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G7 impose a cap on the price of Russian oil

04.12.2022
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According to R. Blakemore, C. Lichfield, B. O'Toole

The price cap on Russian oil that the G7 countries have been promising in recent months in response to Russia's war in Ukraine is becoming a reality. Last week, the Office of Foreign Assets Control of the US Department of the Treasury (OFAC) published a decision to impose a restriction, as well as detailed guidance for market participants. On Friday, after lengthy negotiations, the ambassadors of the European Union signed a document fixing the price ceiling for Russian oil at sixty dollars per barrel.

At the start of the debate in June, US Treasury Secretary Janet Yellen was a strong supporter of a price cap, but the EU was skeptical. By October, the EU became a strong supporter of the restriction and included in its eighth package of sanctions a promise to introduce it before December 5, i.e. after the EU ban on seaborne imports of Russian oil comes into force.

Two weeks ago, a high-ranking American team visited Brussels to agree on the details. The fact that the price cap level was negotiated literally at the last moment shows how tense the negotiations were.

The restriction prohibits firms in participating countries from providing transportation, insurance and other services, including trading and brokering for shipments of Russian crude oil that are sold at a price above a certain price, in this case, sixty dollars a barrel. In practice, these providers will be required to ask their customers for evidence that they have bought oil below the marginal price.

OFAC guidance suggests that shipping and insurance companies may not have complete information about how much their customers pay for each shipment. Firms that request such data (and have no reason to believe that it is false) are unlikely to face enforcement actions.

At the moment, the price cap is not as low as some of the deal participants would like. Russian oil is already trading at a discount: about $69 per barrel compared to $86 for Brent oil. Some EU member states have pushed for a much lower limit that would deprive Russia of the opportunity to make a profit. They achieved a slight reduction from the proposed $65 to $70 to the (reportedly) final level of $60. But even that was enough to raise US Treasury concerns about the implementation of the agreement.

At $60, Russia will still be making big profits. The much-discussed interests of Chinese and Indian buyers, who are targeted by the measure, will now take the restriction into account in their negotiating tactics. In addition, the new restrictions will limit Russia's export earnings without too much rise in gas station prices within the US and the EU.

The restriction will be the more difficult to enforce, the higher the world oil prices rise. With an upper limit of $60 and a Brent price of $86, buyers will not be willing to risk being fined. But the temptation will rise along with the market price.

 

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