was kind of the other way around — OPEC+ cut production due to the Russian oil price cap being discussed and planned to be introduced. Representatives of OPEC+ publicly declared that they didn’t support such measures, seeing as a price cap against one big supplier means certain coordinated actions from the buyers, something akin to the buyers’ cartel. While OPEC+, when it comes down to it, is an oil producers’ cartel. Accordingly, the OPEC+ countries’ point of view is that similar instruments could potentially be used against them too.

— de facto, the cartel’s decision to decrease oil production is a sign of support for Russia. And respectively, a way to reduce the effectiveness of the price cap mechanism.

So, the cartel countries cut down the production in response to the EU discussing the price cap?

It’s one of the reasons. The second reason is connected to the fact that the US has been selling oil from its strategic reserves since the end of March. The idea was to partially compensate for the volumes lost after the introduction of the embargo against Russia and to stabilise the oil market. But when worldwide oil prices had started decreasing back in August, the OPEC+ countries began to kind of call upon the US to suspend the sales of the oil from the reserves, saying that the price was already too low as it was. The US did not take that step, and essentially, OPEC+ perceived that as an unfriendly act towards them.

To some degree, these disagreements were what led to the decision to cut down the oil production by two million barrels per day. It’s clear that the factual reduction will be not that big — up to one million, maybe a little bit less. In particular, due to the fact that Russia extracts less oil than is their quota, which is not very relevant to us right now. For all countries that extract less than are their quotas, this reduction means nothing. The effect will be noticeable only for the countries that produce oil according to their quota or more. First of all, that’s UAE and Saudi Arabia. But if you sum up all the OPEC+ countries that produce oil at the level of their quota or more — that’s a bit less than one million barrels per day.

What was the role of Russia in this OPEC+ decision?

This is a beneficial decision for Russia. So, obviously, it called upon OPEC+ to make it. Russia’s opinion is a major one, but it’s not the definitive one. If Saudi Arabia doesn’t agree with something, Russia’s voice won’t be the ultimate factor. The key point of all OPEC+ decisions is for Russia and Saudi Arabia to come to an agreement, to end up on the same page. Sometimes, like back in 2020, they have disagreements, but currently there are none.

Is this beneficial to the other members of the cartel?

In general, yes. Especially for the countries that produce less than is their quota. Russia, Nigeria, Kazakhstan — it’s beneficial for them, because they won’t reduce their oil production, yet still will win from the prices rising. Saudi Arabia is ready to cut down production to support world prices.

Can non-OPEC+ countries substitute these volumes?

At the moment’s notice, Iran could probably be the only one to do so. It’s part of OPEC+, but it doesn’t have a quota. Iran has quite a lot of oil in its reserves, which it can’t sell due to the sanctions. So any serious alternative supplies can only be acquired through Iran.

How can Western countries react to the OPEC+ decision?

Official US representatives said that they considered this decision unfriendly both to the consumer-countries in general and to the US in particular. They will undertake measures, but it’s not quite clear yet what these measures will be — they’re already selling the oil from the US reserves. They can’t start selling more, there are technological restrictions: how much pipeline infrastructure allows to pump out per unit of time. I think it can’t be more than one million barrels per day.

Maybe, it’s time to remember the NOPEC bill which presupposes that [the US] could introduce restrictions against OPEC+ countries; but this bill has been stuck in the Congress for the last 10-15 years. From time to time, the bill is pulled up, the dust gets blown off of it, but nothing else happens. It’s not excluded that some solutions could be found there, I don’t know. I think that for now one shouldn’t expect any retaliation, because it’s impossible to be solving all problems at once, simultaneously. For Western countries, the bigger priority right now is to establish the price cap, to set up this mechanism, etc. Although the fact that OPEC+ basically supports Russia makes it harder.

Who will lose more at the end of the energy war: Russia or the EU?

This is a difficult and relative question.

Structurally, Russian exports will be damaged. Even the official forecast of Russia’s Ministry of Economic Development assumes that oil production will decrease by 5% next year. And the number will, probably, be bigger.

But oil and gas revenue won’t decrease that much next year. Simply due to the fact that the Ministry of Finance understands that there are certain risks, and so it will increase the level of taxation. They could increase tax collection — the export duty on oil and oil products, the severance tax — and protect budget revenue this way. At least according to the current logic. The first victims of this [policy] will be oil companies.

Is there still space for new oil and gas sanctions against Russia?

Probably, the situation is developing in a dynamic way. Introducing a special tax on Russian oil is being discussed. It’s assumed that if a European company buys Russian oil, it should pay a 25% tax. But this idea contradicts the embargo, so then the embargo would have to get cancelled.

According to you, what will the oil price range be in the near future?

Oil prices are impossible to predict, anyone who does this for a living knows it very well. Everything we’ve discussed are the factors from the supply side, but there’s also the demand side. Let’s say, the world economy enters recession, there’s a serious crisis of the largest economies and an economic downturn. Not just a general crisis, but an actual economic decline, which essentially, has not yet happened neither in the US nor in Europe. Then, oil prices will decrease. If there’s no economic crisis, then the price range will be $90-100 per barrel — which is quite comfortable for the Russian budget. If the global economic downfall begins, then the prices will be much lower.