EU oil ban and price cap are costing Russia EUR 160 million per day

Further measures can multiply the impact

As the sanctions and the costs of the invasion of Ukraine take their toll on Russia’s economy, the country is more dependent than ever on revenue from fossil fuel exports. The EU has taken massive steps over the past year to cut off its dependence on fuel imports from Russia and cut off financing for the Kremlin’s unprovoked and illegal assault against Ukraine and Europe.

The short-term windfall generated to Russia by sky-high fossil fuel prices in 2022 is starting to wear out, in part due to reductions in fossil fuel consumption prompted by the high prices. Further cuts to Kremlin’s revenue will therefore materially weaken the country’s ability to continue its assault and help bring the war to an end. CREA’s briefing assesses the impacts of measures taken by the EU and Ukraine’s other allies to date, and identifies further options to drain Kremlin’s war chest.

The EU oil ban and price cap are costing Russia an estimated EUR 160 mn/day. The fall in shipment volumes and prices for Russian oil has cut the country’s export revenues by EUR 180 million per day. Russia managed to claw back EUR 20 million per day by increasing exports of refined oil products to the EU and to the rest of the world, resulting in a net daily loss of EUR 160 million.

Russia’s Crude Trades At $52

Russian crude is already trading at prices below the proposed G7-EU-UK price 

Russia’s flagship crude grade Urals currently trades at around $52 per barrel, more than $10 a barrel lower than the low end of a proposed G7-EU-UK price cap of $65-$70 per Russian barrel of crude, according to Bloomberg.

No final decision has been taken by the G7 and the EU yet, but the price cap mechanism and the EU embargo on imports of Russian crude by sea are set to enter into force in less than two weeks, on December 5.  Reports emerged on Wednesday that the EU is discussing capping the price of Russian oil at somewhere between $65 and $70 per barrel. Such a cap, if approved, would not effectively lower the price of the flagship Russian crude currently being traded on the market.

A $65-$70 per barrel price cap for Russia’s oil is not expected to immediately shrink Putin’s oil revenues, considering that this is more or less the price that buyers currently pay for Russian crude, multiple industry sources familiar with the transaction prices told Reuters on Thursday.

G7 eyes oil price cap of $65-70

How to limit Russia’s energy revenues 

The G7 is preparing to announce a price cap on Russian oil and is eying a price of $65-70 per barrel, according to people familiar with the negotiations.

EU ambassadors are today discussing the proposal, as they have to sign off on the plan as soon as possible.  The level of the proposed cap is much higher than Russian production costs and also higher than what U.S. Treasury Secretary Janet Yellen had previously suggested, which was about $60 per barrel.

At the meeting of EU ambassadors, Poland and Hungary raised objections to the price cap plans, according to the two people, who spoke on condition of anonymity. Warsaw had previously indicated it wanted the cap to be closer to $20 per barrel, which would bring it closer to Russian oil production costs, and thus do more damage to the Kremlin’s war chest. Poland also wants the cap to be accompanied by a new sanctions package. The talks on the oil price cap are continuing.

The EU embargo on Russian oil kicks in on December 5.

Russia finally falls into recession

Western sanctions lead to a 4% fall in GDP nine months after Putin invaded Ukraine 

Russia has entered a recession, nine months after launching its offensive in Ukraine as Western sanctions weigh on the economy, according to official data. Gross domestic product shrank four percent in the third quarter, according to a preliminary estimate by the national statistics agency Rosstat on Wednesday. As that follows one of the same size in the second quarter, Russia now meets the technical definition of a recession with two consecutive quarters of falling GDP.

Western sanctions have limited exports and imports, including of key manufacturing components and spare parts. Companies have also been suffering from a lack of staff as a Vladimir Putin’s partial mobilisation has taken several hundred thousand men out of the workforce. However, the four percent drop in economic output between July and September was less than the 4.5 percent contraction many analysts had expected. The contraction was driven by a 22.6 percent plunge in wholesale trade and a 9.1 percent drop in retail trade. Meanwhile, construction grew by 6.7 percent and agriculture 6.2 percent.

Inflation Dips Below 8% Annual Rate in October

The drop will not deter the Federal Reserve from its campaign of higher interest rates

Inflation rose at a 7.7% annual rate in October, better than expected but still well above the Federal Reserve’s desired level, the Bureau of Labor Statistics reported on Thursday.

Economists had forecast an annual rate of 7.9%. The monthly increase was 0.4%, the same as in September. The core consumer price index, leaving out often volatile food and energy prices, came in at 6.3% annually, compared to 6.6% in October, and 0.3% following last month’s 0.6% rise. Overall, inflation has trended down since it hit 9.1% in June, when energy prices were spiking in the wake of Russia’s February invasion of Ukraine and disruptions in global supply chains.

