Key Points
- The price cap plan is intended to keep oil flowing in a controlled way after further sanctions are imposed on Russia in December.
- Without the plan, there could be a multi-million-barrel market disruption as Russian oil is cut off.
- The plan will fight inflation from market disruption and drive down revenues for Russia, but only if all participants are willing to play along.
In September, the G7 announced a plan to cap the price of Russian oil as part of the West’s efforts to limit revenues that help Moscow fund its war in Ukraine. The plan would work with the EU’s sixth package of sanctions on Russia, which aim to restrict oil imports and stop EU operators from insuring and financing the transport of Russian oil, even to third countries. Other sanctions in the package include financial and business service measures, broadcasting suspensions and further export restrictions.
“This will make it particularly difficult for Russia to continue exporting its crude oil and petroleum products to the rest of the world, since EU operators are important providers of such services,” the Commission said.
Protecting the market
However, a sharp stop to Russian exports has the potential to cause major disruption to the commodities market when the sanctions start on December 5. The G7 plan is the proposed solution, allowing shipping firms and insurance firms to continue to transport Russian oil to key Asian markets – as long as those barrels are price-capped.
“It's designed to fight inflation by preventing a major oil market disruption, while at the same time driving down the revenue that Russia receives from selling barrels to Asia,” said Helima Croft, Head of Global Commodity Strategy and Middle East and Africa Research at RBC Capital Markets.
Everyone has to play ball
“The all-important wildcard is, will Russia actually sell their barrels as part of this price cap scheme? Or will they look to withdraw barrels from the market and create so much economic concern that Europe essentially blinks?” said Croft.
The challenge with the plan, however, is that there are still crucial details that remain unresolved. The plan is as yet untested and relies on European service providers to enforce the price cap. There are no details yet on how the price is going to be set, or how the enforcement mechanism will work. And, of course, it relies on Russia to keep exporting its barrels under the price cap.
