Russian Oil Price Cap Takes Effect

The Treasury Department last week issued a fact sheet on the new cap, which took effect 12:01 a.m. EST Dec. 5. The U.S. and others stressed that the cap isn’t “set in stone” and likely will adjust over time, and the Office of Foreign Assets Control said the $60 price is set at a level that "Russia has historically accepted," and above its cost of production. Although the price cap immediately affects Russian crude oil, it will not apply to other petroleum products until Feb. 5, when a different price cap likely will be set.

The success of the price cap operation depends on the maritime services industry, including insurance and financing companies, OFAC said. Companies based in the participating nations control around 90 percent of the market for relevant maritime insurance products and reinsurance, while non-G-7 service providers are "limited in scale, more expensive, and less reliable," OFAC said.

Russia has "multiple options" to respond to the price cap, OFAC said. It can sell at or below the price cap and keep its oil flowing onto global markets, or it can rely on service providers in non-G-7 countries, “which are limited in scale, more expensive, and less reliable,” OFAC said. “Given these constraints, reducing the volume of sales would not be in Russia’s economic interest, especially because doing so would mean reducing sales to key emerging markets, including Russian allies,” OFAC said..

The EU also released guidance for industry, saying it will restrict all EU “operators” from insuring, financing and servicing a third-country flagged vessel that is intentionally carrying Russian oil for 90 days after the cargo bought above the price cap has been unloaded. The EU also stressed that its import ban of Russian seaborne crude oil and petroleum products will be unaffected -- the price cap “will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap.”

The cap includes a 45-day transition period for vessels carrying crude oil from Russia that was bought and loaded onto the vessel before Dec. 5 and unloaded at the port of destination before Jan. 19. European Commission President Ursula von der Leyen said the cap will “hit Russia's revenues even harder and reduce its ability to wage war in Ukraine.”

The U.K. also issued a price cap guidance, several general licenses, a sample attestation form for U.K. shippers conducting due diligence, various reporting forms and more. The country said it expects more due diligence from “those closest to the price information and transacting regularly,” such as oil traders and brokers,” than parties transacting annually, such as maritime insurers.

The U.S. "fully supports" the agreed-upon cap number, National Security Council spokesperson John Kirby said during a Dec. 5 call with reporters, calling the policy "an important tool" to restrict Russian revenue and curb the country's ability to fight in Ukraine. The cap is not intended to eliminate Russian oil from the global market, Kirby said. White House Press Secretary Karine Jean-Pierre called the cap "unprecedented" during a Dec. 5 briefing.

Treasury Secretary Janet Yellen said the cap will encourage “discounted” Russian oil and is “designed to help protect consumers and businesses from global supply disruptions.” She also said the cap will “particularly benefit low- and medium-income countries who have already borne the brunt of elevated energy and food prices exacerbated by Putin’s war. Whether these countries purchase energy inside or outside of the cap, the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in global energy markets.

Russia said it “will not accept” the price cap and will decline to ship oil to countries complying with the restrictions, according to a Dec. 5 Reuters report, which cited Russian state news agency Tass. “Starting from this year Europe will live without Russian oil," Kremlin spokesperson Dmitry Peskov said.