June’s number sparked a more aggressive move from the Fed to tame inflation, with four consecutive increases of 75 basis points in the federal funds rate, a trigger for many other interest rates that have driven borrowing costs to their highest levels in years. The average rate on a 30-year fixed rate mortgage, for example, is now above 7% compared to the 3% range a year ago.

Russia abandons Ukrainian city of Kherson

Devastating blow for Moscow

Russian troops have been ordered to retreat from the key southern city of Kherson, in a devastating blow for Moscow after weeks of Ukrainian advances toward the city.

General Sergei Surovikin announced the move during televised remarks on Wednesday, saying it was no longer possible to keep Kherson city supplied. According to Surovikin, Russian troops would be better utilized on the defensive lines on the eastern bank of the Dnipro River.

“I understand that this is a very difficult decision, but at the same time we will preserve the most important thing —  the lives of our servicemen and, in general, the combat effectiveness of the group of troops, which it is futile to keep on the right bank in a limited area,” Surovikin said.

NATO will send ‘hundreds’ of signal-jammers to Ukraine to counter Russia’s onslaught of explosive Iranian-made suicide drones

The military alliance’s chief said the systems will be delivered within the coming days

NATO is sending Ukraine signal-jammers so it can counter deadly Iranian-made suicide drones that Russian forces have used to terrorize cities far from the front lines. Speaking at the Berlin Foreign Policy Forum on Tuesday, NATO Secretary General Jens Stoltenberg said the military alliance will deliver “hundreds” of counter-drone jammers to Ukraine in the “coming days.”

These systems will help Ukraine address the “specific threat of drones, including, of course, Iranian-made drones that are now causing a lot of havoc or suffering in Ukraine,” Stoltenberg said during the virtual interview.
Stoltenberg initially remarked on the future delivery of drone jammers at a press conference in Brussels last week, where he said the systems can “help render ineffective Russian and Iranian-made drones … and to protect Ukrainian people and critical infrastructure.”

JPMorgan CEO: ‘U.S. should pump more oil’

Objective: to avert war-level energy crisis

JPMorgan Chase CEO Jamie Dimon said Monday that the U.S. should forge ahead in pumping more oil and gas to help alleviate the global energy crisis, likening the situation to a national security risk of war-level proportions.

Speaking to CNBC, Dimon dubbed the crisis “pretty predictable” — occurring as it has from Europe’s historic overdependence on Russian energy — and urged Western allies to support the U.S. in taking a lead role in international energy security.

 “In my view, America should have been pumping more oil and gas and it should have been supported,” Dimon told at the JPM Techstars conference in London. “America needs to play a real leadership role. America is the swing producer, not Saudi Arabia. We should have gotten that right starting in March,” he continued, referring to the onset of the energy crisis following Russia’s invasion of Ukraine on Feb. 24.

EU Bans Russia From Using Crypto Services

Cryptocurrencies are one of the most popular ways for Russians to move money abroad

Just days after Russia’s Ministry of Finance announced plans to let any industry in the country to accept bitcoin and cryptocurrencies for international trade without restriction, the EU has imposed a sweeping ban on providing crypto services to Russians as part of its eighth round of sanctions. The new measure steps up restrictions that had been in place since April.

“The existing prohibitions on crypto assets have been tightened by banning all crypto-asset wallets, accounts, or custody services, irrespective of the amount of the wallet (previously up to €10,000 [$9,900] was allowed),” reads a press release published on the European Commission’s website. The increased measures are intended as punishment for “Russia’s continued escalation and illegal war against Ukraine,” including its mobilization of additional troops and open issuance of nuclear threats.

Forbes Russia notes that after Visa and Mastercard left the Russian market earlier this year and some banks were disconnected from SWIFT, cryptocurrencies, in particular stablecoin USDT, became one of the most popular ways for Russians to move money abroad.

Russians are paying up to $27,000 to escape the country

How to avoid mobilisation

Demand for seats on private jets has boomed in Moscow after Vladimir Putin ordered the first mobilisation since the second World War and wealthy Russians look for a way out of the country amid reports that authorities plan to close the borders to men of mobilisation age.

Passengers are said to be predominantly heading to Armenia, Turkey and Azerbaijan, which allow Russians visa-free entry. They are paying between €22,000 and €27,000 for a seat on a private plane, while the price to rent an eight-seater jet ranges from €89,000 to €156,000 which is many times more expensive than the normal fare.

Russia Makes Veiled Threat to Destroy SpaceX’s Starlink

Starlink is meant for peaceful use only says Elon Musk

Russia has issued a veiled threat to “retaliate” against SpaceX’s satellite internet system Starlink for aiding the Ukrainian military.

