Home News The European Union activates its embargo and the cap on Russian oil prices

The European Union activates its embargo and the cap on Russian oil prices

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Adopted by the EU, the G7 countries and Australia, the Russian oil price cap, which comes into force from this Monday, December 5, aims to restrict Russia’s income while ensuring that it continues to supply the world market.

The activation of a cap coincides with the entry into force of an EU embargo on Russian oil transported by sea, several months after the embargo already decided by the United States and Canada. However, Russia is the world’s second largest exporter of crude and, without this ceiling, it would be easy for it to find new buyers at the market price.

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The mechanism adopted therefore provides that only oil sold at a price equal to or lower than 60 dollars per barrel can continue to be delivered, and that beyond that, it will be prohibited for companies based in EU countries, G7 and Australia to provide services enabling maritime transport (trading, freight, insurance, shipowners, etc.).

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In fact, the G7 countries provide insurance services for 90% of global cargoes and the EU is a major player in maritime freight – hence their ability to pass on this cap on the oil delivered to the majority of customers of Russia around the world, a credible deterrent.

A transition is planned (the cap will not apply to cargo loaded before December 5) and an additional cap on petroleum products will come into effect on February 5.

Limited short-term impact

The West has adopted, at $60, a price level well above the current cost of producing oil in Russia, so that Moscow will have an incentive to continue pumping crude oil – since this will continue to provide it with income, even if the latter will be started by the ceiling.

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“Russia must keep an interest in selling its oil”at the risk if not of reducing the world supply and causing a surge in prices, explains a European official, who does not believe in the Kremlin’s threats to stop deliveries to countries respecting the ceiling.

According to him, Russia will remain concerned with maintaining the state of its infrastructures (which would be damaged in the event of a production stoppage) and with maintaining the confidence of its customers, including China and India.

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If the experts are concerned about this “leap into the unknown” and watch for the reaction of the OPEC + producing countries, Brussels ensures that the cap “will help stabilize the markets” and “will directly benefit emerging economies and developing countries”which will be able to acquire Russian crude at a lower cost.

With the price of a barrel of Russian oil (crude from the Urals) currently hovering around 65 dollars (already partially anticipating the coming peak), the impact could be limited in the short term – to the chagrin of kyiv, which has lambasted an insufficient ceiling to penalize the Kremlin.

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The ceiling will be reviewed from mid-January, then every two months, with the possibility of modifying it according to price developments, with the principle that the ceiling is set at a level at least 5% lower than the average market price. . Any revision will require the agreement of the G7 countries, Australia and all of the Twenty-Seven.

Restricted non-European alternatives

All countries are invited to formally join the capping mechanism. If they do not, they will be able to continue to buy Russian oil beyond the fixed ceiling, but without resorting to Western services (insurance, transport, brokerage, etc.) to acquire or transport it.

“We have clear signals that a number of emerging economies, particularly in Asia, will observe the capping principles”says a European official, according to whom Russia is already ” under pressure “ of its customers to grant them discounts.

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Moreover, it will be very complicated to find alternative services to the European companies dominating the transport and insurance of tankers, any improvised alternative solution (in particular insurance in the event of a hydrocarbon leak) would be “extremely risky”he believes.

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Each EU and G7 state will have to monitor companies based on its territory. And if a ship flying the flag of a third country is identified as carrying Russian oil at a price above the ceiling, Western operators will be prohibited from insuring and financing it for 90 days.

Admittedly, Russia could be tempted to create its own fleet of tankers, operated and insured by itself, but “Building a maritime ecosystem overnight will be very complicated” and these ad hoc solutions could find it difficult to convince its customers, it is estimated in Brussels.

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