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Russian oil revenues are down, but not because of the price cap


At the G7 meeting in Japan, Wally Adeyemo, the deputy Treasury secretary, who has been traveling the world trying to sell American sanctions against Russia to skeptical countries, boasted about the success of the American-designed Russian oil price cap.

As reported in the New York Times, he said: “The Russian price cap is working, and working extremely well. The money that they’re spending on building up this ecosystem to support their energy trade is money they can’t spend on building missiles or buying tanks. And what we’re going to continue to do is force Russia to have these types of hard choices.”

The Treasury Department’s website describes the rationale for the price cap. “(It) is a novel tool of economic statecraft designed to achieve two seemingly contradictory goals: restricting Russia’s oil revenues while maintaining the supply of Russian oil. Meeting these goals would make it harder for Russia to fund its brutal war in Ukraine while keeping energy costs down for consumers and businesses around the world.”

But a look under the hood shows that the administration’s claims are more hype than factual. Russian oil revenues are indeed down. Before the war that began in February 2022, oil revenues constituted 30–35 percent of the total Russian budget. In 2023, oil revenues have fallen to just 23 percent of the Russian budget. The administration wants us to believe that the price cap it championed among E.U. nations and implemented on December 5, 2022, has much to do with it. But there are far larger factors at play that are helping the administration meet its price cap goals.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

Poor Economic Growth Is The Culprit

The main reason for the decline in Russian oil revenues is that world oil prices have fallen each month since June 1, 2022, primarily because of poor economic growth globally. “Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic,” said an IMF report in October. Oil consumption is directly related to GDP, and when economies slow down, there’s not much oil demand, resulting in falling prices and oil revenues for all producer nations, including Russia.

According to the St. Louis Fed, U.S. economic growth, as measured by real gross domestic product (GDP), downshifted markedly in 2022, slowing from a 5.7% increase in 2021 to a 0.9% increase in 2022. The numbers for 2023 are not flattering either. For the first quarter, GDP increased only slightly, at 1.1%. But professional Fed forecasters expect real GDP growth to fall again in 2023 to less than 1%, with growth slipping below zero (-0.1%) in the third quarter. Two consecutive negative growth numbers would technically mean the U.S. would be in a recession. We will gladly endorse Mr. Adeyemo’s views if he wants to take credit for America’s terrible economic performance as a reason for falling oil prices rather than the price cap.

The E.U. fared worse. According to Bloomberg, the 20-nation economy expanded by 0.1% in the first quarter of 2023. In 2018, before the pandemic, the bloc grew at a rate of 2.3%.

World Oil Prices Have Been Falling Steadily Since June 1, 2022

In a market where the slightest changes in supply can cause wild price swings, the policies of the 23 members of the Organization of the Oil Exporting Countries (OPEC) Plus carry significant weight. The 13 core members are primarily Middle Eastern and African; the remaining ten, including Russia, have substantial leverage. Russia, which produces about 10 million barrels a day, has a production capacity similar to Saudi Arabia.

The OPEC Basket is a weighted average of oil prices from the different OPEC members. The chart below shows how world oil prices continued their downward trend from June 1, 2022, which recorded a peak price of $117.22 per barrel.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

By November 30, prices had already sunk 32%. The administration’s oil price cap was implemented on December 5, five days later. World oil prices have been reasonably steady around the November 30 price. For the administration to claim that the price cap has resulted in lowering prices is dishonest.

A better argument is that OPEC Plus countries carefully monitor prices and keep them in a Goldilocks range of $75-$85 a barrel. OPEC Plus first announced cuts of nearly 2 million barrels per day (mbd) in October. In April, it announced an additional cut of 1.16 mbd. If prices go up too much, the world can tip into a recession, and oil demand could suffer. If prices go down too much, OPEC countries lose revenue even as they pump more and more oil.

Inflation Continues To Bite

On top of the weakening economy in both America and the E.U., the extraordinary pressures on family budgets brought about by non-stop inflation is another driver for lower oil prices. Families are not driving as much, conserving their cash to tide over rainy days that are expected as the Fed is expected to not lower interest rates for some time. As we noted recently, Bidenflation, a TIPP CPI metric that shows how much prices have risen since President Biden took office, hit 15.3% in April. Gasoline prices today are still 43.7% higher compared to Jan 2021.

Other Factors

India and China have continued to buy Russian oil at a discount. India has considerable refinery capacity and is a crucial cog in the oil supply chain. Russian oil today is flowing to India, where it is being refined and shipped to Western economies as petrol and diesel. These flows are happening not because of the price cap but despite it. Besides, evasion, which is rampant for other sanctions, has not yet kicked in for oil because there has been no need to.

Our Summary

It is too early to tell that the administration’s price cap is working.

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TIPP Takes

Geopolitics And Geoeconomics

1. Ukraine’s Zelenskyy To Attend G-7 Summit In Hiroshima In Person – Kyodo News

Zelenskyy’s likely attendance at the three-day summit is aimed at calling for the solidarity of the G-7 nations to continue supporting Ukraine, including the supply of military equipment.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

A senior U.S. administration official said earlier that the leaders of the group of major industrialized democracies are set to introduce new measures to curtail Russia’s ability to continue the war in Ukraine.

