One such tool was the introduction of price caps on Russian oil and oil products exports, enforced by G7 countries in 2022.
Initially, a cap of $60 per barrel was set, with hopes that Putin’s regime would buckle under the pressure of declining oil revenues. However, the Russian economy has stayed afloat. With each new sanctions package, Moscow invents ever more cunning ways to bypass them, turning its oil pipelines into hidden paths.
The largest importers of Russian oil have become China, India, and Turkey. Russian companies, particularly Rosneft and Lukoil, continue to ensure stable production volumes, allowing them to maintain export levels sufficient to sustain budget revenues. According to CREA, Russia has earned over €744 billion from oil exports since the start of the war, and China and India continue to purchase oil as if it were on a seasonal sale at an outlet.
However, the dynamics of Russian oil prices are changing under sanctions pressure, and since July 2023, the Kremlin has increasingly relied on a "shadow fleet" to circumvent the established restrictions.
Place your bets, gentlemen
Here’s where it gets interesting. Today’s debates about oil prices resemble analysts spinning a wheel of fortune, trying to guess which price will finally collapse Putin’s oil empire. Some bet on $50 per barrel, others on $40, while some believe that price caps should be lowered to $30. All of this is done in hopes of delivering a fatal blow to Russia’s budget while avoiding harm to the global market.
Currently, there’s active discussion of further reducing the price cap to as low as $30 per barrel. The proposed scenario envisions a gradual reduction of the price in several stages. First, the cap may be reduced to $50 per barrel, which would already lead to significant financial losses for the Russian budget. If this doesn’t cause market imbalances, the next step would be lowering the price to $40 per barrel, and ultimately to $30 per barrel (details available in DiXi Group Alert Lowering the Price Cap on Russian Oil and Oil Products: Awaiting New Restrictions).
The arguments in favor of this strategy are simple: even at this price, it would still be profitable for Russia to continue exporting oil. After all, the production cost of oil in Russia hovers around $10-$15 per barrel. But will this be a blow to the Kremlin that could change its aggressive policies?
The arguments in favor of this strategy are simple: even at this price, it would still be profitable for Russia to continue exporting oil. After all, the production cost of oil in Russia hovers around $10-$15 per barrel. But will this be a blow to the Kremlin that could change its aggressive policies?
Small gains, big losses
If we take a closer look at this oil game, it’s evident that the Russian economy continues to suffer significant losses from the sanctions. According to approximate calculations, the current $60 price cap results in losses of $430 million per day for Russia.
However, here lies one small nuance: paradoxically, the global market still needs Russian oil. And if that oil is sold at a discount, countries like China and India continue to purchase it under favorable conditions.
Any decision to lower the price cap on Russian oil must consider potential risks. Russia has repeatedly demonstrated irrational behavior in the market: the Kremlin is willing to take actions that harm even its own economic interests to increase pressure on the global economy. One of the biggest risks is that Russia might sharply restrict oil exports, leading to a market shortage and rising prices. This would negatively affect importer countries striving to ensure their energy security.
Kremlin's bluff
The global oil market remains vulnerable to any changes in supply from major exporters. Imposing new restrictions on Russian oil will inevitably affect the supply-demand balance, which could have consequences for importing countries. Russia has repeatedly threatened the West that it could stop exporting oil altogether if the sanctions become too severe. While many consider this another bluff, the risk remains that Russia might take this step. If Russian oil disappears from the market, prices could spike, putting both importing countries and Russia itself in a difficult position.
But there’s another scenario. The Kremlin could make a "cut off your nose to spite your face" move – reducing oil production to try and destabilize the global market and trigger price hikes. This would, of course, affect all countries dependent on oil imports, but in the end, it would also be a blow to Russia. As shown by the European gas crisis, the Kremlin’s attempts to blackmail the world with its energy resources often backfire. When the Kremlin turned off the gas taps, Europe quickly found alternatives and reduced its dependence on Russian gas.
Is victory over Russian oil exports possible?
The question is: how long will Russia’s stubbornness last? Even with all the tricks involving the "shadow fleet," Russia is still suffering significant losses from the sanctions. The West, for its part, is not planning to abandon the sanctions, and if the price of Russian oil falls to $30, it could be a real test for the Kremlin. Russia could lose approximately $650 million per day, which is nearly 2.3% of its GDP.
Estimates suggest that every $10 price reduction costs Russia about $110 million per day. However, analysts warn that such a drop could provoke even more aggressive actions from the Kremlin, aimed at disrupting global market stability. And as practice shows, Russia always finds a way to circumvent sanctions.
The effectiveness of sanction pressure, however, will depend not only on price restrictions. Strict control over sanctions enforcement is necessary, as Russia actively uses a "shadow fleet" to bypass restrictions. Only a comprehensive approach, including sanctions against violators and continued pressure on Russia, can produce results. Analysts point to the need to block such vessels and increase penalties for companies that facilitate sanctions evasion.
Nevertheless, even under the strictest restrictions, commercial incentives for Russia to continue exports remain strong, as its production costs are among the lowest in the world. Moreover, Russia may attempt to leverage its domestic market to mitigate losses if global oil prices fall to critical levels for the country.
Thus, the global “oil roulette” continues. Russia keeps finding ways to sell its oil, while the West tries to find the perfect sanctions formula that will force the Kremlin to surrender. Will reducing the price to $30 be the final note in this geopolitical game? Only time will tell.
In the meantime, other importer countries, like China and India, continue to take advantage of the situation, buying Russian oil at a discount, while the global community debates whether to take even tougher measures.