Approved by the European Union (EU), the G7 countries and Australia, the ceiling imposed on the price of Russian oil, effective from Monday (5), seeks to limit Moscow’s profits, but without preventing it from continuing to supply oil.
Kremlin spokesman Dmitri Peskov said Monday that the measure may have “an impact on the stability of the world energy market,” but that it “will have no impact” on Russia’s offensive in Ukraine.
Embargo and price ceiling
The application of the mechanism coincides with the entry into force of an EU embargo on Russian oil supplied by sea, several months after the United States and Canada adopted a similar measure.
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Russia is the world’s second largest oil exporter, and without this cap, it would be easy to find new buyers at market price.
The mechanism provides that only oil sold at or below $60 a barrel can continue to be supplied, and that companies based in EU countries, G7 countries, and Australia are prohibited from providing shipping services (trade, freight, insurance, shipowners, etc.).
The G7 countries provide insurance services for 90% of the world’s cargo and the EU is a major player in ocean freight.
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A transition is planned (the cap does not apply to orders placed before December 5) and an additional limit for petroleum products will come into effect on February 5.
Market Impact
By imposing a $60 cap, Westerners have opted for a price level well above the cost of current oil production in Russia to encourage Moscow to keep pumping oil.
“Russia must remain interested in selling oil,” otherwise the world supply could be affected and prices could skyrocket, explained a European official, who did not believe the Kremlin’s threats to cut supplies to countries that apply the price ceiling.
According to her, Russia will try to keep its infrastructure in good condition – because if it stops production, it will deteriorate – and preserve the confidence of its customers, such as China and India.
Although experts have expressed concern about this “leap into the unknown” and are waiting for the reaction of OPEC+ countries, Brussels assures that the ceiling “will contribute to stabilizing markets” and “will directly benefit emerging economies and developing countries,” which will be able to buy cheaper oil.
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Russian oil prices are currently around $65, so the short-term impact of the measure may be limited.
Revisable ceiling
The ceiling will be reviewed every two months starting in January, with the possibility of being modified according to price developments, but must always be at least 5% below the average market price.
Any revision will need to have the agreement of the G7 countries, Australia and the EU.
Effectiveness and countries involved
All countries have been invited to apply the cap measure. If they do not, they will be able to continue buying Russian oil at a higher price, but will not be able to use Western services to buy and transport it.
“We have clear signals that several emerging economies, especially in Asia, will respect the principles of the ceiling,” a European official said.
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In addition, customers in Russia will find it very difficult to find alternatives to European companies responsible for cargo transport and security, he added.
Risk of evasion
EU and G7 states will have to monitor companies based on their territory. If a ship flying the flag of a third country is discovered transporting Russian oil at a price above the ceiling, Western operators will be prevented from taking care of its security and financing for 90 days.
On the other hand, Moscow could create its own fleet of freighters, operated and insured by Russian companies, but “building a maritime ecosystem overnight will be very complicated,” said Brussels, which questioned whether this solution would succeed in convincing customers.
