EU Reaches Agreement on Russian Oil Sanctions
Oil barrels stored at Gazprom Neft's Omsk Lubricant Plant (OZSM) in Omsk, Russia, Nov. 18, 2022. Photo: REUTERS/Olesya Astakhova
The European Commission overcame its last hurdle in putting into place its Russian oil price cap this week, after Poland signaled its approval of the tentative proposal discussed by EU diplomats, It was the last nation to do so.
The G7 and the EU plan to use the price cap to limit the ability of the Kremlin to finance its invasion of Ukraine; however, they have struggled to land on the pricing details.
Poland held up the negotiations over the exact price level of the cap, seeking a more punitive limit. The latest proposal caps Russian oil to $60 per barrel, subject to regular review. The last-minute Polish approval has since kept the price cap scheme on schedule.
The price cap mechanism restricts the Russian use of shipping and insurance services unless the cargo is price compliant. The G7 bloc is leveraging its collective monopoly on the maritime services industry to command a lower price globally.
They are also moving ahead with a ban on Russian crude oil and refinery products in early 2023, which will increase the effectiveness of the price cap as Russia trades with other countries. Ensuring that the cap was on schedule further confounded the efforts of Brussels, as any delay would threaten existing oil contracts and stall new ones.
A section of the Yamal pipeline, in Poland, which links Russia with western Europe, May 23, 2022. Photo:REUTERS/Kacper Pempel
Warsaw has maintained a strong position of inflicting as much financial pressure on the Kremlin as the market will allow. Citing the local Urals prices, a reportedly discounted oil benchmark, Poland and several Baltic countries had insisted on a price cap as low as $30 per barrel.
However, the Biden Administration has since broken its silence on the negotiations, stating that these local prices reported by Russia were inaccurate. The US Treasury Department further warned that the price cap must strike a balance between “keeping Russian barrels on the market” and limiting Russian cash flows.
The price cap mechanism and import ban constitute the last pillar of the Western sanction regime against Russia. Since its invasion of Ukraine began, Russia has profited from rising global oil prices. The deputy chief economist at the Institute of International Finance told the Wall Street Journal that Russian oil exports have declined by only 7.5 percent since the war began. The Kremlin “earned $97 billion from oil and gas sales through July this year, about $74 billion of that from oil.” This has since surged, as temperatures dropped in Europe and oil demand rose. Restricting this source of revenue would prevent Russia from importing much-needed arms, such as the Iranian-made drones used to attack Ukrainian forces and civilians.
However, the bloc must balance the effects of these sanctions by ensuring oil supplies do not decrease and exacerbate economic conditions across the globe. Nations such as Hungary have expressed concern about maintaining oil supplies. The administration in Budapest said that if supply becomes constrained, “then we need to take a step,” signaling noncompliance with the price cap regime.