It took persistent negotiations in the EU and finally the decision is that the cap on the price of Russian oil will be lower than the initial proposal, i.e. to go to 60 dollars a barrel.
The rationale behind the cap, which was basically a US proposal, was to find a "middle ground" between hitting Russia's ability to finance the war in Ukraine through oil and gas exports while avoiding a sudden cut-off of access for many countries to Russian oil, which would cause an even greater energy crisis, hence a surge in fuel prices, which would also affect the developed economies.
In any case, this was a contradiction that the Western countries had to face from the beginning: the most effective form of sanctions against Russia would be not being able to export oil and gas, but this would only exacerbate the energy crisis affecting the global economy.
Hence the talk of an oil price that is lower than reference prices (in this case Brent) but allows Russia to continue to have an incentive to sell. Of course it is telling that the price range that was discussed from the beginning, $60-70 per barrel, was roughly what Russia is currently selling at a discount.
Indeed, often the cap has also been presented as a measure favourable to developing countries since it leads to lower energy costs for them if they source Russian oil.
We should note here that Russian oil is currently selling at around $70 per barrel and its production costs are considerably lower. Russian government documents set it at $44, but there are estimates that it is lower. The Russian Government's own budget, however, is based on the assumption of an average price of USD 70 per barrel for 2023. Of course, Russia itself has refused to go ahead with any compliance with this cap.
The attempt to extend sanctions based on the issue of ship insurance[BR]
On its own, a cap on oil prices by countries that have a strict sanctions regime against Russia anyway would not be very effective. The EU, for example, has already decided that from 5 December the purchase, transport and sale of crude oil and other oil products from Russia is banned, and from 5 February this is extended to refined products.
However, very early on the Western countries (G7, EU and Oceania) found that a very large part of the world was not willing to follow the path of sanctions and continued to trade normally with Russia, buying oil and gas from it.
For this reason, and along with the cap, an attempt will be made to implement a "secondary mechanism" of sanctions designed to ensure that the cap is applied globally, as the cap mainly concerns markets outside the EE and G7.
This mechanism is the ban on insuring ships carrying Russian oil if it is not priced within the limits of the cap, a cap that Russia obviously does not accept. Normally a ship cannot sail without insurance and the vast majority of companies that insure ships and their cargoes are within the G7 and EU boundaries.
This, indeed, could pose a problem as at the moment, despite the steps taken to allow ships to be insured outside the boundaries of Western countries, the companies involved do not have the volume and capital adequacy to do so. However, Russia has also set up a mechanism to insure Russian ships and India has also set up a similar mechanism.
We note that Turkey has announced that it will examine whether tankers transiting the Straits will carry the required insurance certificates.
The search for alternatives
Of course, at the moment there is a significant volume of ships that are violating the sanctions anyway. These are the ships used to transport oil from Venezuela and Iran. To these can be added the ships that belong to Russia anyway. Of course, these are often ships that are subject to sanctions, and in the transport of cargo in winter there is also the parameter of whether the ships are certified to travel in seas with ice, a very important point for the transport of Russian oil, since many of Russia's oil exports come from the Baltic, or follow the Arctic routes.
To these can be added ships whose insurance is outside the countries applying the sanctions and which are not themselves subject to sanctions.
To these can be added ships whose insurance is outside the countries applying the sanctions and which are not themselves subject to sanctions. These could carry Russian oil with less risk, although they are likely to command higher freight rates.
Another issue that will be important will be the extent to which there can be easy ship-to-ship transfers, which means similar OPL (Off Port Limit) locations and in international waters.
However, in 2022 Russia engaged in an intensive effort to purchase tankers to be able to circumvent sanctions, usually 12-15 year old ships that have a few years of service left. In particular, it is estimated that Russia-linked companies have purchased 29 supertankers, so-called VLCCs that can carry more than two million barrels of oil each, 31 Suezmaxes that can carry about one million barrels each, and 49 Aframaxes that can carry about 700,000 barrels each. However, even so it is estimated that in the first instance there will probably be a shortage of ships when the sanctions are fully implemented.
The question of compliance by other countries
However, the biggest problem is that even so a large number of countries, including really big buyers of Russian oil such as China and India, have shown no inclination to comply with Western demands and the sanctions mechanism, without of course underestimating any possibility of buying Russian oil at a discount. Moreover, one can reasonably estimate that in the medium term the problems in relation to ship insurance and more generally ensuring that there are enough ships that may not be directly subject to sanctions can be overcome.
Therefore, the cost to Russia, at some point, will hardly be of a scale that could actually bring it to its knees. Which brings back the difficult question of a political way out of the deadlock of war.
Source: in.gr
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