The Kremlin announced today, Monday, that Moscow is preparing measures to respond to the European Union's placement of a ceiling on the price of Russian oil, after the European Union, the Group of Seven and Australia agreed on a mechanism that might limit Russia's imports to finance its war in Ukraine, and work under it may start today "or a little later."
A cap on Russian oil prices aims to reduce Russia's revenue while ensuring that Moscow continues to supply the global market.
The adoption of this ceiling coincides with the entry into force of an embargo imposed by the European Union on Russian oil transported by sea, several months after the embargo decided by the United States and Canada.
However, Russia is the second largest exporter of crude oil in the world, and without setting this ceiling, it will be easy for it to find other parties to buy its oil at the market price.
The approved mechanism stipulates that only oil sold at a price equal to $60 or less per barrel will be allowed, while companies in the European Union, the Group of Seven and Australia will be prohibited from providing services that allow maritime transport such as trade, shipping, insurance, ships, and so on.
The G7 countries provide 90% of insurance services for global shipments, while the European Union is a major party in maritime transport, which gives it the ability to impose this ceiling on the majority of Russia's customers around the world.
And there is a transitional phase, as the ceiling will not be applied to shipments loaded before December 5, while setting an additional ceiling related to petroleum products will be imposed as of February 5.
impact on the market
Western countries set a price of $60, which is a much higher level than the current cost of oil production in Russia, to motivate Moscow to continue pumping crude oil, as it will continue to generate revenue despite setting a price ceiling.
"Moscow must have an interest in selling its oil," a European official said, otherwise the supply available on the global market will decline, stressing that he does not consider that the Kremlin will implement its promise to stop supplies to countries that adopt this ceiling.
He pointed out that Moscow would be keen to preserve its facilities, which would be damaged in the event of a halt in production, and the confidence of its customers, including China and India.
While experts fear this “leap into the unknown” and await the reaction of the oil-producing countries in the “OPEC Plus” alliance, the European Commission confirms that setting this ceiling “will contribute to the stability of markets” and “will directly benefit developing and emerging countries” that will be able to obtain on Russian oil at a lower cost.
Periodic review
This ceiling will be re-evaluated from mid-January and thereafter every two months, with the possibility of adjusting it according to price developments, with the adoption of the principle that the ceiling should be set at a level that is at least 5% less than the average market price.
A Russian oil tanker near the Gulf of Nakhodka, east of the country, off the Sea of Japan (Reuters)
Any review of it would require the approval of the G7 countries, Australia and all 27 members of the European Union.
effective and involved countries
All countries are invited to formally join the capping mechanism.
And in the event that you do not do that, you can continue to buy Russian oil at a price that exceeds the specified ceiling without resorting to Western services such as insurance, transportation and mediation to buy or transport this oil.
A European official said, "We have clear indications that a number of emerging economies, especially in Asia, will respect the principles of limiting the ceiling," considering that Russia is "under pressure" from its customers to obtain discounts from it.
On the other hand, it will be very difficult to find alternative services to replace European companies that dominate transportation and oil tanker insurance, as any other alternative solution, especially in terms of insurance in the event of a fuel spill, "without too many risks."
Detour risks
Every member state of the European Union and the Group of Seven should monitor companies on its territory.
In the event that a ship was flying the flag of another country and it was found that it was transporting Russian oil at a price that exceeds the specified ceiling, Western companies will be prohibited from providing insurance and financing for it for a period of 90 days.
Russia may try to form a fleet of its own oil tankers to operate and provide insurance for, but "forming a marine environment overnight will be very complex," and these solutions may have difficulty convincing customers, according to Brussels sources.