A Russian representative named Konstantin Vorontsov issued the warning last week at a United Nations working group meeting on reducing space threats.

Vorontsov—who was reportedly a former acting Deputy Director of Russia’s Foreign Ministry Department—didn’t name SpaceX or Starlink by name. But he noted: “We would like to underline an extremely dangerous trend that goes beyond the harmless use of outer space technologies and has become apparent during the events in Ukraine. Namely, the use by the United States and its allies of the elements of civilian, including commercial, infrastructure in outer space for military purposes,” according to the unofficial translation  of his statement.

Vorontsov then issued his veiled threat by saying: “It seems like our colleagues do not realize that such actions in fact constitute indirect involvement in military conflicts. Quasi-civilian infrastructure may become a legitimate target for retaliation.”

Europe has more recoverable shale gas than the U.S.

 UK is lifting a 2019 moratorium on shale gas fracking

As energy prices continue to soar across Europe, with gas prices surging 26% on Monday after Russia stopped pumping via Nord Stream 1, the highly contentious fracking debate is now re-emerging on the continent, led by a new British prime minister with fossil fuels on her mind.  The European Union–which no longer includes the UK–plans to replace two-thirds of Russian gas imports by the end of the year, though analysts warn that the bloc’s best shot at replacing Russian gas imports will fall well short of the target.

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In 2021, the EU imported ~155 billion cubic meters (bcm) of natural gas from Russia. Unfortunately, the bloc’s proposed gas replacements by the end of 2022–which include LNG (liquefied natural gas) diversification, renewables, heating efficiency, pipeline diversification, biomethane, solar rooftops and heat pumps–only amount to around 102 bcm annually, according to data from the EU Commission’s REPowerEU.

Proponents of fracking hold that Europe’s shale gas potential is needed now more than ever, though Germany, France, the Netherlands, Scotland and Bulgaria have all previously banned fracking. Now, the debate is being revived by recent moves in the UK.

Britain’s new Prime Minister Liz Truss has announced that the UK is lifting a 2019 moratorium on shale gas fracking as the country looks to ramp up domestic energy resources and help households and businesses struggling to pay soaring energy bills.

Germany to extend energy subsidies to smaller firms

Objective: split the price of electricity from the price of gas

Germany plans to extend a scheme subsidising energy costs for big businesses that are heavily dependent on energy to all small and medium-sized businesses, as part of a package of measures designed to avoid a wave of insolvencies.

Robert Habeck, the economy minister, said he anticipated that the subsidies would be in place for a limited time, until efforts on the national and European level to bring down high electricity and gas prices took effect.  He said the government would be at pains to “change the design of the electricity market so that cheaper costs can be transferred to consumers”. The aim, he said, was to split the price of electricity from the price of gas. Both have risen markedly since Russia invaded Ukraine and supplies of Russian gas to Germany plummeted, stopping altogether a week ago.

Gas prices soar and pound and euro fall

Russia shuts Nord Stream pipeline

Gas prices surged on Monday and the pound and euro slumped after Russia shut down a big pipeline indefinitely.

Russia has used its control of gas supplies to exert pressure on European countries in retaliation against sanctions imposed after its invasion of Ukraine. Gazprom, the Russian state-controlled gas company, closed the Nord Stream 1 pipeline from Russia to Germany on Friday, saying it had found a leak requiring repair. The threatened cuts to supplies of gas from Russia have prompted a scramble by European countries to store as much gas as possible before winter, as well as efforts to find alternative supplies.

However, the prospect of Russia cutting off an important pipeline completely caused prices to rise on Monday, as investors braced for severe shortages. The contract for gas delivery next month in the UK soared by 35% at one stage, and was about 12% higher in afternoon trading at 465p a therm. That was an increase from the 410p a therm cost on Friday afternoon, and approaching the five-month high of nearly 650p set last month.

Germany’s gas storage facilities are slightly over 77% full

Two weeks ahead of schedule

Germany’s natural gas storage facilities surpassed a fill level of more than 77% this month, two weeks ahead of schedule, as Europe’s largest economy scrambles to prepare for the coming winter.

Chancellor Olaf Scholz’s government initially planned for gas storage levels to reach 75% by Sept. 1. The next federally mandated targets are 85% by Oct. 1 and 95% by Nov. 1. European governments are racing to fill underground storage facilities with natural gas supplies in order to have enough fuel to keep homes warm during the coming months.

Russia has drastically reduced natural gas supplies to Europe in recent weeks, with flows via the Nord Stream 1 pipeline to Germany currently operating at just 20% of agreed upon volume. Moscow blames faulty and delayed equipment. Germany, however, considers the supply cut to be a political maneuver designed to sow European uncertainty and boost energy prices amid the Kremlin’s onslaught against Ukraine.