Russian oil price cap

As part of the sanctions imposed on the Russian Federation as a result of the Russo-Ukrainian War, on September 2, 2022, finance ministers of the G7 group of nations agreed to cap the price of Russian oil and petroleum products in order to reduce Russia's ability to finance its war on Ukraine without further increasing the 2021–2022 inflation surge.

In 2022 the Russian Federation was cushioned against oil and gas-based sanction effects because of the world rise in oil and gas prices. The reason for the price cap sanction is to remove the cushion so that the revenue earned by Russia is restricted and will not rise if world oil and gas prices rise in the future. In addition, it will make the hiring of oil tankers much harder for Russia, which will further restrict the amount of oil that Russia can sell and ship to customers, further reducing revenue.

The 2022 Russian crude oil cap would be enforced by a maritime attestation that Russian crude was purchased below a certain set price, irrespective of market conditions. As of September 2022, this price cap had not been set, but G-7-based finance companies would only be allowed to provide transport and other services to Russian-based crude under these conditions. Because Russian crude will no longer be imported into Europe as of 5 December 2022, and the U.S. has a complete ban already in place, the controlled purchase of Russian oil would only affect third countries. According to ship-tracking data, ownership and oil transfer (of Russian crude) had already occurred outside territorial waters, thereby creating a challenge for its enforcement.

G7 and EU countries intend to duplicate the price cap system over crude oil to provide a price cap on petroleum products from Russia at a later date and a price cap on natural gas.

Discussions on Sanction Proposals

French Finance Minister Bruno Le Maire said the proposal would require wider international participation to be successful, saying "it should not be a Western measure against Russia, it should be a global measure against war." In response, Russia said it would suspend sales to countries supporting the price cap. Energy analysts have also expressed skepticism that a price cap would be realistic because the coalition is "not broad enough"; OPEC+ called the plan "absurd". The U.S. and the E.U. will likely attempt to follow through with the plan by limiting Russia's access to Western insurance services.

In October 2022, India (the world’s third-largest oil importer) announced it would not join the effort to cap the price of Russian oil. India obtains Russian crude at a significant discount, and regards Russia as a strategic, economic partner.

The level of the price cap was discussed at length between the parties to the agreement, the International Working Group on Russian Sanctions at FSI Stanford reported on 28 November 2022 that a price cap of USD75pb would be worse than having no price cap, whereas a price of USD55pb would reduce Russian oil revenue to USD166bn a restriction on finances for the Russian state, before recommending a cap of USD35pb as this would reduce revenue to USD100bn, giving a severe financial change, whilst still leaving the price above the cost of production.

The level eventually agreed for the price cap was a balance between the levelling of Russia’s revenue stream without causing a major disruption to global oil markets. It was also important to show Russia that Russia had lost the ability to disrupt the international economic order without facing pushback.

Price Cap price

The European Union tentatively agreed on 1 December 2022 to set an initial USD60 barrel price cap on Russian seaborne oil with an adjustment mechanism to keep the cap at 5% below the market price, as reported by the International Energy Agency, reviewed every two months. On 2 December 2022 the EU confirmed the price cap rate and joined the US, other G7 countries and Australia in imposing the sanction from 5 December 2022 with two monthly reviews on the level of the price cap.

  • 5 December 2022 USD 60 per barrel

Next price cap review 15 January 2023

Reactions

China

Whilst China has not joined in the price cap it appears that they are increasing purchases from Russia whilst using the cap to argue for lower prices for future deliveries. The Chinese company COSCO Shipping appears to have pulled out of shipping oil from Far East Russian ports since 5 December where oil shipments have fallen by 50%.

Cyprus, Greece and Malta

Cyprus reported that in two months from the beginning of October 2022, around 20% (900,000 gross tonnes) of their flagged oil tanker fleet have departed, by changing their registry. Higher losses being recorded in Greek and Maltese fleets.

India

India have rejected the price cap and Russia has offered to help India build oil tankers to enable them to ship Russian oil directly to India, bypassing the sanctions. In December India was buying around one shipload of 1m bpd. During December India increased Russian oil imports, receiving a discount of USD12-15pb which is around USD7pb higher discount than in October, giving a buy price below the price cap.

Norway

On 8 December 2022 Norway announced that it was joining the price cap sanctioning countries.

Russia

The Kremlin is preparing a presidential decree that will prohibit Russian companies and any traders from selling oil to anyone that participates in a price cap. The decree will also forbid dealings with both companies and countries that join the price-cap mechanism.

With shipping insurance and reinsurance normally coming from Europe or the USA and Lloyd’s syndicates declaring Russian waters a war risk zone, making insurance hard to get and expensive, Russia is seeking to boost acceptance of its own shipping insurance through Russian National Reinsurance Company.

An experiment in sending one of its three ice-breaking oil tankers to China, sailing through the arctic circle north of Russia, has been tested, the journey is 3,300 miles and will take around 8 weeks.

