The European Union (EU), the G7 group of nations, and Australia have settled details of a plan to limit the price Russia can charge for oil it exports to $60 a barrel.

The cap was imposed on 5 December, the same day European nations launched a boycott of Russian oil in protest of Russia’s invasion of Ukraine.

The cap will be reviewed bimonthly, with the first scheduled for 15 January.

The price limit is intended to fluctuate with world oil prices, keeping Russia’s oil revenue about 5 percent below what Russian oil is trading at on world markets.

The $60 limit is just below prices that Russia’s remaining oil customers, including China and India, now pay, which typically range between $60 and $65.

Russian benchmark Urals oil was trading at $67 on 2 December.

Allies set the cap close to Russian oil’s market price so Russia would not appear to be knuckling under and so would still be willing to continue supplying oil to help meet world demand, The New York Times noted.

Agreement on the cap came after extended negotiations, sometimes contentious, among European nations, as we reported in “Plan to Limit Russian Oil Price Mired in Debate” (29 Nov 2022).

The plan is intended to be both symbolic and pragmatic.

In part, it is meant to show support for Ukraine in its defense against Russia’s invasion. 

However, it also is aimed at limiting Russia’s ability to raise prices, restricting its future available cash to fund its Ukraine incursion while still keeping millions of barrels of Russian oil flowing into the world market every day.

A complete ban on Russian oil exports would create a global energy shock that could send oil and gasoline prices skyrocketing, pushing U.S. gasoline prices to $7 a gallon, according to some analysts.

“This price cap has three objectives,” Ursula von der Leyen, president of the European Commission, explained in a press briefing.

“First, it strengthens the effect of our sanctions. Second, it will further diminish Russia’s revenues. Third, it will stabilize global energy markets,” she said.

The cap, coupled with the EU’s boycott of Russian oil, could force “a noticeable tightening on the oil market in early 2023,” Commerzbank analysts said in a research note, predicting that the price of benchmark Brent crude could rise to $95 per barrel early next year.

The agreement among Western powers follows a flurry of meetings among European ministers over the past two weeks.

Estonia, Lithuania, Poland, and Ukrainian president Volodymyr Zelensky had pushed for a cap of about $30 a barrel, regardless of consequences to oil markets and the world economy.

Every dollar the cap is lowered translates to $2 billion less revenue for Russia, Kaja Kallas, Estonia’s prime minister, said in a public statement.

In contrast, the economies of Cyprus, Greece, and Malta depend on revenue from shipping. Those nations wanted a cap at or above $70 or a pledge that they would be compensated for shipping-related income lost under a lower cap.

Enforcement of the cap will fall largely to shipping and insurance firms handling Russian oil sales, The New York Times noted. Shippers will be allowed to carry Russian oil outside the Western bloc only if the shipment complies with the price cap. Shippers would be legally liable for violating the limit.

Similarly, insurance companies must insure Russian oil shipments for values specified by the cap or face legal consequences. Most companies insuring oil transport are based in the U.S. or Europe and likely would not be willing to risk noncompliance, analysts told the NYT.

Russia has repeatedly said it will ignore the price policy and retaliate against countries that support it. India already has said it will continue to buy Russian oil regardless of Western price limits.

Critics charge that the cap can be evaded if Russia contracts with shippers in China or other countries not taking part in Western sanctions; Iran and Venezuela are under Western sanctions but are known to use rogue shippers.

Russia’s oil also could be transferred from ship to ship and mixed with other oils of similar quality, camouflaging its origins.

At least such machinations would raise the cost and trouble of handling Russian oil, which could discourage other countries or companies from bothering to deal with it, the NYT pointed out.

A $60 cap will not have much impact on Russia’s finances, said Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels. That “will almost go unnoticed,” he said, because it would be near where Russian oil is already selling.

“The cap is not a satisfying number,” energy policy analyst Simone Tagliapietra at Bruegel, a Belgian research firm, told the Associated Press, but added that “the cap might be lowered over time if we want to increase the pressure on Russian President Vladimir Putin. The problem is, we have already spent a lot of months waiting for a measure to dent” Russia’s oil income. 

Russia depends so thoroughly on its oil revenue that a cap of $50 would make it impossible for Russia to balance its budget, he noted. Russia is believed to need at least $60 a barrel to break even on its oil sales.

TREND FORECAST: The cap will not have any immediate or crushing effect on Russia’s oil exports, war effort, or overall economy.

Instead, any effect will be gradual, adding to the steady accretion of difficulties, including shrinking revenue, wrought by Western sanctions and allies’ determination to deny Russia a victory in its attempt to absorb Ukraine.

The cap also will have little, if any, effect on world oil markets. Demand is sagging with the sluggish global economy and is likely to remain at least somewhat muted at least through the next quarter.

To some degree, Russia will succeed in evading the price cap with the aid of its customers and political allies. The degree of that success is an open question.