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Russian oil price restrictions affect energy markets

The price plan being considered… Western countries want to benefit themselves in the form of reducing Russia’s revenue from hydrocarbon sales and at the same time creating cheaper raw material alternatives. Such plans were discussed in the European Union in the spring, and after discussions within the G7 it was stated that a broader coalition should now be formed, including the major oil importers. The initiator of the discussions was the United States, which stated that such a “tariff” for Russian oil would be supported by the EU before the eventual embargo on tanker traffic was imposed. Before import reductions began, EU countries were buying up to 25% of oil from Russia.

Citing sources, Bloomberg reported that the discussed range of capping the price of Russian oil is $40-60/barrel. Current prices for Brent crude oil are in the $100/barrel region.

In an interview with CNBC, independent oil and gas analyst Neil Atkinson expressed his surprise and concern over the potential risks of such a move: “Something like this can only happen if all key producers, and most importantly key consumers, are forced to work. And the truth is, China and India are the biggest consumers, or one of the biggest, of Russian oil.”

Is the restriction realistic? Some experts state that such measures can lead to market imbalances and price increases. JPMorgan experts warned that prices could rise more than threefold if Russia refuses to sell oil at these prices or even cuts production.

The embargo imposed by the European Union and the United States on the purchase of Russian oil (in the case of the EU, which will come into full force by the end of the year) led to a sharp increase in prices, which opened up new market alternatives to Russian oil. The Federation will direct large volumes of raw materials to other markets, primarily Asia – India and China. Therefore, Russia has increased its revenues as a result of Western sanctions, even by selling smaller volumes of oil at a premium. Russia currently sells its oil at a discount of around $30 to Brent and WTI, which is very profitable for China and India.

Moreover, political support for the course of Western countries is also not clear, since neither China nor India has openly and unequivocally condemned Russia.

On the subject, oil and gas analyst Atkinson said: “In any case, the Russians are not going to sit around and do nothing. They can play games with the oil and even gas supply… They might confuse the G-7 in a way, so I don’t think this plan really works.”

Potentially, limiting the price of oil by banning insurance and shipping could affect the business of Russian oil companies whose high revenue share depends on exports. When investing in Russian oil and gas companies, it is necessary to take into account the previously agreed embargo of the European Union, which will affect especially large exporters and companies with a high share of tanker traffic.

However, experts believe that the development of events related to the global price restriction of Russian oil seems unlikely, since alternative purchasing schemes with a small discount are beneficial for oil consumers, but the market remains stable. An attempt to excessively limit Russia’s revenue could force Russia to switch to market manipulation and launch prices into the “stratosphere,” as JP Morgan analysts call it. China is unlikely to be persuaded. The G7 will have to offer China a very good deal. Nevertheless, it is useful to follow the news about a possible restriction. If India and China support this project, the situation of oil and gas companies will change dramatically.

Russia and Turkey – politics… A break in Turkey-Russia relations cannot be expected. Given the exorbitant cost of a collapse, Ankara will endeavor to maintain functional bilateral relations with Moscow. More broadly, despite the changing context, Turkey will continue to seek autonomy in its foreign and security policy. This pursuit comes from the prioritization of balancing policy and is not simply driven by disaffection with the West. It seems that Turkey wants to position itself in a balanced way in line with the analyzes that the global order has become more multipolar and less Western-centered. Despite the similarities in their narratives, Turkish and Russian-West oppositions manifest in different ways in terms of politics. Finally, Russia’s geopolitical revisionism will bring Turkey and the West relatively closer on geopolitical and strategic issues, provided that Turkey’s current blockade of Sweden and Finland’s NATO membership bid are resolved in the not-too-distant future.

Trade relations… In the last five years, Germany and England have become Turkey’s most important trade partners in exports. Russia has been number one among Turkey’s import-side trading partners since 2006, only briefly outstripping China and Germany between 2015 and 2017, but well below the table as Turkey’s export-side trading partner – Ranked tenth in 2019. Therefore, Turkish-Russian trade relations are dominated by Russian exports worth approximately 23 billion US dollars in 2019, compared to only 2.7 billion US dollars worth of Turkish exports to Russia. Russia’s main exports to Turkey are mineral fuels and refined products (58.7% of exports) and metals and metal products (25%). Turkey’s exports to Russia include machinery, equipment and vehicles (28.3%), food (31.3%) and textiles and shoes (18.1%).

Turkish Natural Gas Market (2010-2020)

Turkey’s dependence on Russia’s natural gas resources and the resulting trade imbalance is one of the main problems of bilateral relations for Turkey. Between 1987 and 1994, Russia was Turkey’s sole gas supplier. In 1994, the Russian monopoly of approximately 5 billion cubic meters was broken by Algeria, which reached a share of 418 million cubic meters in the Turkish gas market.

With the help of Azerbaijan and Iran and the growing share of liquefied natural gas (LNG), Turkey has managed to diversify its gas supply over the last decade, reducing Russia’s share to 33% in 2020.

Diversifying gas supply has not eliminated the trade imbalance, but for Russia, Ankara’s concerns about inequality are alleviated by revenues that do not appear in annual reports on trade volume, such as profits from tourism.

The most overlooked and unrecorded aspect of Turkish-Russian economic relations is the work of Turkish contracting companies in Russia. Thanks to the 1984 Natural Gas Agreement, such companies gained access to Soviet Russia and other Soviet Republics. Among the many shopping malls, hotels and high-rise complexes, a few projects stand out. For example, the Turkish company Enka rebuilt the White House in Moscow, which was damaged during the 1993 constitutional crisis; also took part in the restoration of the Russian State Duma. The largest Turkish construction company in Russia is Rönesans Holding, which is responsible for the two tallest buildings in Europe, the Lakhta Center in Saint Petersburg and the Federation Tower in Moscow. Between 1989 and 2005, the total of Turkish construction projects in Russia reached US$ 14.7 billion. There were also presidential-level discussions on the participation of Turkish companies in the preparations for the 2014 Winter Olympics in Sochi. In 2018, the total volume of Turkish construction projects in Russia since Turkish companies entered the market was estimated at US$71.8 billion, making Russia the leading foreign market for Turkish construction companies with a 19.6% share and followed by Turkmenistan (12.9%).

Bilateral interests… It is very important for the interaction between the recognition of interests and a common vision for the future that both sides see the expected cooperation as advantageous. Reconciling different interests will be difficult, if not impossible, if one side does not benefit. This came in the wake of the Arab Spring in 2015, an event that would lead to a conflict between Moscow and Ankara over Syria. Until the gradual normalization that followed the jet crisis, not only did Turkey and Russia’s interests diverge significantly, but the “shadow of the future” was not enough to persuade the two countries to settle their differences. The main reason for this was that Turkey did not see its future prospects as advantageous for both sides. In other words, Syria was more in danger for Ankara than for Moscow, and this outweighed the advantages of the TurkStream cooperation proposed by Moscow in 2014/15. After the Arab Spring, at that time, Turkish-Russian relations weakened more due to a lack of shared belief in the mutual benefits of future cooperation, rather than their inability to compartmentalize.

Conclusion? The G7 countries are actively discussing the introduction of additional sanctions against Russia, in particular restrictions on the price of Russian oil. The mechanism of action must be based on the fact that international companies will only insure and transport at a ceiling price, meaning that if Russia does not accept it, direct oil supply will be almost impossible.

Kaynak Enver Erkan / Tera Yatırım

Hibya Haber Ajansı

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