European oil embargo and G7 and EU oil price cap: Today, the EU embargo on seaborne crude oil imports from Russia comes into effect, as does the price cap on all Russian oil sales which use services from companies based on the G7, EU and Australia. We see this as a key step, which lower Russian oil exports and revenue earnings. However, to be fully effective, we have proposed a lower oil price cap — at $35/bbl rather than $60/bbl – which would still be significantly higher than Russia’s production costs, and so maintain Russia’s incentive to supply, but would cut Russia’s export earnings to a level which would constrain Russia’s ability to wage war on Ukraine. 

Russian contraction set to deepen: The initial wave of sanctions hit the Russian economy hard in spring, driving the CBR to hike rates to 20% and introduce capital controls. But then high oil and gas revenues and the collapse of imports drove record inflows which stabilized the economy, driving the RUB higher, reducing inflation and allowing the CBR to reverse its rate hikes. Even so, Russia is still heading for a substantial contraction this year – albeit revised up to -3-3.5%, according to recent CBR and IMF forecasts. But looking ahead, we expect contraction to deepen. This partly reflects the impact of Russia’s September mobilization, which appears to have driven a major liquidation of household financial assets. More importantly, it reflects the looming collapse in oil and gas revenues — which account for over 60% of exports and over 40% of budget revenues — thanks to the European oil embargo, the G7 oil price cap, and the collapse in Russian gas sales to Europe. Subject to robust implementation of the price cap, we forecast Russian oil and gas revenues will fall below the critical point – around $150 bn per annum — next year. At this point, as in previous episodes of weak oil prices, we expect Russia’s underlying financial fragilities in the currency and at banks to resurface, constraining Russia’s ability to continue financing the war.  

More information on the Russian economy and forecasts about the impact of the new restrictions can be found in the December Chartbook by KSE Institute.