Russia has hit back at G7 attempts to cap profits from the country’s oil revenues after Vladimir Putin signed a decree banning sales under contracts falling under the $60 price cap imposed by Ukraine’s western allies correspond.
The decree, signed by the Russian president and released on Tuesday, said the Kremlin would ban the sale of the country’s crude oil and crude oil-related products under contracts that “directly or indirectly imply a price cap mechanism.”
But the decree says that under certain circumstances, Putin can issue “a special permit” for the sale of oil and oil products even if buyers comply with the cap — wording that potentially paves the way for Russia to continue selling crude oil to producers in markets like India for sale and China.
The price cap imposed in early December aims to weaken funding for the Kremlin’s invasion of Ukraine by targeting oil and gas revenues, which account for nearly half of Russia’s budget. In practice, the cap has yet to apply as Ural, Russia’s main crude oil blend, sells at prices below $60 a barrel.
Russia has shrugged off the G7’s move aimed primarily at insuring oil supplies and assembled a “shadow fleet” of ships that have continued to ship oil in response.
Putin’s move is less severe than harsher retaliatory options floated in the Russian media, such as a “low” oil price or a minimum discount level on its sales.
The Kremlin decree comes into force on February 1 and will be valid for five months, while the date for a similar measure for oil products has yet to be set.
Putin called the G7’s move in December “stupid and premature,” noting that Ural has already been sold at a discount to Brent, the global benchmark.
After western nations moved to halt purchases of Russian oil and gas after invading Ukraine in early February, the Urals have traditionally sold off at levels below the ceiling. Russia has offered generous rebates to the main importers of its oil, India and China.
Currently, Russia sells almost 80 percent of its crude oil to Asia and only 17 percent to Europe, two-thirds of which is transported through the Druzhba pipeline, according to data provider Kpler.
In the 10 months since Putin launched his invasion of Ukraine, Ural crude’s range against Brent has widened from the pre-war standard of $1-2 to the current level of $20-30 a barrel.
Even at $60, the cap is close to the $70 per barrel price on which Russia’s 2023 budget is based, raising doubts about the cap’s effectiveness in limiting the Kremlin’s fossil fuel revenues.