It is believed that Russia has been purchasing around 100 old (12-15 year) oil tankers to create a "shadow fleet" to circumvent possible sanctions. Paying two to three times the normal price for tankers with ice-class ratings. Russia currently needs around 240 tankers for its current level of production.

On 4 December 2022 Russia stated that it rejected the price cap of USD60 but would wait before responding to the sanction. Three responses have been suggested, which could become operational at the end of December 2022, a ban on sales to the price Cap participants, (only Japan is still importing ship borne oil from Russia), setting a floor price where Russian producers could not sell crude oil below a pre determined price and thirdly a maximum discount on Russian crude oil compared to the market price of crude oil from other suppliers.

Russian Urals oil price

October to November 2022 average price for Urals oil was $71.10pb.

The average price for Russia’s Urals oil blend was $57.49 per barrel between 15 November and 14 December 2022 according to Russia’s Finance Ministry.

Switzerland

On 8 December 2022 Switzerland joined the EU sanction rules relating to the price cap.

Turkey

From 5 December 2022 Turkey demanded proof of full insurance on all tankers proposing to use its straits, to enter or leave the Black Sea, causing a traffic jam of tankers. The temporary holdup was resolved by 12 December.

Ukraine

Ukrainian president Volodymyr Zelenskyy called the oil cap "a weak position" and not "serious" enough to damage to the Russian economy.

OPEC

Some OPEC delegates attending an OPEC meeting in Vienna on 4 December 2022 believed that the production of Russian oil could decrease from the current 9.9m bpd by over 1m bpd because of the price cap. The International Energy Agency believes the drop in production could be 1.4m bpd. Some OPEC delegates believe global production should be decreased to force the recent fall in oil prices back to a higher level, whilst others believe a small increase in production could be undertaken to fill the gap left by the predicted fall in Russian production. The OPEC decision was to not change production levels from those set in October 2022.

Operation of sanctions

Oil tankers

Around 55 percent of the tankers that transport Russian oil out of the country are Greek-owned, they will be able to continue operating provided the price cap conditions are met.

It is believed that Russia has been experimenting with altering a ship transponder to avoid sanctions, with a tanker, the Kapitan Schemilkin giving in May to July 2022 a location near Greece when the tanker was near Malta, satellite imagery was used to prove the false location and identify the tankers real position.

EU terms of Oil Price Cap

The EU introduced rules similar to the USA rules with a 45 day wind down for the regulations and changes to enable ships to comply. EU parties may not deal with any vessel that within the previous 90 days had discharged Russian oil at a price over the cap level. Any price cap changes will require a unanimous decision of the 27 EU Member States comprising the Council.

UK terms of Oil Price Cap

The Office of Financial Sanctions Implementation (OFSI) is responsible for the sanctions in the UK and Overseas Territories. Crown Dependencies, as well as Bermuda and Gibraltar will legislate themselves. The rules follow those published by the USA and include oil directly shipped from Russia, the transfer of goods between ships and the mixing of loads from different countries.

The permitted maximum monetary penalty is the greater of £1,000,000 or 50% of the estimated value of the breach. A licence can give written permission from OFSI to allow an act that would otherwise breach prohibitions imposed by sanctions.

USA terms of Oil Price Cap

On 22 November 2022 the Office of Foreign Assets Control (OFAC) in the USA published guidance on the operation of the Price Cap Policy.

A coalition of G7 countries, the European Union and Australia have agreed to prohibit the import of crude oil and petroleum products of Russian origin, supported by a broad range of companies involved in the transport of oil.

The object is to maintain the supply of oil whilst reducing the revenue of the Russian Federation.

US persons will be permitted to undertake services relating to:

  • Trading/commodities brokering
  • Financing
  • Shipping
  • Insurance, including reinsurance and protection and indemnity
  • Flagging
  • Customs brokering

if the oil price is the same as the Price Cap or lower.

Oil loaded before 12:01 am on 5 December 2022 and delivered before 12:01 am 19 January 2022 will be exempt.

Oil cannot be shipped to a jurisdiction that has a ban on the import of oil from the Russian Federation, such as the USA.

Parties undertaking services that facilitate the breaching of the Price Cap will be subject to OFAC penalties.

A flagging jurisdiction is expected to put a vessel involved in a breach of the rules through a de-flagging process.

Safe harbour rules apply to parties involved in permitted actions.

Licences can be requested from OFAC.

The Cap price is set by the Price Cap Coalition.

Effect of price cap sanctions

December 2022

The number of sales of oil tankers in 2022 has broken the 2021 levels with buyers for old oil tankers reported in the Middle East, in early December 2022 the charter price of a tanker in the Mediterranean was reported to have risen from 80,000 to USD 130,000 per day if carrying oil from Russia.

In the first week, Russian oil price at Baltic ports was reported as being as low as USD45.10 pb. Seaborne exports also fell by around 500,000 bpd.

See also


This page was last updated at 2022-12-21 08:41 UTC. Update now. View original page.

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