OPINION: Coming Oil Sanctions Against Russia: What to Expect

The current sanctions in place against Russia will in the near future be supplemented by a key component, that of oil sanctions.

On the one hand, they are the most important.

After all, Russia is rightfully called “a gas station masquerading as a country.” On the other hand, they are the most difficult.

Therefore, it has taken nearly six months to implement them.

Why is this difficult? The oil market is overly important for the world economy, and for the U.S. economy and politics too.

After all, it is not for nothing that the president’s poll ratings clearly correlate with movements in the price of fuel – and that applies to the poll ratings of any president.

These sanctions were planned a long time ago. But it is impossible to calculate their effect, and game theory professors can give a lot of lectures about this problem.

It is impossible because they were supplemented with a key component – the price limit for Russian oil.

What is it, and what’s all the fuss about? The key idea of this sanction is not to remove Russian oil from the market, but to deprive the Russian state budget of revenues from the sale of oil, as now, more than ever before, it depends precisely on oil earnings, because the sanctions steamrollered other sources for filling the budget.

At present,  the EU (except for Hungary and some other states, but that’s a sad story), the U.S., Britain, Japan, Canada and Australia are refusing Russian oil. By the way, now, even before the introduction of the sanction, a fall in Russian exports is already being recorded.

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But Russia can redirect its oil to other markets, primarily to Asia, to which Russian oil can be delivered and has been supplied since the start of the war at a significant discount.

The West cannot prohibit them from buying it. This is not the time. Therefore, it was decided to introduce a price limit at which third countries will be able to buy Russian oil.

How can it be organized in reality? How can you tell India, for example, at what price it can buy oil from Russia?

Well, through insurance.

Every tanker must be insured. Otherwise, for example, it will not be able to pass through the Bosphorus. And as it turns out the lion’s share of Russian tankers have to pass through the Bosphorus.

But insurance in the world is mainly carried out by companies from Western countries. Britain is the key insurer. Now they are simply prohibited from insuring oil under contracts whose price exceeds the limit.

How will this affect the Russian state budget?

It is still impossible to calculate this. Because we simply don’t know the ceiling level.

And we don’t know the reaction of Russia, which can be irrational, as it turned out to be on the gas market when Putin deprived himself of gas revenues.

What will the price limit be? It can’t be much lower than the current price of Russian oil, or can cause income coming in to collapse dramatically. We see this in trade within the EU.

Malta and Greece, whose companies are engaged in transporting oil,  want such a limit that Russia won’t notice and continue transportation.

And, for example, Poland and the Baltic States want to immediately hurt Russia and are looking for a price of $30 per barrel. The limit can be fixed at one level and then changed.

The limit can and most likely will be fixed, and not tied to quotes on exchanges.

Why? Because if prices go up, the ceiling price will also rise, which will only benefit Russia’s state budget.

Why can prices rise? There are thousands of reasons. But the main factor influencing uncertainty is Russia’s reaction.

And here we come to the most interesting thing, that of game theory.

At first Russia reacted very sharply to the plan to introduce the ceiling price. Apparently because it understands that it will be painful both in the long-term and short-term.

It is quite possible that the Kremlin’s hysteria with firing missile attacks to force Ukraine to negotiate is connected precisely with Putin’s realizing how excruciating it will be for him after oil sanctions are introduced.

And he’s in a hurry.

Thus, Russia declared that it would not tolerate such humiliation, and would not supply oil to those countries that support the introduction of the price limit.

The question is which countries they actually have in mind. If they mean those that impose sanctions, then that is one thing.

Anyway, an embargo will be introduced, and they will not buy Russian oil.

Or maybe Russia means that those countries that will buy oil insured under the new rules will be qualified as such. Then tanker deliveries to almost all buyers will have to be halted.

Will it hurt Russia itself? Of course.

But Russia has proven on more than one occasion that it can do this.

How can we figure out what the Kremlin will do? It’s impossible. It is believed that the higher the ceiling price, the less likely Putin’s hysteria will be.

But there is no guarantee. After all, they are often led by the principles based on the idea of a great and powerful Russia.

On the other hand, when Putin went on principle in the gas market, he knew that the EU was already planning to abandon supplies from Russia in six months, and he had little to lose in the long-term.

It’s not so easy with oil. Oil revenues have always been the key issue. Before the war, they exceeded gas revenues fourfold.

Confused? That’s it. And everyone’s confused.

So, what is the conclusion? Let’s stock up on popcorn and wait for Monday, December 5. We’re all looking forward to it.

The views expressed in this article are the author’s and not necessarily those of Kyiv Post.