Ukraine’s Allies Agree on Russian Oil Price Cap

A complex US-led plan to limit what Russia can charge for its oil exports is set to cap the price of Russian crude at $60 a barrel, the G7 nations have agreed to. on Friday. This threshold, which has been resolved after lengthy negotiations between European Union diplomats, is likely to create a small dent in the Kremlin’s energy revenues and the White House hopes will help prevent it. a global oil shock.

The deal was heralded by the EU’s executive body and quickly won approval by the rest of the G7 and Australia late on Friday.

“With this decision today, we fulfill the commitment of the G7 leaders at their summit in Elmau to prevent Russia from profiting from the war of aggression in Ukraine, and to support the stabilization of energy markets. global quality and mitigate the negative economic impact of Russia’s war of aggression. , especially for low- and middle-income countries, who have felt the disproportionate impact of Putin’s war,” the joint statement said.

The final agreement came after months of deliberation on how to maintain economic pressure on Russia without creating an oil price shock that could trigger a global recession. Negotiators in Europe have been working throughout the week to resolve the price ceiling, completing it shortly before the embargo on Russian oil takes effect on Monday.

“This price ceiling has three goals: First, it reinforces the effect of our sanctions. Second, it will further reduce Russian revenues, and third, at the same time, it will stabilize the global energy market,” said Ursula von der Leyen, president of the European Commission, shortly after agreement is in effect.

The United States praised the deal and said it would limit Russia’s ability to finance the war.

“Together, the G7, the European Union and Australia have now come together to put a cap on the price of Russian seaborne oil, which will help us achieve our goal of limiting Putin’s main source of income. for his illegal war in Ukraine while maintaining the stability of the global energy supply,” said Finance Minister Janet L. Yellen.

The price threshold reflects what US officials have long said is their main goal in pushing the plan: keeping millions of barrels of Russian oil flowing to global markets as a new wave of European sanctions mounts. For Russia’s oil exports to come into effect, avoid a sudden drop in supply that could cause gasoline and heating fuel prices to soar in the United States and around the world.

The $60 a barrel cap seeks to lock in the discount that Russian oil buyers can currently pay compared to other sources of oil on the world market. While it doesn’t significantly reduce Russian export revenues, which are crucial to the war effort in Ukraine, it could still weaken Russia’s finances. The cap will be accompanied by gentle enforcement, but European allies have agreed that it will be quickly followed by a fresh round of sanctions against Russia.

Tackling the price hasn’t been easy. The European Union’s ambassadors in Brussels have met several times in the past two weeks to discuss the ceiling, with some countries arguing for far lower rates than $60 and others urge a higher ceiling. oil to countries like India and China at prices – from $60 to $65 a barrel.

Oil traders seem to take the plan as a sign that the European Union’s embargo on Russian oil imports, which took effect on December 5, is unlikely to be much removed, if so, Russian oil is out of the global market. Global oil prices fell on the news of the ceiling and are down about 10% from a month ago. Biden administration officials called it proof that the ceiling worked to negate the high oil prices enjoyed by Russia earlier this year.

EU diplomats have agreed that prices should be reviewed every two months, or more often if needed, by a committee of policymakers from the Group of Seven countries and allies. Officials say the first review will take place on January 15, and the goal is to keep the ceiling at least 5% lower than the market price of Russian oil. This approach will ensure that fluctuations in market prices, using International Energy Agency prices as a benchmark, will be followed by movements in the price cap.

The G7 statement said the price changes would be enacted with an extension to minimize disruption to the oil market. Acknowledging that the policy is a work in progress, the union said it would “consider further action to ensure the effectiveness of the price cap”.

That plan places the burden of enforcing and controlling price ceilings on the businesses that help sell oil: global shipping and insurance companies, most of which are based in Europe.

The European Union embargo on Russian oil includes a ban on European services from transporting, financing or insuring Russian oil shipments to destinations outside the bloc, a measure will disable the infrastructure that ships Russian oil to buyers around the world.

For example, about 55% of tankers transporting Russian oil out of the country are owned by Greece, according to maritime data and analysis by the Institute of International Finance.

To apply a price ceiling, these European shipping providers will instead be allowed to ship Russian crude outside the bloc only if the shipment complies with the price ceiling. It will be up to them to ensure that the Russian oil they are transporting or insuring has been sold at or below the ceiling price; otherwise, suppliers will be liable for violations of sanctions.

“The good news is that the West has now equipped itself with an important tool to put pressure on Putin,” said Simone Tagliapietra, a senior fellow at the Bruegel think tank in Brussels.

Russia has repeatedly stated that it will ignore this policy and refuse to sell oil below the ceiling price; Setting prices close to market prices can help Moscow avoid looking like it’s collapsing.

Earlier this year, the economy forecasters expressed concern that Russia’s removal of oil from the market could push gasoline prices in the United States above $7 a gallon by the end of the year.

“Our motive is to stifle Russian revenue to impede its ability to engage in war,” Yellen said in an interview last month. “And second, to make sure that there is enough global oil supply that global oil prices don’t skyrocket, because that would exacerbate inflation and potentially trigger a recession.”

American officials celebrated the imposition of the limit. “A lot of people doubt the resolve of the G7 and especially Europe,” said Ben Harris, assistant secretary for economic policy at the Treasury Department. Still, he said, the ceiling would help stabilize the market: “Sometimes you don’t get credit because the crisis is avoided.”

The protracted negotiations in Brussels are proof of the discord this limit has sown in Europe. For much of the process, EU officials and diplomats from several member states worked to ameliorate two types of concerns.

A group of three EU maritime states – Greece, Cyprus and Malta – have demanded a very high price cap, at or above $70 a barrel, to ensure that their business interests will not be jeopardized. discontinuity. Another group of three hard-line pro-Ukrainian countries – Estonia, Lithuania and Poland – have demanded an ultra-low cap, at around $30 a barrel, to significantly cut oil revenues. of the Kremlin, regardless of the disruption it may cause in the global oil market.

The benchmark for Russian oil prices, known as the Urals mix, traded between $60 and $70 a barrel in the year before the pandemic, close to the global benchmark. A more than 20% discount to global prices was opened shortly after Russia invaded Ukraine in February, but Russia can still sell Ural crude for around $100 a barrel at its post-invasion peak. comb.

Since then, global oil prices have fallen while Russia signed an agreement to sell oil at a further discount to China, India and other countries. Falling prices have strained Moscow’s finances, at least to some extent.


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