The price cap of 60 dollars per barrel of Russian crude oil decided by the G7 countries has been in effect since December. This, so the calculation goes, would deprive the Kremlin ruler of an important weapon: Putin can no longer enrich himself from oil and use it to finance his war. The Russian central bank is now warning of a very weak economy. Is Putin trying to build a shadow fleet?

The western strategy could work: initial findings indicate that the latest sanctions imposed by the west are severely disrupting the Russian oil export business. Moscow’s central bank admits with unusual openness that Russia’s economic development will be significantly reduced – also because of the oil embargo. Since December, the G7 countries have implemented a resolution according to which Russian crude oil can only be paid for at a maximum of 60 dollars per barrel (159 litres).

The complicated regulations of the G7 countries and South Korea on the one hand, and the restrictions imposed by the EU that go beyond this, hit the market for Russian oil at a moment when there is no global shortage. In other words, the West is not dependent on buying Russian oil for the time being. Therefore, the measures do not tear a hole in the supply in this country, especially since the West has long been oriented towards other sources. The sanctions also include not offering Russian exporters any services related to oil exports as soon as the price of oil exceeds $60 per barrel.

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Since Russia relies on Western technology for export via oil tankers, the price cap applies. Also: The largest shipping companies in the world are based in the EU. In addition, the international tanker fleet needs western insurance to protect its transports. This means: If you don’t stick to the price cap of 60 dollars, you will have a big problem with shipping. Not least because of this, numerous countries outside the EU, for example in Asia, also agreed to the embargo conditions.

Meanwhile, beneath the surface, a kind of shadow war is raging between Kremlin ruler Vladimir Putin and much of the rest of the world. The current situation, namely that Russia has to offer its oil in the ports in the Baltic States and the Far East at prices well below the embargo limit, is ruinous in the long run. But since Russia does not have sufficient storage capacity, the production, which has been curtailed anyway, has to be sold – at almost any price, as major buyers such as China or India know. The Chinese support for the Russian brothers does not go so far that they would pay more for the oil than is absolutely necessary.

Depending on the type, a Russian barrel currently changes hands for between $40 and $68 – well below the current price for North Sea Brent oil ($82.60). Although Putin issued a decree prohibiting him from selling oil to importers who apply the price cap directly or indirectly from February 1, it is of course still open whether this can be maintained: “We have clear signals that a number of emerging countries, especially in Asia, will observe the principles of the cap,” the AFP news agency quoted an unnamed EU representative as saying. As a result, Moscow lost a large number of customers after February 1, which should further depress the price. Possibly reaching then without a lid at 60 dollars or less.

A countermeasure that Russia has been pursuing for some time, according to industry insiders, is likely to take effect too late: the increasing purchase of used oil tankers by unknown addresses indicates that Russia is in the process of building a so-called “shadow fleet” that could run under its own direction. Until such ships are ready for use and the necessary technology and logistics, which cost billions, have been set up, a lot of valuable time should pass for Putin. And every day that Russia has to squander its oil, the deficit drives up: Western experts have calculated that Russia can produce at around $100 a barrel to break even; the thing would only really be worthwhile at around 120 dollars.

The situation is currently coming to a head because such a price surge is nowhere in sight. Until recently, observers had expected an increase of up to 150 dollars, but the mild winter in the industrialized countries and overall economical consumption have caused demand to collapse. The production cuts announced at the last meeting by the states of the OPEC oil cartel and Russia are no longer as frightening as they were in December.

Now the consequences of the sanctions and the recession are coming together in a mix that is not good for Russia. As the Moscow Ministry of Finance announced this week, the deficit in the state budget for 2022 was the equivalent of 44 billion euros. The economy shrank by three percent and is expected to remain in recession again this year at three percent, although such forecasts are difficult in view of the volatile situation. Capital flight remains a crisis issue in Moscow – and the central bank also referred to the consequences of the general mobilization for the labor market that are now gradually being felt: the conscripted soldiers are not in production. But those who are still missing are the numerous Russians who have fled the country and want to escape the war in Ukraine. On the embargo front, meanwhile, Russia is facing a further tightening: From February 5, the sanctions will no longer only apply to crude oil, but also to all oil products such as petrol and diesel – another blow, this time for the country’s refineries.

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