BAKU, Azerbaijan, Sept.5. Full implementation of the EU’s ban on Russian crude imports effective from Dec.5 will likely see a significant decline in Russia’s production, Trend reports with reference to Fitch Solutions.
“To date, the resilience in Russian exports has hinged on rerouting its supplies to buyers in Asia at heavily discounted prices. The key Urals export grade has traded at an average discount to Brent of USD26.8/bbl in the wake of the invasion, compared to just -USD1.7/bbl in the two months prior to it. However, there are limits to which Asia can keep absorbing additional volumes from Russia. Major consumers, such as China, will be wary of overreliance on any single exporter, while a country’s import mix is necessarily constrained by the make-up of its domestic refineries and their optimal crude slates,” reads the report released by the company.
Fitch Solutions’ analysts note that while the EU has shown generally strong cohesion in implementing its wide-ranging array of sanctions on the Russian economy in response to the Ukraine war, its energy-related sanctions – including the December 5 ban on seaborne imports of Russian crude – have been among the most divisive and contentious.
“Moreover, governments are under increasing pressure from their populations, which are grappling with a mounting cost-of-living crisis. This could impact on the implementation of the import ban, should it contribute to further energy prices increases. One avenue being explored is the potential for G7 price cap on Russian oil exports. Under this scenario, the EU would facilitate trade between Russia and third-party buyers – easing access to shipping, insurance and finance – providing they pay a capped price for crude. This would, in theory, help to support Russian exports. In practice, though, the proposed cap faces a number of issues, including technical difficulties in its implementation and enforcement,
challenges in getting key Asian buyers on board, opposition from OPEC and the risk that Russia retaliates by lowering its output in order to inflate prices,” the report says.
Fitch Solutions believes that even assuming that EU seaborne imports fall to near-zero level and the G7 price cap falls through, Russian exports could remain well-supported, if adequate alternative buyers can be found in Asia.
“However, are limits as to the extent that such a switch can occur, more so if the EU opts not to facilitate third-party trade.”
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