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Home News Here is how the so-called price cap on Russian oil will work.

Here is how the so-called price cap on Russian oil will work.

by Staff
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European Union diplomats have agreed on a $60-per-barrel limit on the price at which Russian oil can be traded outside the bloc, the latest effort by Western allies to try to deprive Moscow of revenue to finance its war in Ukraine.

But there are serious questions over whether such a plan can be enforced, and whether Russia and its main buyers, including China and India, will go along with the price set by the Group of 7 industrialized nations.

Here is a look at some key elements of the plan:

Western allies don’t want Russia to stop selling oil, its main export. Doing so would put a big dent in the global supply and drive prices up at a time of already soaring global inflation. It would also affect countries such as India and Turkey — key buyers of Russian crude — whose support the West is hoping to leverage to maintain pressure on Moscow.

Instead, the United States and allies have negotiated a plan aimed at reducing the revenue Russia earns from each barrel that it ships. The effort is a reflection of how Western sanctions have failed to weaken Moscow’s energy exports: Russia is on track to earn more this year from oil sales than in 2021, buoyed by a surge in the global price after the war began, despite often selling to China and India at discounts.

The U.S. Treasury secretary, Janet L. Yellen, has described the plan as a price cap, but it’s nearly impossible to manipulate the price of a global commodity such as oil. Instead, the plan relies heavily on European dominance of the maritime insurance industry, a web of companies that provide coverage for ships and their cargo, liability for potential spills and reinsurance, a form of secondary insurance used to defray the risk of losses.

Most of the major shipping companies and insurers are based in Group of 7 countries. The plan prohibits those companies from handling Russian crude unless the shipment has been sold at or below the price set by the Group of 7. If it is not, they will be held liable for violating sanctions.

The $60-per-barrel price is a disappointment for some European countries, including harder-line pro-Ukraine nations such as Poland, that wanted to see the Kremlin lose much more revenue from its oil sales. With Russia’s oil production costs estimated at $20 per barrel — and the benchmark for the price of Russian oil having traded at between $60 to $100 per barrel in the past three years — the agreed-upon price still allows Moscow to reap substantial profits.

E.U. diplomats involved in the negotiations were bothered by what they saw as an American-led process that left them with complex and difficult implementation costs without significantly altering Russian revenues.

U.S. officials argued that it would be better to set a price high enough that Russia would comply with it by continuing to ship much of its oil exports using European and American infrastructure, like ships and insurance.

Industry officials have questioned the feasibility of the plan, which relies on each party in the supply chain of Russian oil to attest to the price of shipments. Insurers and shippers have warned that records could be falsified by Russia and trading partners intent on keeping oil flowing.

The Kremlin has said it will not sell to countries that comply with the pricing mechanism, meaning those intent on buying its oil may find ways around it. One method could be side payments — for example, overpaying Russia for wheat or other commodities not subject to sanctions — which occurred during the 1990s when the United Nations tried to impose a similar plan on Iraq.

China, India and others could buy Russian oil at any price if shipped or insured by non-European companies, which a senior U.S. Treasury official said would most likely be more expensive, but not subject to penalties. And guidance issued by the Treasury Department said Russian oil that had been sold under the pricing mechanism but then “substantially transformed” or refined outside Russia would not be subject to the sanctions.

Companies that are found to have knowingly violated the policy will be barred from offering services for Russian oil for three months — a penalty that critics say is far too lenient to make the policy effective.

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