Why the Oil Price Cap Won’t Hurt Putin?

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Credits: Zbynek Burival/Unsplash

In terms of the price of Russian oil, the West wants to have it all, as reported by Foreign Policy.

Steep discounts

When Western leaders announced on Dec. 2 that they had agreed on a $60 price cap on Russian oil exports, they trumpeted it as a bold multinational achievement in energy diplomacy.

After all, Russian oil has sold at prices in the $60 range for much of the last several years.

When countries such as India and China snapped up the surplus, they negotiated steep discounts.

But the discount for Urals crude, the main Russian benchmark—nearly $40 per barrel compared with Brent oil in the early months of the war—has slowly dropped into the low $20 per barrel range, allowing Moscow to continue cashing in.

Russian President Vladimir Putin’s recent escalation of the war with missile strikes against Ukrainian energy infrastructure, water supplies, and other civilian targets should have been met with an equally aggressive price cap.

The $60 cap certainly won’t keep Putin up at night.

Global market inflation 

The price is wrong if the objective of the cap is cutting off the funds Russia is using to run its war machine.

While they wanted to sanction Russia, they were also worried that any interruption of Russian supply to the global market could drive up energy prices and inflation for Western consumers and companies, which in turn could undercut popular support for aiding Ukraine.

The good news is that the EU, which initiated the policy and negotiated the price, will review the cap as soon as mid-January.

Several Eastern European and Baltic governments have already called for a lower number.

Warsaw has argued for a price cap as low as $30 per barrel, barely above production costs, currently estimated at around $20 per barrel.

It’s no secret we wanted the price to be lower,” Estonian Prime Minister Kaja Kallas lamented on Twitter.

Embargo on Russian oil

The divide reflects similar splits among EU member states related to the bloc’s own embargo on Russian oil, which went into effect on Dec. 5.

The embargo only affects seaborne imports, which the EU says represent roughly two-thirds of oil imports from Russia.

Pressure from Hungary, Slovakia, and the Czech Republic led to oil imported via Russia’s Druzhba pipeline being exempted from the embargo.

These disagreements over both the price cap level and oil embargo magnify concerns that the EU may find it difficult to maintain unity on sanctioning Russian oil.

As much of the bloc goes cold turkey on Russian oil without much likely effect on the Kremlin’s finances, it’s only a matter of time before complaints from various member states and their citizens that the entire scheme is ineffective and only hurts Europe.

Insurance compliance

The price cap and maritime oil embargo, however, are only two parts of the picture.

Similarly, Turkey has stopped oil tankers transiting the Bosphorus from the Black Sea since the ban went into effect on Dec. 5 in order to ensure insurance compliance, even when the oil appears to originate from non-Russian sources.

For example, guidance issued by the U.S. Treasury Department on Nov. 22 shields U.S. maritime service providers from secondary sanctions should one of their suppliers provide false claims of compliance with the price cap.

This is a potential major loophole for the Kremlin and should be dropped.

Washington should deter service providers from even considering interactions with companies of less-than-sterling reputations.

 

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Source: Foreign Policy

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