Agreeing on a Russian oil cap was the easy part. Now it has to be implemented

Why do we need price caps if Russian oil imports are banned?

The US, the UK, Canada, Australia, and the EU swiftly introduced import bans on Russian crude and refined products after its February invasion of Ukraine. These bans still stand.

“The price cap—which comes on top of the EU import ban on Russian seaborne crude oil and oil products, and the corresponding bans of other G7 partners—will further reduce the revenues Russia earns from oil…[and] serve to stabilise global energy prices which Moscow’s illegal war on Ukraine has inflated,” a Dec. 3 EU notification explained.

The price cap applies to Russian oil being transported to third countries. For ships that intentionally violate the price cap, EU operators will be prohibited from insuring, financing and servicing the vessel for 90 days after the cargo purchased above the price cap has been unloaded.

Will the price cap work?

The opaque oil market, with its many nuances, is hard to regulate.

“History has shown that it is possible for the shipping industry to misrepresent or obscure the origin of its cargo,” according to the Atlantic Council. The American think tank in the field of international affairs points to exemptions for certain pieces of the Russian production complex, such as the Sakhalin-2 project, which was heavily funded by Japan; and it says the cap doesn’t fully address blends that include Russian crudes, suggesting Russian barrels could be manoeuvred through refined or partially refined products.

Moreover, there are several possible workarounds that make the plan less than foolproof, according to Brussels-based think tank Bruegel:

• Russia could organize its own insurance or use a third country, like China
• Importing countries could circumvent the price cap through side payments. “Imagine for example that India pays a higher than usual price for arms deliveries from Russia. Could it be proved that this is a side payment for oil? Will the G7 be ready to enforce sanctions if that happens? It seems that the proposed buyers’ cartel is not very credible,” Bruegel analysts Klaas Lenaerts, Simone Tagliapietra, and Georg Zachmann warn.
• A less likely but still plausible move would be Russia cuts it oil supply, pushing prices up

One more thing: OPEC+ won’t change a thing

On Sunday (Dec. 4), the 23-nation oil cartel in the Middle East decided to stick to the reduced oil production targets it set in October—2 million barrels per day less until the end of 2023. A monitoring committee will meet again in February, and a full-fledged meeting isn’t until June.