Agreeing on a Russian oil cap was the easy part. Now it has to be implemented
Three months after initiating talks of a price cap on Russian-origin crude oil and petroleum products, the International Price Cap Coalition is turning its words into action.
On Dec. 2, the cohort comprising G7 member states—Canada, France, Germany, Italy, Japan, the UK, the US—the European Union (bar Hungary, which got a special exemption), and Australia set the price of Russian crude oil at or below $60 per barrel.
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The group of the world’s most developed economies established the price cap “to prevent Russia from profiting from its war of aggression against Ukraine, to support stability in global energy markets, and to minimize negative economic spillovers of Russia’s war of aggression,” according to a joint statement.
The new price on Russian-origin crude oil is meant to enter into force starting Dec. 5 For petroleum products from the region, the timeline is Feb. 5, 2023. Two prices for Russia’s petroleum—one for high-value and another for low-value refined products—are yet to be announced.
Agreeing on the price cap was the first step of a longer process. The global oil transportation taps can’t be turned on and off on a single day of course. To ensure a smooth transition, the price cap will not apply to oil purchased above the price cap, which is loaded onto vessels prior to Dec. 5 and unloaded before Jan. 19, 2023.
But when that deadline is reached, monitoring how the price cap is being honored will be a whole other task.
The effect of a price cap, in the words of US treasury secretary Janet Yellen
“The price cap will encourage the flow of discounted Russian oil onto global markets and is designed to help protect consumers and businesses from global supply disruptions. The price cap will particularly benefit low- and medium-income countries who have already borne the brunt of elevated energy and food prices exacerbated by Putin’s war. Whether these countries purchase energy inside or outside of the cap, the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in global energy markets.” —US Secretary of the Treasury Janet L. Yellen
What is Russia’s reaction to the price cap?
Russia will not accept the cap, Kremlin spokesman Dmitry Peskov said, quoted in Russian state-owned news agency TASS. He added that Russia would conduct an analysis of the agreement and respond after that.
“Starting from this year Europe will live without Russian oil,” Mikhail Ulyanov, Moscow’s ambassador to international organizations in Vienna, wrote in a Dec. 3 tweet. The next day, he said that Russia’s deputy prime minister, Alexander Novak, confirmed that Moscow would not supply oil to countries supporting “anti-market” cap.
Russian oil in the world, by the digits
14%: Share of global crude oil Russia supplies
45%: Oil and gas contribution to Russia’s budget in 2021
2%: Small decline in Russian oil production since the invasion
$65-70: The price cap G7 was considering, which would have had little impact because Urals were already selling to Asian countries for around that much
$35: Steep discounted rate Russia offered India in March
40%: Share total sea exports of Urals India purchased in November
103: Shadow fleet of tankers Russia has amassed this year to sell oil and deliver to India, China and Turkey amid Western sanctions
Charted: Russian Urals’ price compared to global benchmark Brent
Why do we need price caps if Russian oil imports are banned?
The US, the UK, Canada, Australia, and the EU swiftly introduced import bans on Russian crude and refined products after its February invasion of Ukraine. These bans still stand.
“The price cap—which comes on top of the EU import ban on Russian seaborne crude oil and oil products, and the corresponding bans of other G7 partners—will further reduce the revenues Russia earns from oil…[and] serve to stabilise global energy prices which Moscow’s illegal war on Ukraine has inflated,” a Dec. 3 EU notification explained.
The price cap applies to Russian oil being transported to third countries. For ships that intentionally violate the price cap, EU operators will be prohibited from insuring, financing and servicing the vessel for 90 days after the cargo purchased above the price cap has been unloaded.
Will the price cap work?
The opaque oil market, with its many nuances, is hard to regulate.
“History has shown that it is possible for the shipping industry to misrepresent or obscure the origin of its cargo,” according to the Atlantic Council. The American think tank in the field of international affairs points to exemptions for certain pieces of the Russian production complex, such as the Sakhalin-2 project, which was heavily funded by Japan; and it says the cap doesn’t fully address blends that include Russian crudes, suggesting Russian barrels could be manoeuvred through refined or partially refined products.
Moreover, there are several possible workarounds that make the plan less than foolproof, according to Brussels-based think tank Bruegel:
Russia could organize its own insurance or use a third country, like China
Importing countries could circumvent the price cap through side payments. “Imagine for example that India pays a higher than usual price for arms deliveries from Russia. Could it be proved that this is a side payment for oil? Will the G7 be ready to enforce sanctions if that happens? It seems that the proposed buyers’ cartel is not very credible,” Bruegel analysts Klaas Lenaerts, Simone Tagliapietra, and Georg Zachmann warn.
A less likely but still plausible move would be Russia cuts it oil supply, pushing prices up
One more thing: OPEC+ won’t change a thing
On Sunday (Dec. 4), the 23-nation oil cartel in the Middle East decided to stick to the reduced oil production targets it set in October—2 million barrels per day less until the end of 2023. A monitoring committee will meet again in February, and a full-fledged meeting isn’t until June.
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