Oil price ceilings are increasingly ineffective for Russia

Russian oil companies are enjoying the cheapest shipping rates to China and India over the past year, thanks to more and more tankers running on this route.

The emergence of new shipping lines outside the West has allowed Russian businesses to sell above the price ceiling of 60 USD per barrel imposed by the US and its allies late last year. This also means that the oil price ceiling will have a very limited impact on Moscow's revenue.

On October 12, the US imposed its first sanctions on two Russian oil tanker companies whose purchase prices exceeded the ceiling. One company is based in Türkiye and the other in the United Arab Emirates (UAE). This is intended to fill a gap in the sanctions mechanism against Moscow.

In December 2022, G7 banned shipping companies and insurance companies in member countries from providing services for exported Russian oil if the selling price exceeded 60 USD per barrel. This ban does not apply to businesses in other countries.

When the ban was issued, the majority of ships participating in this activity were Western. If oil prices then exceed $60, sanctions will seriously impact Russian exports. However, it was not until July this year that Russian oil prices exceeded that level. This means Russian traders, transporters and oil companies have months to prepare for sanctions.

During these few months, traders actively collect old oil tankers for transportation. Many other oil tankers are registered in countries that do not impose sanctions on Russia.

An oil tanker at Kozmino port (Russia) in December 2022. Photo: Reuters

The number of oil tankers operating underground (owners unknown) has reached 535, with an average age of 23 years, according to analysis by maritime industry tracking company Lloyd's List Intelligence. They revealed that two-thirds of these ships have no insurance data.

"As long as governments view these services as policy tools to control trade, there will be those who find ways to do so without breaking the law," said Mike Salthouse - Director of Public Affairs at the insurer NorthStandard said on Reuters.

So many ships are willing to carry Russian oil that freight rates have dropped. This causes the revenue of Russian oil companies to even increase. Russian oil traders saved $7 a barrel on shipping costs this fall compared to when the new price ceiling was applied, according to calculations by Reuters and traders.

This means exporters sell about 70 USD a barrel for oil exported at Baltic ports. When oil prices peaked at 97 USD per barrel in September, Russian oil companies were said to earn 79 USD per barrel.

Freight rates for transporting Russian Urals oil to Asia this month also dropped to their lowest since the price ceiling was applied, oil traders said. The cost of renting a ship of 100,000 tons from a Baltic port to India is currently 4.8-5.2 million USD (about 7 USD per barrel). Earlier this year, this figure was more than $15 million ($14 a barrel).

Shipping prices also decreased after Russia announced it would reduce oil exports by an additional 300,000 barrels a day to support the oil market with Saudi Arabia. However, Russia still exported nearly 5 million barrels of crude oil per day this year. The International Energy Agency (IEA) estimated on October 12 that in September, Russia exported 7.6 million barrels per day of both crude oil and oil products.

Shipping costs for 140,000 tons of Urals oil from Novorossiysk port (Black Sea) to India also decreased to 4.1-4.2 million USD per trip this month, Reuters quoted shipping sources as saying. This price in the summer was 5 million USD.

Ships registered in the Middle East, Africa, China, Latin America and even Russia are operating on this route. "We have seen a few new names on the list of oil transport ships," Reuters quoted a close source as saying.

However, Western officials still believe that price ceilings are effective, even when Russian oil companies sell for more than $60 a barrel. They explained that without sanctions, Russian oil would cost even more and that Russia now has fewer customers and fewer service providers.

In addition, the US and its allies said they imposed price ceilings to prevent disruptions in the oil market, causing oil prices to rise even higher. Early last year, Brent oil prices were close to $140 a barrel because of speculation that the US might ban Russian oil imports. Currently, Brent trades around 88 USD per barrel.