January 29, 2023

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Ukraine’s allies agree on the ceiling of Russian oil prices

Ukraine's allies agree on the ceiling of Russian oil prices

The Group of Seven nations agreed on Friday on a detailed US-led plan to limit what Russia can charge on its oil exports, set to cap the price of Russian crude at $60 a barrel. The threshold, which was settled after lengthy negotiations among EU diplomats, is likely to make a slight dent in the Kremlin’s energy revenues, which the White House hopes will help avert a global oil shock.

The deal was announced by the European Union’s executive body and quickly approved by the rest of the G7 members 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 benefiting from its war of aggression against Ukraine, support stability in global energy markets and reduce the negative economic repercussions of the Russian war of aggression, especially on low- and middle-income countries that felt the effects of Putin’s war unfairly. proportional.

The final agreement came after months of deliberations on how to maintain economic pressure on Russia without causing a shock to oil prices that would cause a global recession. Negotiators in Europe worked throughout the week to settle a cap price, completing it with little time to spare before an embargo on Russian oil took effect on Monday.

“This price cap has three objectives: first, it enhances the effect of our sanctions. Second, it will reduce Russia’s revenues even more, and third, at the same time, it will serve stability in global energy markets.

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 put a price cap on Russian seaborne oil that will help us achieve our goal of constraining Putin’s primary source of income for his illegal war in Ukraine while at the same time preserving a stable global energy supply,” Treasury Secretary Janet Yellen said. .

The price threshold reflects what U.S. officials have long said was their primary goal in driving the plan: to keep millions of barrels of Russian oil flowing to the global market while enacting a new wave of European sanctions on Russian oil exports, and to avoid a sudden downturn. In supply that could lead to higher prices of gasoline and heating fuel in the United States and around the world.

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The $60-per-barrel cap seeks to secure the steep discount buyers of Russian oil can now pay compared to other oil sources on the global market. While it does not significantly reduce Russia’s export revenue, which is crucial to its war effort in Ukraine, it could still affect Russia’s finances. The cap would come with light enforcement, but European allies agreed that it would quickly be followed by a new round of sanctions against Russia.

It wasn’t easy to settle on the price. EU ambassadors have met in Brussels several times over the past two weeks to discuss the cap, with some countries arguing for a price well below $60, others demanding a higher cap.. They settled on a price that reflects what Russia has sold recently. Oil for countries like India and China for – between $60 and $65 per barrel.

Oil traders appear to view the plan as a sign that the European Union’s ban on Russian oil imports, which takes effect on December 5th, is unlikely to remove much, if any, Russian oil from the global market. Global oil prices slumped after news of the cap and fell about 10 percent from last month. Biden administration officials describe this as evidence that the ceiling was indeed working to deny Russia the premium oil prices it enjoyed earlier this year.

EU diplomats agreed that the rate should be reviewed every two months, or more frequently if necessary, by a panel of policymakers from the Group of Seven and allies. The first review will take place on January 15, officials said, and the aim is to keep the ceiling at least 5 percent lower than the price at which Russian oil trades on the market. This approach will ensure that fluctuations in the market price, using the IEA price as a benchmark, will be followed by fluctuations in the price ceiling.

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The G7 statement said price changes would enter with a grace period to minimize turbulence in oil markets. Recognizing that the policy is a work in progress, the coalition said it would “consider further action to ensure the effectiveness of the price cap”.

That plan places the onus of activating and controlling the price cap on the companies that help sell the oil: the global shipping and insurance companies, mostly based in Europe.

The EU embargo on Russian oil includes a ban on European services to ship, finance or insure shipments of Russian oil to destinations outside the bloc, a measure that would disrupt the infrastructure that transports Russian oil to buyers around the world.

About 55 percent of the tankers carrying Russian oil out of the country are owned by Greece, for example, according to marine data and analysis by the Institute of International Finance.

To apply the price cap, these European freight providers would instead be allowed to transport Russian crude out of the bloc only if the cargo complies with the price cap. It is up to them to make sure that the Russian oil they transport or insure is sold at or below the specified price; Otherwise, the service providers will bear the legal responsibility for violating the penalties.

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

Russia has repeatedly said it will ignore politics and refuse to sell oil under a price cap; Setting the level close to the market price can help Moscow avoid appearing to be caving in.

Earlier this year, the economic Forecasters have expressed their concerns Russia taking oil off the market could push US gasoline prices above $7 a gallon by the end of the year.

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“Our motives are to reduce Russia’s revenue to impede its ability to go to war,” Yellen said in an interview last month. And second, to make sure there is enough global oil supply so that global oil prices don’t jump, because that would exacerbate inflation and would likely cause a recession.

US officials celebrate the imposition of the cap. “A lot of people question the resolve of the G-7 and Europe in particular,” Ben Harris, assistant secretary for economic policy at the Treasury Department, said in an interview. But he said a cap would help stabilize markets: “Sometimes you don’t get credit to avoid a crisis.”

The prolonged talks in Brussels were evidence of the discord that Cover had sown in Europe. For most of the process, EU officials and diplomats from some member states worked to mitigate two types of concerns.

One group of three EU maritime states – Greece, Cyprus and Malta – has demanded a very high price cap, at $70 a barrel or more, to ensure that their trading interests are not disrupted. Another group of three hardline pro-Ukrainian countries – Estonia, Lithuania and Poland – demanded a very low ceiling, at or around $30 a barrel, to drastically cut the Kremlin’s oil revenues, regardless of the turmoil it might cause in global oil markets.

Russia’s benchmark oil price, known as Urals Blend, traded from $60 to $70 a barrel in the year before the pandemic, near global record prices. A discount of more than 20 percent off world prices opened up shortly after the Russian invasion of Ukraine in February, but Russia was still able to sell Urals crude for around $100 a barrel at its post-invasion peak.

Since then, global oil prices have plummeted while Russia has signed agreements to sell its oil at an additional discount to China, India and other countries. These falling prices strained Moscow’s finances, at least to some extent.