Russia is set to face a US$60 barrel oil price cap from Monday, after European Union, G7 and Australia countries seal an agreement to limit revenues of Moscow to finance the conflict in Ukraine.
“The G7 and Australia […] have reached consensus on a maximum price of US$60 per barrel for Russian-origin crude oil transported by sea,” the countries said in a joint statement released on Friday.
US Treasury Secretary Janet Yellen welcomed the announcement in a statement, which “is the culmination of months of effort by our coalition”.
The agreement was made possible by the consensus reached by the 27 countries of the European Union.
The finance ministers of the G7 countries had agreed in early September on this tool, designed to deprive Russia of financial means.
In concrete terms, the price set must be high enough for Russia to have an interest in continuing to sell them oil, but lower than the price to limit the income it can derive from it.
The mechanism will come into force on Monday “or very soon after”, specify the G7 and Australia. It is indeed Monday that the EU embargo begins on Russian oil transported by sea.
Thus, only oil sold by Russia at a price equal to or less than US$60 can continue to be delivered. Beyond this ceiling, it will be prohibited for companies to provide services allowing maritime transport (freight, insurance, etc.).
Currently, the G7 countries provide insurance services for 90% of global cargoes and the EU is a major player in sea freight, providing a credible deterrent, but also a risk of losing markets to competitors.
Price adjustment
Russia, the world’s second largest exporter of crude, had for its part warned that it would no longer deliver oil to countries that would adopt this cap.
Without this ceiling, it would be easy for him to find new buyers at the market price. The price of a barrel of Russian oil (crude from the Urals) is currently fluctuating around 65 dollars, barely above the European ceiling, implying a limited impact in the short term.
“We will be ready to review and adjust the maximum price if necessary,” assured the G7 and Australia in their press release. And a ceiling should also be found for Russian petroleum products from February 5, 2023.
The European embargo comes several months after the one already decided by the United States and Canada. But Westerners also have to deal with the interests of powerful British insurers or Greek shipowners.
“The EU remains united and stands in solidarity with Ukraine”, welcomed the Czech Presidency of the Council of the EU in a tweet.
Russia has earned 67 billion euros ($95 billion) from oil sales to the EU since the start of the war in Ukraine, while its annual military budget stands at around 60 billion, Phuc-Vinh points out Nguyen, an expert in energy issues at the Jacques-Delors Institute.
Destabilization fears
The instrument proposed by Brussels plans to add a limit set at 5% below the market price, in the event that Russian oil falls below US$60.
In fact, some experts fear a destabilization of the world market and wonder about the reaction of the producing countries of OPEC, which meet Sunday in Vienna.
“This cap will help stabilize global energy markets […] and will directly benefit emerging economies and developing countries”, since Russian oil can be delivered to them at prices below the ceiling, on the contrary assured on Twitter the President of the European Commission, Ursula von der Leyen.
From Monday, the EU’s embargo on Russian oil transported by sea will eliminate two-thirds of its crude purchases from Russia. Germany and Poland having also decided to stop their deliveries via an oil pipeline by the end of the year, total Russian imports will be affected by more than 90%, said the Europeans.
On the other hand, “an oil price ceiling has never been seen. We are in the unknown,” said Phuc-Vinh Nguyen, stressing that the reaction of OPEC countries or big buyers like India and China will be crucial.
The only certainty, according to him: a cap, even at a high price, will send “a strong political signal” to Russian President Vladimir Putin, because, once in place, this mechanism can be tightened.