On September 9, the US Department of Treasury’s Assistant Secretary for Terrorist Financing and Financial Crimes, Elizabeth Rosenberg, mentioned during a briefing that“…The price cap policy is an important tool to put downward pressure on global energy prices by allowing Russian oil to continue flowing to the global markets… That’s good for countering inflation and denying Russian President Vladimir Putin revenue to fund his brutal war in Ukraine.” According to US officials, the price cap policy itself builds on the EU’s sixth sanctions package. In this package, the EU has announced prohibition of services like insurance, banking and brokering for the seaborne shipment of Russian oil and products, globally.
After months of negotiations, on December 5, coalition of theG7 and Australia announced a $60 per barrel price cap on Russian seaborne crude oil, after securing consensus of the EU. The price cap plan is the latest of the sanctions enforced by Western countries against Russia for its invasion of Ukraine. The explanation offered by the G7 for setting the price cap at $60 per barrel is that this cost is low enough to reduce Russian export revenue but high enough to keep Russian oil flowing to markets. The cap and an EU embargo on maritime deliveries of Russian crude oil became effective on the same date.
The cap is dynamic and subject to review by the coalition partners for accommodating future oil market situations. Price Cap Coalition members will implement it through their respective domestic legal processes. The price cap will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap. Currently, the price cap only targets the crude, however, the refined petroleum products, will also be subjected to this process after February 5, 2023 — the price for refined products has not yet been finalized.
Implementation methodology – If a third country flagged vessel intentionally carries Russian oil above the price cap, EU operators will be prohibited from insuring, financing, and servicing it for the transport of Russian oil or petroleum products for 90 days after the cargo purchased above the price cap has been unloaded. And if EU flagged vessel violates the price cap, it will be subject to the consequences in accordance with the national legislations of the respective coalition partners.
Next important event in the sanction regime chronology will occur on February 5, 2023,when the full EU import ban on Russian crude and petroleum products with specific exceptions, become effective.
Russia is a primary exporter of crude oil (about 5 million barrels a day) and refined oil products: gasoline and diesel (about 3 million barrels a day).40% of its export revenue is earned through oil and only 5% from selling natural gas (IEA, 2021 data).
In last twelve months Russia has sold oil and gas worth $430 billion, to Europe alone. According to an estimate revenue from Russia’s crude oil exports has increased 41% during this period, due to high global prices of oil.
Russian response towards the cap is clearly reflected in the comments made by the Russia’s embassy in the United States, wherein it criticised the coalition actions for “reshaping” of free market principles and reiterated that its oil would continue to be in demand despite the measures. An open threat which was conveyed through these comments, mentioned, “Steps like these will inevitably result in increasing uncertainty and imposing higher costs for raw materials’ consumers.
At this stage Russia has not yet declared any definite counter plan. Impact of the developing situation on India can only be guessed based on the experience of past few months. Currently, India is importing oil from 39 countries. Post Ukraine conflict, share of Russian oil in Indian oil basket has increased substantially due to discounts offered by Russia. While in March this year India imported 68600 Barrels per day from Russia, during November the import stood at 909400 Barrels per day. For the period from May till November, Indian export of Russian oil averaged around 900000 Barrels per day, an increase of approximately 13 times in volume when compared with pre-Ukraine conflict figures (data source: Vortexa Ltd).
So, obvious solution for the India is to manage through negotiations, that cost of future Russian imported oil does not exceed $60 per barrel. And this can be done without joining Cap Coalition. India may also leverage this situation for bargaining with US for easing of sanctions against Iran and Venezuela so that it can purchase oil from these countries. In overall assessment, Cap imposed on Russian oil export is not likely to affect India in a big way. But due to sanctions imposed on Russian banks, India will have to devise a workable payment system for oil import in quick time.
Signing off for the week, by quoting Daniel Yergin, “The starting point for energy security today as it has always been is diversification of supplies and sources”.
Brigadier Rajiv Mahna YSM, SM, VSM is an Indian Army Veteran who has chosen to remain a student for the lifetime.
“We Said It”
- News about Public executions carried out by Taliban in Afghanistan last week was covered prominently in media.
- Human rights situation in Afghanistan was discussed in the article titled; ‘Afghanistan Narratives’ published in ‘Beyond Boundaries’ column on 21st November 2022.