Western nations cap price of Russian oil over war in Ukraine

Amna Nawaz:

Today, the West is attempting something that has never been tried, capping the price of oil. The G7 group of leading industrialized nations, the European Union and Australia have agreed not to facilitate the export of Russian oil unless it's sold for $60 or less a barrel. And, today, the E.U. banned all seaborne imports of Russian oil.

Nick Schifrin explains the impact of the farthest reaching efforts to target one of Russia's main sources of income that helps fund its war in Ukraine.

Nick Schifrin:

Every day, Russia exports an average of 7.7 million barrels of oil. In October, that made Moscow $17 billion.

Exporting those barrels require a buyer, a ship, which has an owner, charterers, and managers. It also has insurance and re-insurance and logistics. And now all these services subject to U.S., E.U. or Australian law — that's 90 percent of them — can't illegally facilitate Russian oil exports unless that barrel is bought for $60 or less.

Frans Timmermans, Executive Vice President, European Commission:

We want to reduce the income Putin gets from his oil, because he's financing his barbaric war with it and all the atrocities the Russians are committing in Ukraine, and at the same time not disrupt international oil markets. That would not help us either.

Nick Schifrin:

Russia is the world's second largest oil exporter. And, this weekend, Deputy Prime Minister Alexander Novak said Russia would keep selling oil — quote — "only to those countries that will work with us under market conditions, even if we have to reduce production a little."

Those countries outside the cap include China, Turkey and India, which together buy 3.5 million seaborne Russian barrels a day. Today, Beijing said it would ignore the West's efforts.

Mao Ning, Chinese Foreign Ministry Spokeswoman (through translator):

China and Russia always carry out energy cooperation in the spirit of mutual respect and mutual benefit.

Nick Schifrin:

U.S. officials believe $60 is high enough to motivate Russia to keep producing, but Ukrainian President Volodymyr Zelenskyy called the cap too high.

Volodymyr Zelenskyy, Ukrainian President (through translator):

You wouldn't call it a serious decision to set such a limit for Russian prices, which is quite comfortable for the budget of a terrorist state. This is a weak position.

Nick Schifrin:

And for more on all this, we turn to Elina Ribakova, deputy chief economist at the Institute of International Finance. Her organization is a global association of the financial industry.

Elina Ribakova, thank you very much. Welcome to the "NewsHour."

How much will this $60 price cap reduce Russian revenues?

Elina Ribakova, Institute of International Finance: Well, it will reduce Russian revenues by about 1 or 2 percentage points of GDP.

It will make Russia's deficit next year not 2 percent. It will make it three or 4 percent. And let's not forget that Russia's debt-to-GDP ratio is one of the lowest in the world, at 17 percent. So, I would say not too much.

Nick Schifrin:

And if I'm sitting in Ukraine thinking about this price cap, hearing Zelenskyy it's not enough, 1 to 2 percent sounds like a lot less than what Ukraine has suffered.

Elina Ribakova:

Absolutely.

What Russia has done since 2014 is prepare fortress Russia. It has protected its external finances. It has cleaned up its Banking system. It's implemented inflation targeting and the fiscal rule in order to be better protected from future sanctions that we might impose on them.

Nick Schifrin:

How is Russia likely to respond, beyond the statement that we saw it make this weekend? Are U.S. officials right in predicting that Russia will continue to produce the same level of oil?

Elina Ribakova:

This is a very tough prediction. Russia has been very consistent from day one, saying that they're not going to comply with oil price cap, which is, in this case, particularly ironic, because this price cap is very close to their budgeted number.

It might be actually very convenient for them to comply. But, as we know, President Putin can be extremely stubborn and not guided by macroeconomic considerations, but how it looks on the geopolitical agenda. And then he just might refuse, because, so far, the message has been extremely consistent.

As you mentioned, Novak made the statement, the minister of energy, Peskov, presser for Putin, as well, Putin himself. And they also made prepared guidelines for not complying. So, if they're — one of their buyers are complying with oil price cap, it is illegal for them to then sell to that person.

Nick Schifrin:

And so is there a risk there that, if Russia decides to reduce production, that would actually drive prices up?

Elina Ribakova:

There is a risk.

Basically, if Russia refuses, it means it shoots itself in the leg, and then we actually go back to the embargo. We have spent a disproportionate time discussing the oil price cap just because of the complexity of the oil price cap endeavor. But the embargo, I think, is — that's the real game-changer here, and Europe refusing to buy Russian oil.

So, if Russia refuses to sell at the cap, I think then that's what we're going, to an embargo. There is a risk of — I have seen estimates — We have looked at it ourselves — between 3.5 to two million barrels per day could be removed from the market. And then, of course, that will have a short-term impact on the oil price.

Nick Schifrin:

The embargo you're talking about, of course, is the E.U. stopping any kind of seaborne oil shipments as of today.

How significant is that, given Europe's historic reliance on Russian oil?

Elina Ribakova:

Well, Europe has demonstrated it can live without Russian gas. And European reliance on Russian gas has been disproportionately more significant than Russian oil.

Yes, before this war or the sort of full-fledged invasion, Europe used to import more than 40 percent of Russian oil. That picture has changed dramatically already. We have seen China, India, Turkey pick up Russian oil, and Europe has reduced significantly.

So, as you know, embargo is just on seaborne oil. But, already, Germany and Poland said they're not going to use the Druzhba — Druzhba, by the way, is friendship, right, ironic — pipeline. They're not going to buy oil from that pipeline either.

So I think, for Europe, if Europe has demonstrated they can live without traditional gas, they can definitely live without Russian oil.

Nick Schifrin:

Russia has created what industry experts call a ghost fleet of ships, basically ships not covered by traditional insurance, again, most of which is governed by the G7.

Will those kinds of efforts that Russia is making allow it to effectively skirt around the price cap?

Elina Ribakova:

Well, the fact that we gave them a sort of headway, a head start to prepare for this measure, of course, for European Union, it was also important for their own reasons to have this sort of gap between the implementation of the sixth package and the actual and actual enforce — sort of coming into force.

Russia established a working group in Kremlin, working very hard how to circumvent the sanctions. They have bought extra ships, and they have found sort of extra capacity. That is more than a quarter of their seaborne oil at the moment. So, they still have a big gap.

Once the embargo and the oil price cap go into force, they cannot fully substitute the global companies' provision of ships for seaborne oil.

Nick Schifrin:

And, finally, these two actions today, both the price cap that we have been focused on and the E.U. embargo, are the largest attempt by the U.S. and Europe to try and affect Russia's finances when it comes to being able to fight the war in Ukraine.

So, bottom line, will these steps have an impact in how Russia wages its war in Ukraine?

Elina Ribakova:

Well, just I will turn it around and ask you a question. Do you think Putin is concerned about 1 or 2 percentage points of GDP loss and revenues in the near term?

He is willing to send more than a million people, mobilized to the war that will likely die without any preparation for this sort of pointless invasion. So, will that change his calculus? I highly doubt that.

However, the fact that we are imposing measures, we're sending strong signals that we want to do what's possible to stop the war. It will have a medium-term impact on Russia, maybe not today, not tomorrow, not even potentially next year, but it will eventually limit Russia's ability to continue this war or start the new ones.

Nick Schifrin:

Elina Ribakova, thank you very much.

Elina Ribakova:

Thank you for having me.