When the late US Senator John McCain described Russia a few years ago, he used an interesting image. “Russia is a gas station masquerading as a country,” McCain said in an interview with CNN. The business model was perfectly described: bring oil into the world and live off the income. But since the war of aggression against Ukraine, the West has been reluctant to use the state-owned gas station.
Unlike gas, Germany and most other European countries have long since stopped buying oil from the Kremlin. For decades, the raw material flowed through the Druschba pipeline to the chemical town of Schwedt in Brandenburg. But “Druzhba” means friendship, and things aren’t looking good at the moment.
The USA also orchestrated a price cap for Russian crude oil as part of the G7 industrialized countries association. The Kremlin is no longer expected to earn more than $60 per barrel on the world market from other buyers. “The oil price cap works,” said US Deputy Treasury Secretary Wally Adeyemo recently. And yet there is a suspicious curve that is at least making experts prick up their ears.
If you show the price curve of the leading Russian oil type “Urals” in a diagram, it runs conspicuously from the bottom left to the top right. While Russian oil cost around $55 a barrel in May, the price is now just under $78. “The prices for Russian types of oil are currently well above the oil price cap in the West,” says oil expert Thomas Benedix from the fund company Union Investment. Actually, one could say, this oil price shouldn’t even exist. At least when it comes to the West.
US administration officials had been working on the concept of an oil price cap for weeks – and finally convinced the G-7 states. Western shipping companies should only be able to carry out transports if the price of the oil being shipped is below $60 per barrel. Western insurance companies should only insure ships and cargo. But how does this fit with the rising curve of Russian oil prices?
At first glance it looked as if the price cap was working
If you want to understand this, you have to follow the path of Russian oil. Traditionally, Russian companies brought their oil to Europe via pipelines and via the western ports: Primorsk and Ust-Luga not far from Saint Petersburg, as well as Novorossiysk on the Black Sea. “Western buyers have essentially stopped buying Russian oil,” says economist Elina Ribakova from the Brussels-based think tank Bruegel in an analysis. Because Western buyers hardly order anymore, Russia had to temporarily sell its Urals oil at its western ports at large discounts. Some even say: sell it off. In some cases the country had to help with discounts of $40 on the world market price in order to attract Indian buyers, for example.
For the West, it seemed as if the oil price cap was working. For months, Russian Urals oil eventually changed hands for $50, maybe even $55. However, hardly anyone noticed what was really happening on the Russian oil market. Nobody seemed to be paying attention to Russia’s oil market in the Far East; after all, distance is already in the word.
In the port of Kosmino, where Japan and China are closer than Moscow, the situation was different. Economist Benjamin Hilgenstock from the Kyiv School of Economics, together with other researchers, has been observing Russian export data, figures from well-informed data services and the financial terminals of stock market professionals for months . His conclusion: Even immediately after the price cap started in December 2022, 95 percent of oil sales in the port of Kosmino in the far east of Russia were above the price cap. Many buyers paid a good $75, sometimes up to $85 per barrel. This is what Hilgenstock’s data shows.
Traditionally, a lot of oil has always gone to Asia from the port of Kosmino. There was hardly any need for new buyers, and certainly no price reductions. Even immediately after the start of the oil price cap, more than half of the oil tankers in Kosmino, according to the research group’s analysis, either came from a Western shipping company or were protected by a Western insurance company. Experts believe it is unlikely that shipping companies and insurance companies did not check oil prices. “The papers were probably simply forged,” say researchers at the Bruegel think tank in Brussels.
A lot of oil remains in the ground every day – that’s supposed to drive up prices
However, Russia is now trying to drive up oil prices in the Baltic and Black Seas. Together with Saudi Arabia, the country leaves 1.3 million barrels of oil in the ground every day that it could actually extract and export. This is intended to keep the oil market tight and drive up prices. Oil has now become so scarce that buyers can also obtain significantly lower discounts at Russian western ports.
The consequence? Prices for Russian oil at the western ports have also long been well above the $60 per barrel mark. Currently it is exactly $77.80.
According to the International Working Group on Sanctions, between January and September Russia shipped 65 percent of its oil via Western ships or with Western insurance. Sanctions experts are therefore calling on the G-7 countries to punish violations of the price cap more severely. Attestations about the price of ship cargoes should only be issued by registered oil traders in order to exclude shady trading companies in Hong Kong or the United Arab Emirates. Insurers should also take a closer look. The US administration is now apparently trying to apply gentle pressure: it is said to have written to insurers, shipping companies and oil companies. The tone, according to news agencies, was rather friendly.
This friendliness comes at a price: every dollar less in Russian oil prices means three billion dollars less in export revenue for the Kremlin. This is how the Kiev researchers calculated it. The Russian oil companies are said to have already transferred $41 billion to the Russian treasury this year.