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Tuesday, March 21, 2023

Putin’s Achilles Heel: Ex-Intel boss urges West to choke on Russian oil

Western nations and their G7 partners should intensify their attacks on Russia’s lucrative fossil fuel export earnings and curtail Moscow’s ability to fund its ongoing war in Ukraine, a former intelligence chief has said.

said Mikk Marran, who headed Estonia’s foreign intelligence service from January 2016 to October 2022 news week that more sanctions and a lower cap on Russian crude oil exports are needed to put more pressure on the Kremlin.

“We should introduce more sanctions, we should lower the oil price ceiling,” Marran said. “We should impose more sanctions on the top banks in Russia, because there are still powerful banks that have not been sanctioned by the West, for example Gazprombank, one of the largest banks in Russia.”

“The West has done reasonably well in supporting the Ukrainian army and state, but we could do more as a collective West to put more pressure on Russian finances,” Marran said. Western allies, he added, are “getting there, they’re almost there” by establishing a tougher approach to Moscow.

“Estonia and other Baltic countries and Poland, we still need to share more information. But we know that even the larger intelligence agencies in the West are collecting more and more on Russia, so they’re getting better and better. And they also pass this information on to their political leadership.”

The European Union-G7 joint action set a maximum purchase price of US$60 per barrel for sea-based Russian crude oil, the introduction of which coincided with an EU-UK ban on sea-based Russian crude oil imports in December. This was followed in February by further EU-G7 price caps for other refined petroleum products.

The crude oil price cap is set to be reviewed in regular interviews, and the G7 countries are due to meet this month to discuss further lowering the price cap. The Wall Street Journal reported this week that the G7 do not want to lower the cap, although several European nations are arguing for a lower price.

“It’s a good development that the oil price cap was set, but $60 a barrel is actually too high,” said Marran – now CEO of the Estonian State Forest Management Center. “We should push that down because Russia has no new ways to limit production. Russia has no way of stopping oil production. They can’t stop the oil rigs because they don’t have that technology.”

Marran was referring to the difficulties of curtailing or even halting oil production at wells, which can force a so-called “shut-in”. Such a move could be beneficial for a producer as it reduces overall supply and drives up the price, but the long-term impact is significant.

In the summer of 2022, Putin said he would not order Russian wells to be closed. “As for the denial of our energy resources, while it is not clear what will happen in those few years, it is unlikely for the next few years,” the President said. “That’s why no one will pour cement in the wells.”

Shortly thereafter, Julianne Geiger, a researcher for Oilprice.com, wrote that “when Russian wells are shut down for an extended period of time, it can result in permanent closures, with operational challenges proving insurmountable in some of their mature fields.” Geiger also pointed out that Russia’s benchmark Ural crude blend is made up of oil from multiple fields, and its quality could be altered and price reduced if some Russian wells are shut down.

Craig Kennedy, a Harvard expert on Russia’s oil industry, wrote in April 2022 that a large-scale reduction in Russian oil production would “do serious harm […] on the upstream production capacity of Russia. It could render tens of thousands of rim wells uneconomical and jeopardize complex field-level pressure management systems.”

“This risk is well appreciated by Russian reservoir engineers but is less obvious to Western decision makers,” Kennedy wrote. “Furthermore, it could also profoundly undermine political support for the Putin regime in Russia’s oil-producing regions.”

Kiev, along with some of the EU’s most Russia-sceptical nations like the Baltic states, have been pushing for a cut in the oil price cap. Oleg Ustenko, an economic adviser to President Volodymyr Zelenskyy, said news week that reducing the cap is a top priority.

“I think we need to go further and lower this price cap to the lowest possible level,” said Ustenko from Kyiv. “We must ensure that the Russians do not have any cash available to finance their military machinery.”

Ustenko proposed a price cap of $10-$20 per barrel, which is lower than the $30-$40 per barrel cap proposed by Zelensky. Proponents of a lower price cap have noted that Russia continued to sell during the COVID-19 slump that saw Urals crude fall to $16.6 a barrel in April 2020, arguing this shows Moscow could be forced much lower .

It was “absolutely correct” to say that Russia will have trouble shutting down operations at certain oil drilling sites, Ustenko said. “They are unable to temporarily close some of their fields… I wouldn’t say that of all, but many.”

Recent economic indicators suggest that the Russian economy, which at times appeared more resilient than hoped, is struggling to sustain its lucrative fuel exports.

The International Energy Agency said on Wednesday that Russia’s estimated oil export earnings fell to $11.6 billion in February, down $2.7 billion from January, when significantly more oil was exported.

Russia’s budget deficit is also widening amid higher military spending and falling fossil fuel revenues, with the deficit topping $34 billion in early March. The Treasury Department reported oil and gas revenues of about $12 billion in January and February, down 46.4 percent from the same period in 2022.

In a statement, Kremlin spokesman Dmitry Peskov said news week: “The claims made by the Estonian foreign intelligence service can hardly be described as professional. Most of them are just wrong.

“The statement that the economy is doing badly is wrong,” Peskov added. “The economy is resilient and the unprecedented sanctions not only failed to undermine it, but also failed to cause a significant contraction, which was slightly over 2 percent last year. And this year the economy has already started on the growth path. Macroeconomic stability is 100 percent.”

“The banking system is also completely stable. Demand for Russian energy resources is growing. The Russian Federation is confident that it will not recognize price caps and will not sell resources to countries that recognize price caps.”

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