Oil Price Cap Could Hit Russia’s War Chest, If Enforced | business news

GARMISCH-PARTENKIRCHEN, Germany (AP) — The leaders of the world’s largest developed economies are weighing a cap on the price of Russian oil aimed at attacking the Kremlin’s mainstay of finances following its invasion of Ukraine, and to limit the havoc at that point. Energy prices are wreaking havoc around the world.

Details have not been agreed at the Group of Seven summit in Elmau, Germany, but the basic idea would be to link the price ceiling to the services that make oil trading possible. For example, insurers would be prohibited from dealing with shipments that are above the limit, wherever it is set.

Because such service providers are largely based in the European Union and the United Kingdom, Russia is expected to face difficulties in finding alternative solutions on a large scale.

Capping the price would reduce the Kremlin’s revenue from oil: at the start of the war, it was about $450 million a day in Europe alone. The cap would also limit the impact of higher oil prices on inflation in consuming countries, with the cost of gasoline and diesel putting pressure on consumers and businesses.

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But much would depend on whether Asian countries like India would agree to the price cap. A key issue is application, and European officials are also cautious about side effects.

“We want to go into more detail. … We want to make sure the goal is to target Russia and not make our lives more difficult,” said Charles Michel, head of the European Union’s 27-member council of governments. “We need to have a clear common understanding of what the direct effects are and what the collateral consequences might be.”

The EU has agreed to phase out 90% of Russian oil arriving by ship by the end of the year, but is upset that it is still contributing to the Kremlin’s war chest. EU countries, however, need time to line up new oil sources and are under pressure from high crude prices.

Governments are facing calls for even tougher measures, such as an immediate end to Russian oil and natural gas shipments, a move many economists say would trigger a recession in Europe.

Fears that supplies from Russia will be lost on the global market have helped push global oil prices sharply higher, along with a recovery in demand from the COVID-19 pandemic. The OPEC+ alliance of oil-producing countries, including Saudi Arabia and Russia, has increased production, but too slowly to lower prices.

Russia is selling less oil as Western buyers shun its supply, but higher prices have erased much of the loss for state finances.

The country’s central bank managed to stabilize the ruble despite Western sanctions, partly with the help of oil revenues. International benchmark Brent crude is trading at $113 a barrel, up from $79 a barrel earlier in the year.

One result has been pump prices reaching an all-time high of more than $5 per gallon in the US and more than $7.50 in Germany.

“At current prices, this implies massive gains for the Kremlin,” said Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels. “If the G-7 agrees on a price cap for Russian oil, it would be a very important step to limit Putin’s windfall.”

Tagliapietra said the EU’s delayed boycott of Russian oil was “too little too late,” especially considering Russia’s cutoff or reduction of natural gas to 10 EU countries in recent weeks. Western officials say Russia is “weaponizing” energy and exploiting Europe’s dependence on supplies from Moscow.

Russia has been able to find buyers outside the West as Asian customers such as India and China have replaced the EU as the biggest buyers of oil shipped by sea.

Due to sanctions, Russian oil is trading at a steep discount to international benchmark Brent, increasing profit margins for refiners in India that convert crude into gasoline. And some Russian oil sales have simply gone off the books.

Once Russia’s oil is refined into gasoline or blended with other crude, it’s hard to tell where it came from, especially if no one wants to look too closely.

“It is questionable whether countries like India and China will agree to stop buying Russian oil, especially since it is trading at a significant discount to the world market price,” said commodity analyst Carsten Fritsch at Commerzbank in Frankfurt, Germany. “Instead, India is helping Russia continue to sell its oil despite Western sanctions.”

Fritsch said India was willing to provide safety certification for more than 80 ships belonging to a Dubai-based subsidiary of Russia’s state-owned shipping company Sovcomflot after Western certification bodies were unable to do so due to sanctions.

Since European refiners began avoiding Russian oil in late February, imports of Russian crude oil into Europe fell from 2.04 million barrels a day to 1.49 million between March and May, according to Rystad Energy. Russian-origin oil imports by Asian refiners, including China, saw a corresponding increase of 503,000 barrels per day.

“The expectation that Russian crude would no longer be traded on international markets has not materialized and instead the steep discount on Russian crude has caused ships to redirect to alternative markets,” said Wei Cheong Ho, vice president of Rystad Energy.

“While the cost of financing these vessels and transactions has risen significantly due to the freezing of the Western financial system, the discount in the Urals is too attractive for some refiners to ignore,” Ho added.

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