By Geoffrey Smith

Investing.com — After six months of haggling and prevarication, the European Union’s embargo on Russian oil is finally close to taking effect — and neither Europe nor the rest of the world really knows what impact it will have.

With some limited exceptions, companies in European Union member states will not be able to buy from Russia from Monday, a measure aimed at slashing revenue flowing into President Vladimir Putin’s coffers and constraining his ability to pursue his war in Ukraine.

Given that Russia was still exporting about 1 million barrels of oil per day to Europe until recently, this is an important step.

Its effects are already being felt in global spot markets, where discounting on Russia’s main export mix, the Urals, has widened sharply in recent days and weeks: Industry specialist Argus Media reports that Russian exporters had to sell for just $45.31. a barrel this week, compared to a Brent price of more than $80.

This should not be interpreted as a signal that the rest of the world shares North America and Europe’s disgust with the Kremlin’s war of aggression, which has turned from an unsuccessful blitzkrieg into a systematic attempt to freeze the Ukrainian population into submission. .

It is a result of the history and geography of the Russian oil system. Its export pipelines lead to port terminals built to serve European markets. Oil leaving Primorsk on the Baltic Sea, for example, usually takes a short hop across the sea to refineries in Sweden, Poland or the Netherlands. However, as of Monday, those markets are all closed, leaving their nearest virtual buyer in Morocco. Buyers have to pay shipping costs, so they are less willing to spend on the item itself. In order for Primorsk Alger to compete in the Moroccan market, it therefore needs to sell at a much lower price than the Algerine blends.

These dynamics have already greatly eroded the Russian government’s share of its oil exports. Crude oil export duties, which account for the bulk of the Kremlin’s oil revenues, are usually calculated according to a formula that allows producers a certain return on their investment, after transportation fees, and takes what’s left for the state. This fee peaked in 2018 at $152 per metric ton – the equivalent of about $20.70 per barrel. However, it was already down to around $60/ton by the time of the invasion and down another quarter to $43.30 this month.

Meanwhile, its revenue from gas exports to Europe has already dwindled to almost nothing from about $50 billion last year. Anti-Russian hawks in Central and Eastern Europe may protest that the pressure could be much harder, but the numbers are really big.

So much so, in fact, that the notorious and possibly impractical plan to prevent other countries from paying above a certain cap level for Russian crude looks like a distraction.

Reports out of Brussels at the time this article was due to be published indicated that the EU Commission had proposed a ceiling of $60 per barrel. However, Poland wished to add a new sanctions package to the latter measure, thus preventing a final agreement.

From Monday, buyers of crude oil will not be able to buy European freight or insurance services if they cannot show that they paid $60 a barrel or less for the shipment. Given Western dominance in such services, this amounts to a quasi-ban for anyone violating the cap.

Experience from US sanctions on Iraq and Iran over the past two decades suggests that Russia will find ways around this, but it nonetheless makes it more difficult to get Russian oil to market. Moscow is concerned enough that it has said it will not sell to any country that respects the ceiling.

This puts many poor countries in an awkward position. Pakistan, devastated by floods earlier this year, as well as by soaring global grain prices (caused by you-know-what), has not formally signed up for the cap, but has asked Russia to voluntarily give it a 30%-40% discount on its crude exports. . According to Pakistani media, the request was not approved.

Uncertainty about how the effects of the embargo and the price ceiling will play out is a strong argument for the so-called OPEC+ bloc to avoid any further changes in oil production quotas this weekend. But its effects will be seen before long, especially if Russia is forced to choose between closing the wells for lack of a plug, or continuing pumping in order to keep the well intact through the cold winter – which would thwart any efforts by OPEC to cut supply. To balance the market.