Rules agreed by the European Union, the Group of Seven and Australia to cap Russia’s seaborne oil prices have come into effect.
The $60-a-barrel cap, which took effect on Monday, Dec. 5, is designed to limit Russia’s ability to fund its war in Ukraine while ensuring it continues to supply global markets.
But Moscow said it would not abide by the cap even if it had to cut production.
The cap builds on the EU’s embargo on Russian offshore crude oil imports and similar commitments by the US, Canada, Japan and the UK.
This means that Russian oil, which is only sold at or below $60 a barrel, can be shipped to third countries using G7 and EU tankers, insurance companies and credit institutions, because the world‘s major shipping and insurance companies are Located in a G7 country. And the move could make it harder for Moscow to sell oil at a higher price.
Countries that do not take the initiative can continue to buy Russian oil above the price cap, but cannot use Western services to source, insure or transport it.
“We have some clear signals that some emerging economies, especially in Asia, will comply with the cap,” a European official told AFP. He also said Russia was already under “pressure” from customers to offer discounts.
But on Sunday, Russia, the world‘s second-largest oil exporter, said it would not accept the cap or sell oil that complies with it.
Deputy Prime Minister Alexander Novak called the move a gross intervention by the West that violated free trade principles and said it would destabilize global energy markets by triggering supply shortages.
“We are looking at mechanisms to prohibit the use of price-cap instruments, regardless of the level they set. Because such intervention could further destabilize the market,” he said.
He also said, “We will only sell oil and oil products to countries that cooperate with us under market conditions, even if we have to cut production.”
The sale of oil and gas to Europe has been one of Russia’s main sources of foreign exchange earnings since Soviet geologists discovered it in the swamps of Siberia in the decades after World War II.
The price ceiling agreed by the G73 on Friday was not lower than the level of $67 a barrel for Russian oil at the close of the day. Therefore, the EU and G7 countries expect that Russia will still have an incentive to continue selling oil at this price, but will need to accept lower profits.
Another European official told AFP that “Russia must maintain an interest in selling oil” or it risks reducing global supply, causing prices to spike. He also said they didn’t believe the Kremlin’s threat to halt deliveries to countries adhering to the cap.
The official believes that Russia will continue to focus on maintaining the state of its infrastructure, which will be damaged if production stops. In addition, it has to maintain the confidence of its customers, including China and India.
Russia may be tempted to build its own tanker fleet, operate it and insure it, but Brussels argues that “building a marine ecosystem overnight will be very complex”, so this expedient may prove difficult to convince customers.
Implementation of the cap levels is reviewed every two months by the EU and the G7, with the first review scheduled for mid-January.
“This review should take into account aspects such as the effectiveness of the measure, its implementation, international compliance and harmonization, potential effects on alliance members and partners, and market developments,” the European Commission said in a statement.
The cap on crude will be followed by a similar measure affecting Russian oil products. The measure will come into effect on February 5, but the cap level is still to be determined.