Limiting the price of Russian oil at $60 opens a new front for Western countries seeking to exhaust the Kremlin's resources for waging war in Ukraine.
also creates new uncertainty in global energy markets.
writes about it
The restriction, which came into effect on Monday after a negotiating session between the Group of Seven countries, Australia and the European Union, aims to limit Russia's revenue from oil sales and weaken Moscow's ability to finance its military.
It is also another way to put pressure on Russian President Vladimir Putin.
Although the price of oil was stable on Monday, the measures complicate an already volatile situation, raising fears that the embargo could lead to higher energy prices due to a reduction in global oil supplies.
What you need to know about Russian oil price caps, the EU embargo, and what these developments could mean for US consumers and the global economy.
Why limit Russian oil?
The purpose of the price cap is twofold: to reduce Russia's income from oil exports abroad and at the same time maintain the flow of Russian raw materials to the world market.
The EU and Great Britain have previously floated the idea of banning insurance of any Russian oil supplies, but expressed concern that removing so much oil from the markets would lead to a sharp rise in prices.
"There is an inherent contradiction between the first — a significant reduction in Russia's export revenues and the second — avoiding a physical deficit on the world oil market.
EU and G7 politicians are mindful of the current inflationary pressure and the political crises that arise because of it," says analyst Raymond James.
Who is affected by the price cap?
The US stopped importing Russian oil in the spring of 2022, and an EU embargo on Russian oil went into effect on Monday.
The restriction is aimed at foreign countries that still import Russian oil.
"China, India and Turkey stand out as major oil importers that have not imposed their own sanctions against Russia, so the price cap is of most immediate importance to them," noted Raymond James.
Russia, the world's second-largest oil producer, has already diverted much of its supply to India, China and other Asian countries at cut prices after Western customers began abandoning Russian crude before the EU ban was imposed.
How does the price cap work?
Insurance companies and other firms needed to transport oil will only be able to deal with Russian crude if the price per barrel is at or below $60.
Most of the world's insurance companies are located in the EU or the UK, so it will depend a lot on them how the restriction will be enforced.
The U.S. Treasury Department said the price cap depends on a vital element of the global oil trade: the maritime services industry, which includes insurance, trade finance and other key services that support the complex transportation of oil around the world.
Almost all ports and major supply channels require vessels to have appropriate insurance, with around 90% of the market controlled by G7 companies.
While Russia can try to circumvent the restrictions by using various shipping and insurance resources, the restrictions make it "more expensive, time-consuming and cumbersome," said Maria Shagina, a sanctions expert at the International Institute for Strategic Studies in Berlin.
"This cat-and-mouse game is always inherent in sanctions mechanisms," she said.
How did Russia react?
Russia rejected the price cap, and Kremlin spokesman Dmitry Peskov said Russia needed to analyze the situation before deciding on a specific response, reports said.
Russia's permanent representative to international organizations in Vienna, Mykhailo Ulyanov, wrote on Twitter that the country will stop supplying oil to countries that support the restrictions.
He called the actions of the West "politically motivated anti-market decisions that endanger the stability of the oil market."
The EU is preparing retaliatory measures if Russia stops all imports of crude oil to the continent.
Although the EU no longer imports Russian oil by tankers from Monday, raw materials still arrive there via pipelines.
"Why should Russia send oil to countries participating in the sanctions?
This is a risk that Europe is taking," said Patrick DeHaan, energy analyst at GasBuddy, noting that the first effects could be felt in weeks or months.
DeHaan noted that much will depend on other factors, including how cold the winter will be, how much the global economy will slow down, which will reduce demand for oil, and whether economic growth in China will pick up.
If Russia shuts off oil to Europe, it "may be offset by the reduction of strategic reserves under the auspices of the International Energy Agency," JPMorgan Chase Holding said.
"These reserves are obviously not infinite, but even given last year's contraction, the world's largest economies are poised to respond to an oil shock."
Meanwhile, other countries that currently import Russian oil by ships — China, India and Turkey — will probably be able to circumvent this restriction, analysts believe.
Last week, India said it would continue to buy Russian oil without using Western financial or insurance services.
Earlier, Treasury Secretary Janet Yellen said that India would be "happy" to do so, including if the price of oil is above the limit.
Media reports that Russia is building its own fleet of tankers to avoid Western restrictions.
Oil could also be pumped from one ship to another and mixed with oil of similar quality to hide its origin.
What is the impact of different price cap levels?
The $60 limit was a compromise between EU member states who wanted to avoid sharp spikes in global oil prices and others, including Poland and the Baltic states, who wanted the limit lowered to financially punish Russia.
Russian oil currently sells for just under $60 a barrel, meaning the cap will not have much of an impact on Russia's finances.
It will "almost go unnoticed," said Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels.
However, if the price of oil rises sharply, the restriction could seriously affect the Russian economy.
The EU has also left room to adjust the cap along with the world oil price.
According to analysts, Russia needs to sell oil at about $30 per barrel to cover production costs.
Robin Brooks, chief economist at the Institute of International Finance in Washington, tweeted last week that the $30 limit would "start Russia in the financial crisis it deserves."
What happens next?
The biggest impact of the EU embargo may come not this week, but on February 5, when an additional European ban on refined products made from Russian oil, including diesel, comes into effect.
According to JPMorgan Chase, Europe still imports about 1.3 million barrels of Russian oil products per day, half of which is diesel.
In Europe, there are still many cars that run on diesel fuel, and the fuel is also used for freight transport to deliver a wide range of goods to consumers and to run agricultural machinery.
These higher costs are likely to spread throughout the economy.
Analysts at Commerzbank said the EU embargo and restrictions together could lead to a "significant tightening of the oil market in early 2023" and expected the price of international benchmark Brent to rise again to $95 a barrel in the coming weeks.
OPEC said at its meeting this weekend that it would not increase supply in response to the EU's moves.
It will be recalled that it was previously reported that on December 5, oil tankers formed a queue near the coast of Turkey
on the first day of price restrictions on Russian oil in the West
We also previously reported that the Council of the EU
introduced price restrictions
on Russian marine crude oil.
The limit is set at USD 60 per barrel.
The price may be adjusted in the future to respond to market developments.
The Western mass media learned about the scheme by which Russia will be able to circumvent oil sanctions
This is a weak position: Zelenskyi on limiting the price of Russian oil at the level of 60 dollars per barrel
Limitation of oil prices: in Russia, there was hysteria and they threatened to stop the supply to Europe
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