The Group of Seven (G7) countries and Australia have agreed to cap the price of Russian marine crude oil at US$60 per barrel. For some, this limit is too high and will not significantly reduce Russia’s revenues. For others, this cap is too low and could have a negative impact on inflation control. In this fourth article, we will focus on how Russia exports its oil by sea to Asia.
In the weeks before Russia’s military intervention in Ukraine, less than two-fifths of the crude oil loaded on tankers in Russian ports was destined for Asia. Today, that proportion is two-thirds, with China and India being the two main consumers of this black gold.
In November, Russia pumped an average of 10.9 million barrels per day of crude and a type of light oil called condensate, according to Energy Ministry figures. This is the highest level in eight months.
With the implementation of sanctions, Russia is trying to continue to redirect its crude oil exports to Asia and so limit a possible decrease in its production. Moscow has reaffirmed it will not sell oil below the G7 price cap, as it considers such a restriction unacceptable and contrary to market and World Trade Organization rules.
The country is expected to continue to offer deep discounts to international benchmarks to ensure that its oil finds a buyer. In recent days, discounts for Russian Urals oil have increased significantly, pressured by record freight rates for tankers carrying Russian oil.
Russian “Ural” grade oil was trading at about US$52 a barrel at the export terminal. This is a discount of US$33.28 vs. Brent. In comparison, the average markdown in 2021 was US$2.85. “We see the price cap is something that benefits China, benefits India, and benefits all purchasers of Russian oil,” U.S. Treasury Secretary Janet Yellen said.
Indeed, India is not ready to give up its purchases. Its oil minister recently said he had a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy oil everywhere,” he added.
To circumvent the sanctions, Moscow has been working in recent months to build a logistics network to ensure that its crude continues to flow to global consumers. According to shipping brokers, Russia has assembled more than 100 tankers and spent US$16 billion expanding its fleet.
Traders have indicated that Russia needs more than 240 tankers to maintain its current export flow. Operators linked to Russia are suspected of having purchased as many as 29 supertankers in 2022. Also called VLCCs for Very Large Crude Carriers, they are capable of carrying more than 2 million barrels.
On the insurance side, Moscow has strengthened its own marine insurance company, the Russian National Reinsurance Company (RNRC). It has been recapitalized and has received a guarantee from the Central Bank of Russia (CBR). This gives it “infinite coverage”.
Uninsured ships cannot enter international ports or shipping lanes and some 95% of all marine insurance is issued by London-based companies. Russia is replacing all London-based policies with Moscow-based insurance to avoid sanction measures.
India and Turkey have said they will recognize Russian insurance as a cover, effectively ignoring Western sanctions. China, on the other hand, fears US retaliation and has been more circumspect. The issue of whether or not to accept Russia’s insurance remains highly politicized.
According to the Russian Minister of Transport, Alexander Poshivay, China does not yet recognize all the protection and indemnity insurance and reinsurance certificates issued to shipowners by Russian insurers.
Russia will, therefore, also have to rely on the public or private fleets of buyer countries such as India and China, whose governments have the means to insure them.
Finally, it is interesting to note that Japan is participating in the sanctions on the cap on Russian crude oil, except for that which is imported from the Sakhalin-2 plant. This decision was made by Tokyo to ensure its energy security.
Japan already imports about 90% of its oil from the Middle East. Last year, it received about 34 million barrels of oil from Russia, accounting for 3.6% of the country’s total supply.