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Sep 11, 2022
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Russian Oil Price Ceiling and Pitfalls for Russia

The US Treasury gave clarifications on how the price setting for Russian oil, agreed upon by the G7 and the EU, will work. According to the US Treasury, a coalition of G7 and EU countries will begin to implement policies that affect a wide range of services related to the sea transportation of Russian oil. From December 5, it is planned to introduce a ban on the transportation of crude oil from the Russian Federation by sea, and from February 5 next year – Russian oil products.

How will the price ceiling be set? Countries that agree to implement a price-based maritime service policy, as well as those that commit to price caps on imports, will be able to participate directly in this coalition’s price ceiling consultation process. A coalition of countries should conduct technical assessments.

Sanctions may be imposed on individuals who make significant purchases of oil at a price above the limit. “Our approach to the implementation of the measures is based on the principle that Russian oil should continue to flow to the world market, subject to good faith compliance by buyers and service providers with the principle of marginal prices,” the US Treasury said.

After such clarifications, it seems that the optimistic statements of Russian officials that non-market measures against Russian oil will not work will probably diminish. The US and the EU still have the ability to impose harsh sanctions against those who disobey their policies. This also applies to India and China. And it is unlikely that these countries will not heed the warnings of Washington and Brussels. Yes, and it will be profitable for them to buy Russian oil at the established price ceiling. China and India are already buying Russian oil at up to 30 percent discounts.

The statement of the US Treasury is related to the fact that while the EU is bogged down in agreeing on a cap on Russian gas prices, which will follow immediately after the introduction of a ceiling on oil prices. And in Washington they decided to push the EU to take more decisive action with their statement. The message is simple: we have a sanctions mechanism and it works, since even China and India are in no hurry to help Russia find workarounds.

Whether the US Treasury’s clarification will work is not yet very clear. The European Union has not yet decided to take a step into the unknown. As Reuters writes following the meeting of the heads of EU energy departments, it was not possible to agree on measures, since only a few states supported the initiative, while the countries of Central Europe strongly opposed it. On the other hand, the concept of a common ceiling on all gas imports, including from Norway, is gaining popularity. According to the agency, it was approved by 15 members of the bloc, although Brussels did not put such a proposal on the agenda of the meeting at all because of the risks that the EU would lose its attractiveness for all suppliers. As the head of the Belgian Ministry of Energy put it, this is “a clear signal for the European Commission.”

Bloomberg correspondent in Brussels Maria Tadeo describes the meeting of ministers: “There are a lot of ideas. My interlocutors describe this meeting as something like a brainstorm – everyone throws in proposals, any initiatives are acceptable, there can be no stupid ideas. There is talk of a price cap on gas, decoupling electricity prices from the cost of gas, a windfall tax, and a forced reduction in demand for energy resources. However, a roadmap of possible solutions may appear only next week, after which it will be up to political will. At the same time, the next meeting of EU leaders is scheduled for early October, so everything can drag on for several weeks. Unless, of course, an extraordinary congress is announced at the end of September.”

In the meantime, a number of other measures have been agreed upon, in particular, a tax on excess profits of electricity producers.

Reuters rightly notes that as painful as the potential shutdown of Russian gas would be for the European Union, the Russian economy will not be easy either. According to the agency, the report on this was discussed at a meeting with Prime Minister Mikhail Mishustin on August 30, and the document refers to the risks for the Russian domestic market. According to the article, the low cost of fuel within the country is provided by export prices, and the cessation of supplies to the West and discounts in other directions can lead to “an imbalance in the system” and “lack of funds for gasification of the regions.” As EUObserver adds, citing European Energy Commissioner Kadri Simson, the ceiling scenario for Russian gas in Brussels has not yet been completely ruled out.

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