2. Pentagon Error Said To Overvalue Ukraine Arms Aid By $3bn – Al Jazeera

The U.S. Department of Defense overestimated the value of weapons and other equipment provided to Ukraine by approximately $3bn; an error in accounting leading the way for more arms being sent to Kyiv.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

The accounting error resulted from assigning a higher than the warranted value on older weaponry taken from those existing stocks.

3. Russian Oil Revenues Tumble Due To Price Cap, U.S. Treasury Says – RFE/RL

The U.S. Treasury Department said that despite initial skepticism around the price cap, market participants and geopolitical analysts now acknowledge that it is accomplishing both of its goals — keeping Russian oil on the market while depriving Russia of  revenues.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

The treasury, citing Russian Finance Ministry figures, said federal government oil revenues were down over 40 percent between January and March compared to last year.

Related tippinsights editorial today.

4. China’s Xi Unveils Grand Development Plan For Central Asia – Reuters

China is ready to coordinate development strategies with Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan and promote the modernization of all, Xi said.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

With its engagement, China has put itself at the forefront of the race for political influence and energy assets in the resource-rich region, with Russia distracted by its war in Ukraine and the withdrawal of U.S. forces from Afghanistan, diminishing the U.S. presence in the region.

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Efforts by the U.S. and its allies to secure supplies of crucial chip technology took center stage as world leaders and business executives gathered in Japan ahead of the Group of Seven summit.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

Japan is hosting the G-7 summit in the western city of Hiroshima starting Friday. Supply chain resilience, including for semiconductors, will likely be a key item on the agenda for the leaders amid a fluid geopolitical environment.

6. China Overtakes Japan As World’s Top Car Exporter – BBC

Official figures released last week said China exported 1.07m vehicles in the period, up 58% compared to the first quarter of 2022.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

At the same time, Japan’s vehicle exports stood at 954,185 after edging up 6% from a year earlier.

China’s exports were boosted by demand for electric cars and sales to Russia. Last year, China overtook Germany to become the world’s second-largest car exporter.

7. U.N. Report: Russia, China Top Arms Suppliers To Myanmar Military – UPI

Myanmar’s military has imported at least $1 billion in weapons and related materials from Russia, China, and other countries since seizing power in a February 2021 coup, according to a U.N. report.

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Russia is responsible for more than $400 million in advanced weapons transfers, while China has supplied more than $260 million, with much of the trade coming from state-owned entities in both countries.

8. U.S. Proposes ‘Unprecedented’ Military Planning With Israel Against Iran: Report – Middle East Eye

The U.S. has asked Israel to engage in joint military planning against Iran, offering a proposal that U.S. officials have described as “unprecedented” to boost bilateral military cooperation.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

The proposal has been met with some skepticism in Israel, according to Axios, with officials concerned it could be used to “tie Israel’s hands” from striking Iran if the U.S. objects.

Three jailed Iranian protesters found guilty of involvement in the deaths of two Basij paramilitary force members and a law enforcement officer have been executed.

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Amnesty International has said the three protesters have been deprived of access to their chosen lawyers and were pushed into “forced confessions.” Some groups have said the three were tortured while in detention.

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10. Iran ‘Never’ Considered Saudi Arabia As An Enemy: President Raisi – Al Arabiya

Iran has “never” considered Saudi Arabia, an enemy, President Ebrahim Raisi said, adding that Israel is the “common enemy” of all Muslim countries.

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In March, Saudi Arabia and Iran announced that they had reached an agreement, brokered by China, to reestablish diplomatic relations after seven years of no formal ties.

11. Turkey Slams U.S. For Sending Warship To Cyprus – Middle East Eye

Turkey criticized the U.S. for dispatching a warship to the divided island of Cyprus, accusing Washington of disrupting the balance of power in the Eastern Mediterranean.

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Turkey and Greece – Cyprus’ closest ally – are enmeshed in disputes over maritime rights, the sovereignty of Aegean islands, natural gas, and airspace boundaries.

12. North Korea Bristles At Planned South Korea-U.S. Live-Fire Drills – Yonhap

North Korea condemned South Korea and the United States for planning to kick off their major joint live-fire drills next week, describing them as a “war exercise” against Pyongyang.

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South Korea and the U.S. are set to stage the drills from May 25 to June 15 as they mark the 70th anniversary of their alliance.

13. Half Of World’s Largest Lakes, Reservoirs Losing Water: Study – Al Jazeera

Over half of the world’s large lakes and reservoirs have shrunk since the early 1990s, chiefly because of climate change.

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International researchers reported that some of the world’s most important freshwater sources lost water at a cumulative rate of approximately 22 gigatonnes per year for nearly three decades.

That is about 17 times the volume of the largest reservoir in the United States – Lake Mead.

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Apple Inc has restricted ChatGPT and other external artificial intelligence tools as it develops its similar technology, the Wall Street Journal reported.

Russian Oil Revenues Are Down, But Not Because Of The Price Cap

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