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Russian Oil Price Cap, EU Ban Aim to Limit Kremlin War Chest

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Russian Oil Price Cap, EU Ban Aim to Limit Kremlin War Chest

Western leaders are walking a fine line between trying to cut Russia’s oil income and preventing an oil shortage that would cause a price spike and worsen inflation.

Russian Oil Price Cap, EU Ban Aim to Limit Kremlin War Chest
Credit: Depositphotos

Oil prices rose Monday as the first strong measures to limit Russia’s oil profits over the war in Ukraine took effect, bringing with them uncertainty about how much crude could be lost to the global economy through the new sanctions or Russian retaliation.

International benchmark Brent crude rose 2 percent to $87.30 per barrel, a day after the OPEC+ alliance of oil producers, including Russia, made no changes to supply plans because the impact of the new restrictions on Russian oil is not yet clear. Starting Monday are a European Union embargo on most Russian oil and a price cap of $60 per barrel on Russian exports to other countries imposed by the Group of Seven democracies and the EU.

The EU ban on Russian oil moving by sea is “by far the biggest step to date to cut off the fossil fuel export revenue that is funding and enabling Russia’s barbaric invasion of Ukraine,” said Lauri Myllyvirta, lead analyst at the Finland-based Centre for Research on Energy and Clean Air.

“It took a long time to get here — but this arguably is one of the strongest responses to Putin’s war in Ukraine,” tweeted Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels.

Western leaders are walking a fine line between trying to cut Russia’s oil income and preventing an oil shortage that would cause a price spike and worsen the inflation plaguing economies and hurting consumers around the world. But Russia has said it will not sell oil to countries that observe the cap, which could take oil off global markets and raise energy costs, including for gasoline at the pump.

Kremlin spokesman Dmitry Peskov, asked in a conference call how the oil price cap might affect the war, said, “The economy of the Russian Federation has the necessary potential to fully meet all needs and requirements within the framework of the special military operation, and such measures will not affect this.”

The U.S., EU, and allied countries have hit Russia with a slew of sanctions aimed at bank and financial transactions, technology imports, and regime-connected individuals. But until now, those sanctions have for the most part not directly gone after the Kremlin’s biggest moneymaker, oil and natural gas.

Europe was heavily dependent on Russian oil and natural gas before the war and has had to scramble to find new supplies. Previously, the EU banned imports of Russian coal, and the U.S. and the U.K. halted their limited imports of Russian oil, but those steps had a much smaller economic impact.

Even as Western customers shunned Russian oil, the higher prices driven by fears of energy shortages helped offset lost oil sales, and Russian exporters have adjusted by shipping more oil to India, China, and Turkey in a major reshuffling of global oil flows. Russia’s economy has shrunk — but not by as much as many expected at the start of the war almost 10 months ago.

One unknown is how much of the oil formerly sold to Europe can be rerouted. Analysts think many, but not all, of those Russian barrels will find new homes, tightening supply and raising prices in coming months.

Indian Foreign Minister Subrahmanyam Jaishankar indicated Monday that the country would keep buying oil from Russia to prioritize its own energy needs. India also so far hasn’t committed to the G-7 price cap.

The cap has a grace period for oil that was loaded before Monday and arrives at its destination before January 19 to minimize disruption on oil markets.

The price ceiling would work by barring insurers or ship owners from helping move Russian oil to non-Western countries unless that oil was priced below the cap. Most of those companies are located in the EU or U.K., bringing them with range of the restrictions.

The idea is to keep Russian oil flowing while reducing the Kremlin’s income, though the immediate hit may be limited because Russian oil already was trading around where the cap was set. The U.S. and Europe decided to lean more toward preventing a price spike than provoking financial distress in Russia, although the cap could be tightened later.

European Commission Vice President Frans Timmermans said Monday that “we agree that we should not disrupt international oil markets. That would not help us either.” That is why the EU decided “the right price” was $60 per barrel.

Ukraine’s President Volodymyr Zelenskyy had called for a cap around $30 per barrel. That would be near Russia’s cost of production, letting Russian oil companies earn enough only to avoid capping wells that can be hard to restart. Russia needs some $60 to $70 per barrel to balance its budget.

One wild card is Russia’s response. If it follows through on a threat not to sell oil to countries observing the cap, that could limit supply and raise prices, benefiting Russia to the extent it can evade the restrictions.

Russia could use methods such as those employed by Iran and Venezuela to dodge sanctions, such as using “dark fleet” tankers with obscure ownership and ship-to-ship transfers of oil to tankers with oil of similar quality to hide its origin. Russia or China could also organize their own insurance. Sanctions experts say that those steps will impose higher costs on Russia.