A price cap on Russian oil at $60 (£49) per barrel, enforced by the Group of Seven (G7) industrialized economies (US, Canada, the UK, France, Germany, Italy, Japan), as well as the EU, and Australia, comes into force this Monday, December 5.
It comes hand in hand with an EU embargo on seaborne Russian oil that was incorporated into the seventh package of sanctions against Moscow on July 21, which also included a gradual phase-out of crude from the world's second-largest oil exporter.
Price Cap & Embargo
Conceived with the objectives of punishing Russia over its special military operation in Ukraine and curbing its ability to earn oil revenues, the restrictions adopted in summer provided for a complete import ban on all Russian seaborne crude oil as of December 5, 2022, and petroleum products as of February 5, 2023.
The price cap initiative dates back to June 2022, when the G7 came up with its grand design to install such a mechanism to allow third-party countries to carry on importing seaborne Russian crude oil using G7 and EU tankers, insurance companies and credit institutions only under the condition that the commodity is sold for less than $60. Ostensibly, this could throw a wrench into the works even for countries which are not part of the controversial deal. The EU and the G7 are to review the level of the cap every two months, with the first such review slated for mid-January.
The price cap – a measure conceived in blatant disregard of market conditions - had sown discord within the EU and resulted in months of bickering. In their blind frenzy to hurt Moscow, Poland, Lithuania and Estonia argued the case for an even lower price cap of $30 per barrel. Greece, Malta and Cyprus had haggled for a higher price cap or compensation to safeguard their shipping industries.
Furthermore, Russia’s Deputy Prime Minister Alexander Novak specified earlier that if the cap came into effect, Russia would either redirect its crude supply to "market-oriented partners" or slash production. But despite this warning and fully aware of the potential havoc on the energy markets in the event of Russia's curbing oil extraction, the West pushed ahead with its plan.
As the EU seaborne crude ban does not apply to Russia's crude entering into Europe via pipelines, Hungary, the Czech Republic and Slovakia are set to continue receiving it through the Druzhba pipeline. Bulgaria was also granted a special temporary exemption from the seaborne oil ban until the end of 2024.
Regarding oil products, there is not enough clarity so far. Croatia will be able to import vacuum gas oil from the Russian Federation, while the Czech Republic will be able to produce gasoline and diesel from Russian raw materials. As Europeans can also import non-Russian oil headed their way via Russia, Azerbaijani, Turkmen and Kazakh crude shipped from Ust-Luga and Novorossiysk terminals are not under threat. The same likely applies to Latvian so-called “blends” from Ventspils.
Dangerous & Illegitimate Instrument
Russia has slammed what it qualified as an effort to manipulate “the basic principles of free markets.” It will "only sell oil and oil products to those countries which will work with us on market conditions, even if we have to somewhat cut production," Russian Deputy Prime Minister Alexander Novak said on December 4.
"We are not going to use instruments linked with the price cap. We are now looking at mechanisms to ban the use of the price cap instrument," Novak added.
Russia won't export oil and gas to those countries that choose to cap energy prices, as announced by Russian President Vladimir Putin in mid-October, but is monitoring the situation, Kremlin spokesman Dmitry Peskov said on Sunday
"We base our actions on President Putin's statement that we will not trade in oil and oil products or gas with such countries [that introduce price caps]. So, this is our position for now," Peskov told media.
Russia's embassy in the United States called the price cap a "dangerous" initiative, saying:
"Steps like these will inevitably result in increasing uncertainty and imposing higher costs for raw materials' consumers... Regardless of the current flirtations with the dangerous and illegitimate instrument, we are confident that Russian oil will continue to be in demand."
No one from the OPEC+ countries has yet commented on the new restrictions against Moscow, however, on Sunday the Organization of the Petroleum Exporting Countries (OPEC) and its allies held a meeting at which it came to a decision to maintain the existing oil production quotas. The alliance had agreed earlier to cut output by 2 million barrels per day (bpd) from November until the end of 2023, driven by a weaker economic outlook.
Looking ahead, experts predict a shortage of oil and diesel fuel in the European market as spillover from the embargo, as well as a surge in fuel prices, which will deal a serious blow to the EU economy.
"Consequences of such a decision are obvious: it will lead to a booming demand, disruptions of supply chains and the explosive growth of fuel prices across the globe," first deputy chairman of the Russian Federation Council's Committee on Economic Policy, Ivan Abramov, warned.
At the same time, Russia has significantly increased supplies to China, India, Turkey, Africa and the Middle East, and continues to seek and find alternative markets. According to sources cited by western media, Rosneft is expanding its own tanker charter business, Lukoil is moving its oil from the Baku-Tbilisi-Ceyhan (Turkey) pipeline to the non-sanctioned Caspian Pipeline Consortium system.
Russia has continuously underscored that it has an extensive consumer market and will sell oil only on terms favorable for Moscow.
