Today's Paper Arkansas News Legislature Newsletters Core Values Sports Public Notices Archive Obits Puzzles Opinion Story Ideas
ADVERTISEMENT
ADVERTISEMENT

Steps to limit Russian profit on oil in force

$60 price cap, embargo aim to curb Ukraine war funds by Compiled by Democrat-Gazette Staff From Wire Reports | December 6, 2022 at 5:24 a.m.
FILE An oil tanker is moored at the Sheskharis complex, part of Chernomortransneft JSC, a subsidiary of Transneft PJSC, in Novorossiysk, Russia, Tuesday, Oct. 11, 2022, one of the largest facilities for oil and petroleum products in southern Russia. The European Union reached a deal Friday for a $60-per-barrel price cap on Russian oil, a key step as Western sanctions aim to reorder the global oil market to prevent price spikes and starve President Vladimir Putin of funding for his war in Ukraine. (AP Photo, File)


The United States and Europe began enforcing Monday two of the toughest measures aimed at curbing Russia's income from oil, the principal source of cash used to fund its nearly 10-month-old war in Ukraine.

But there was no drastic impact on oil markets -- with an early spike, prices were largely unchanged by late afternoon -- and that was by design.

The first measure, a price cap initiative led by the U.S., sets a top price of $60 per barrel for Russian crude and was endorsed by the Group of Seven countries, Australia and the European Union.

The second is an embargo that prohibits EU countries from buying most Russian crude as of Monday. It was a step that the bloc had agreed to months ago but that was phased in with exceptions to prepare member nations.

Impacts of both measures, however, may be blunted because Russia, the world's No. 2 oil producer, has so far been able reroute much of its European seaborne shipments to China, India and Turkey, although at steep discounts, and the price cap is near what Russian oil already cost.


As it stands, Russia will likely have enough money to not only fund its military, but also support key industries and social programs, said Chris Weafer, CEO and Russian economy analyst at consulting firm Macro-Advisory.

"At this price level, that outlook really doesn't change much. But what is key is how much volume Russia would be able to sell," Weafer said. "And that depends not only on the willingness of Asian buyers to continue buying Russian oil, but also what is the physical ability of Russia to shift that oil."

Western leaders are walking a fine line between trying to cut Russia's oil income and preventing an oil shortage that would cause a price spike and worsen the inflation plaguing economies and hurting consumers worldwide. They could later agree to lower the price cap to increase pressure on Russia, which says it will not sell to countries that observe the limit.

That could take oil off global markets and raise energy costs, including for gasoline at the pump. International benchmark Brent crude rose Monday before falling 2.5% to $83.40 a barrel.

To seriously cut Russian revenue, the cap must be lowered "quickly and progressively," said Lauri Myllyvirta, lead analyst at the Finland-based Centre for Research on Energy and Clean Air.

Even the $60 cap, if enforced, would already push Russia to lower per-barrel tax, he said, calling it "by far the biggest step to date to cut off the fossil fuel export revenue that is funding and enabling Russia's barbaric invasion of Ukraine."

Russia has been living off the huge windfall from higher oil prices earlier this year and will be more vulnerable in the next several months when that money is spent, Myllyvirta said.

Kremlin spokesman Dmitry Peskov, when asked in a conference call how the oil price cap might affect the war, said, "The economy of the Russian Federation has the necessary potential to fully meet all needs and requirements within the framework of the special military operation, and such measures will not affect this."

The United States, EU and allied countries have hit Russia with a slew of sanctions aimed at bank and financial transactions, technology imports and regime-connected individuals. But until now, those sanctions have for the most part not directly gone after the Kremlin's biggest moneymakers, oil and natural gas.

Europe was heavily dependent on Russian oil and natural gas before the war and had to scramble to find new supplies. Previously, the EU banned imports of Russian coal, while the U.S. and the U.K. halted their limited imports of Russian oil, but those steps had a much smaller economic impact.

Even as Western customers shunned Russian oil, the higher prices driven by fears of energy shortages helped offset lost oil sales, and Russian exporters have shipped more oil to Asian countries and Turkey in a major reshuffling of global oil flows.

Russia's economy has shrunk but not by as much as many expected at the start of the war almost 10 months ago.

One unknown is how much of the oil formerly sold to Europe can be rerouted. Analysts think many, but not all, of the roughly 1 million barrels covered by the embargo will find new homes, tightening supply and raising prices in coming months.

The Biden administration doesn't expect that Russia's threats to cut off countries observing the cap and slow production would "have any impact long term on global oil prices," National Security Council spokesman John Kirby said.

Kirby said "this cap will lock in the discount on Russian oil" and countries like China and India would be able to bargain for steep price reductions.

The cap has a grace period for oil loaded before Monday and that arrives at its destination before Jan. 19 to minimize disruption on oil markets.

The measure bars insurers or ship owners, most of them located in the EU or U.K., from helping move Russian oil to non-Western countries, unless that oil was priced at or below the cap.

INDIA UNDETERRED

India will prioritize its own energy needs and continue to buy oil from Russia, its foreign minister signaled Monday.

Minister of External Affairs Subrahmanyam Jaishankar made the comments after holding talks with his visiting German counterpart, Annalena Baerbock, in which they discussed bilateral relations and Russia's war in Ukraine.

Jaishankar said it isn't right for European countries to prioritize their energy needs but "ask India to do something else."

"Europe will make the choices it will make. It is their right," he told reporters.

India has so far not committed to the $60-per-barrel price cap on Russian oil.

Jaishankar did not make any direct reference to the price cap but said the EU was importing more fossil fuel from Russia than India. Indian officials have defended buying oil from Russia, saying the lower price benefits India.

Since the Russian invasion of Ukraine, India has steadily increased its purchases of discounted Russian oil. Indian imports of Russian oil hit a record high in October, with Russia becoming India's top oil supplier in terms of barrels per day, the Press Trust of India news agency said, quoting data from energy tracker Vortexa.

India and Russia have close relations and New Delhi has not supported Western sanctions on Moscow, even though it has repeatedly urged an "immediate cessation of violence" in Ukraine. India, also a major market for Russian-made weapons, has so far abstained from U.N. resolutions critical of Moscow's war.

Information for this article was contributed by Stanley Reed of The New York Times; and David McHugh, Raf Casert, Aamer Madhani, Sheikh Saaliq and Colleen Barry of The Associated Press.


Print Headline: Steps to limit Russian profit on oil in force

ADVERTISEMENT

Sponsor Content

ADVERTISEMENT
ADVERTISEMENT