On Friday, finance ministers from Canada, France, Germany, Italy, Japan, the UK and the US gave the go-ahead for such a plan, saying it would “build on and strengthen the reach of existing sanctions ». Officials stress that much work remains to be done before a price cap is enacted, however, with key questions remaining, including the level of the cap. The success of the proposals will depend on the readiness of major importers of Russian oil, including India and China, to go along with the plan. So far, no country has indicated a willingness to participate. Russia has warned it will retaliate against any country involved by withholding oil shipments.
What has the G7 agreed?
The G7 countries have agreed to finalize a “total services ban” allowing the transport of Russian marine crude and petroleum products. These services — which include shipping insurance — will only be allowed if products are purchased at or below a price to be determined by a “broad coalition of countries.” The idea has been strongly supported by US Treasury Secretary Janet Yellen. The idea of a price cap is to allow Russian oil to reach markets that have not imposed import bans — particularly low- and middle-income countries — limiting upward pressure on global oil prices while limiting Moscow’s ability to finance the war against Ukraine. Importers wanting G7 or EU insurance coverage and shipping services to allow Russian oil to be transported will have to adhere to the price cap. A senior US Treasury official said the plan would include setting a price ceiling for crude oil and two other price ceilings for refined products.
How does it affect the existing sanctions regime?
The cap mechanism will not replace the G7 countries’ existing embargoes on Russian oil, but will be implemented simultaneously, coming into effect on December 5 for crude and February 5 for refined products. A senior U.S. Treasury official said the Office of Foreign Assets Control will issue guidance on how to implement the price cap in the U.S. — though the specific price won’t be revealed until closer to the effective date. Washington is aiming for a large number of non-G7 countries to sign on to the price cap, but officials stressed that even if no other government agreed to it, buyers of Russian oil around the world were already demanding and would continue to demand , discounts on their purchase contracts due to the looming cap. “In my conversations with other countries, I’m told that Russia is aggressively out there trying to get long-term contracts now at lower prices,” said a senior US Treasury official. “Even if they haven’t decided to join the price cap coalition, part of their conversation with the Russians is ‘well, given the price cap coming up, how should we think about lower prices?’ EU implementation will require member states to unanimously agree to amend the sixth sanctions package detailing the bloc’s embargo on Russian crude, including adjusting the ban on insurance services. That sanctions package was finalized in May after painstaking negotiations. The main advantage, Hungary, secured a gap for Russian oil delivered through pipelines.
What is happening with Russian oil exports recently?
Russian oil exports fell by about 1 million barrels a day in the wake of the invasion of Ukraine in February, as many buyers in Europe sanctioned themselves and curtailed purchases amid public outcry. But while the International Energy Agency warned that Russian output — normally above 10 million b/d — could fall by 3 million b/d within months, it has proved more resilient, thanks to India. Before the invasion, India imported almost no Russian oil. By July it imported nearly 1 million b/d of deeply discounted Moscow crude, or about 1 percent of global supply, according to Vortexa, which tracks shipments. Russia’s ability to maintain exports has helped global oil prices fall from around $120 a barrel in early June to around $95 a barrel, or roughly their pre-war level. Because Russia produces more than 10 percent of the world’s oil supplies, officials in the U.S. and Europe worry about sanctions on its barrels from the market. The loss of a quarter of Russian supply could send oil prices soaring.
What are the risks with price capping?
Russia could decide to export less oil. Moscow has been accused by the West of “rigging” gas supplies by reducing flows to Europe. While gas export volumes have declined, Moscow’s revenues have increased because gas prices have soared. It is possible that Russia will turn to the same driver in the oil market and reduce supply while increasing world prices. However, US officials believe that a significant reduction in oil production will cripple Russia’s production capacity. Closing fields can damage reservoirs. When the Soviet Union collapsed, Russian oil production dropped from over 10 million barrels per day to less than 6 million. It took more than 20 years to restore production to over 10 million b/d. Russian exports could also decline if they cannot find enough tankers willing to operate without Western insurance. The G7 countries are responsible for 90 percent of the world’s marine insurance, and Russia exports nearly 8 million b/d of crude and refined products, which requires a huge number of ships.
How will insurers react?
Allowing cargo under the price cap to be insured means the sanction is not the full insurance ban agreed by EU and UK officials in May. However, the involvement of the wider G7 means that the vast majority of marine insurance markets will be in scope, making it harder to overcome the ban. Different jurisdictions will be aligned, which insurance experts say is crucial to taking risks in a global sector.
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However, industry executives have expressed concerns about combining a price cap with an insurance ban. They worry that they will be relied on to supply or cover oil shipments that exceed the cap. A senior executive at the Lloyd’s of London market, speaking on condition of anonymity, said there needed to be a “recognition that insurers are nowhere near the price at which oil is trading”. “To require insurers to suddenly step in and get that information. . . people just wouldn’t do it [offer insurance] on the basis that they would be very concerned,” the person added. Instead, insurers would look to those trading the oil to give an undertaking that they are abiding by the price cap, they said.
