The United States and its allies are about to deliver a double blow to Russia aimed at starving its oil revenues.
First, the European Union will ban all maritime imports of Russian oil, a decision that takes effect on Monday.
In addition, the United States and other members of the major Group of Seven economies will attempt to impose a price cap on the oil that Russia continues to sell to other parts of the world.
Both measures are intended to limit Russia’s ability to finance its war in Ukraine, but are designed to prevent disruptions in oil supplies that could lead to higher prices.
Analysts say the price cap, led by the US Treasury Department, could be difficult to enforce.
Ben Cahill, a senior fellow at the Center for Strategic and International Studies in Washington, says a cap on Russian oil prices has never been attempted before. Most energy sanctions, such as those against Iran and Venezuela, target volume, not price.
“What policymakers are trying to do is to largely squeeze the world’s largest oil exporter out of the market,” he says. “They are trying to cut Russia off from Europe, which has always been one of its main export destinations.”
Most EU countries will stop buying Russian oil
Kenzo Tribouillard/AFP via Getty Images
The EU’s ban on Russian oil imports by sea was part of a package of sanctions passed in June. It also includes a ban on maritime services – such as marine insurance and financial services – on any tanker carrying Russian crude. Hungary and some other countries can continue to import Russian oil through pipelines.
Most global marine services for tankers are based in the UK and the European Union, so the ban would apply to virtually all tankers sailing in waters around the world.
The United States feared that the EU ban on oil and insurance would take at least a million barrels a day of Russian crude off the market, causing prices to spike sharply. Russia provides about 10% of world oil production.
“The EU sanctions package raised fears of a potential supply shock,” said Cahill, the energy analyst. “And so the proposed price cap is a way of trying to keep those volumes in the market, while reducing Russia’s revenue.”
Price cap is intended to maintain supply – but limit Russia’s profits
Allowing oil sales below a price limit is one way to ensure that the insurance ban does not prevent the oil from flowing. Under the plan, shipping services and insurance could be provided to tankers carrying Russian crude as long as it is purchased at a price set by Western countries.
But setting the exact ceiling price is tricky. It will require the agreement of all EU countries, although most will not buy the oil. They may have reached a tentative deal at $60 a barrel, news agencies reported on Thursday, after some countries like Poland pushed for an even lower price of around $20 a barrel.
Russian crude oil is already selling for less than $70 a barrel, well below other world oil market prices.
It’s a balancing act between finding a price low enough to limit Russia’s profits but high enough to keep it producing oil.
China and India are buying Russian oil and it’s unclear how they view the price cap
Sergei Bobylev/Sputnik/AFP via Getty Images
There is skepticism about the effectiveness of price caps. On the one hand, it will require other countries beyond the G-7 and the EU to buy into the plan.
China and India are essential. Both have been on a Russian oil buying spree since the war in Ukraine.
Arkady Gevorkyan, commodities strategist at Citi Research, says India imported very little oil from Russia before the conflict. Now he helps fill the Kremlin’s coffers, importing about 900,000 barrels a day, which he says is substantial. “It allowed the Russians to divert some of the oil originally intended for Europe, to India,” says Gevorkyan.
China, India and Turkey get Russian oil at a very favorable price — about $20 less per barrel. They will continue to set a good price if they think they have leverage once the price cap is set.
Cahill says efforts to get countries outside the G-7 on board with the plans have not been successful, in part because they distrust the complicated plan.
“I think there’s also some irritation with Western sanctions and the idea that, you know, the US and the EU are really pushing countries to do this and they’re interfering with the global market for oil,” adds Cahill. “They are very skeptical. And I don’t think India and China will sign the plan and fully endorse it.”
And according to Gevorkyan, there are doubts that Russia can find enough tankers willing and able to circumvent sanctions.
And then there is the issue of insurance. “Russia has started working on the development of its national insurance company,” he says. “He has been in discussions with China and India and other trading partners to have a different assurance that would allow them to continue importing.”
Enforcing the price cap will be a challenge
The G-7 price cap plan relies heavily on documentation and proof of where a tanker’s oil comes from and how much it costs.
michelle wiese Bockmann, an analyst with Lloyd’s List, a London-based shipping news agency, says there is already a lot of illicit oil trading, especially the sanctioned shipping of oil from Iran and Venezuela. She says it involves everything from falsifying documents to clandestine ship-to-ship transfers in the middle of the night.
“The evasion tactics used by Iran and Venezuela can be easily encountered and borrowed by Russia to continue shipping without this price cap compliance,” she says. “It is very likely that the circumvention of sanctions will be a feature of what happens after December 5.”
Russia may try to retaliate, using fuel as leverage
Analysts and officials have warned that the West’s new actions could prompt Moscow to retaliate by cutting off remaining natural gas supplies to European countries.
Russian President Vladimir Putin has said he will not sell oil to any country abiding by the price cap and that Russian oil will find other customers willing to risk breaching the sanctions.
Other countries could help him. OPEC+, an alliance of oil producers that Russia co-chairs with Saudi Arabia, worries about the idea of buyers colluding – countries banding together to try to influence the oil market and target certain producers. They fear that if the West can do this to Russia, it could one day do the same against other oil producers.
Oil cartel members are due to meet in Vienna on Sunday, a day before the start of the EU oil embargo and price cap.
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