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Ukraine’s Allies Agree on Russian Oil Price Cap

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An elaborate US-led plan to limit the amount Russia can charge for its oil exports is set to cap Russia’s oil price at $60 a barrel, the G7 countries agreed on Friday. The threshold, decided after protracted negotiations among European Union diplomats, is likely to have a modest impact on the Kremlin’s energy revenues, and the White House said it would be too much to avert a global oil shock. I hope you find it useful.

The deal was heralded by EU enforcement agencies and received prompt approval from the rest of the G7 and Australia late Friday.

“With this decision today, we will make a commitment at the summit in Elmau to prevent Russia from benefiting from its war of aggression against Ukraine, to help stabilize global energy markets, and to prevent the negative economic impact of Russia’s war of aggression. Implementing the commitments of G7 leaders to minimize, especially in low- and middle-income countries that feel disproportionately affected by Putin’s war,” the joint statement said.

The final deal comes after months of deliberations on how to keep economic pressure on Russia without triggering an oil price shock that triggers a global recession. European negotiators said it took him a week to finalize the ceiling price, done in little time before the embargo on Russia’s oil went into effect on Monday.

“This price cap has three purposes: first, it will strengthen the effectiveness of the sanctions; second, it will further reduce Russian revenues; said European Commission President Ursula von der Leyen shortly after the deal was finalized.

The United States applauded the deal, saying it cuts Russia’s ability to finance the war.

“The G7, the European Union and Australia will jointly limit Putin’s primary source of revenue against the illegal war in Ukraine, while at the same time helping us achieve our goal of maintaining stability in Russia. We have jointly capped the price of offshore oil and the world’s energy supply,” said Treasury Secretary Janet L. Yellen.

The price threshold reflects what U.S. officials have long said was the main goal pushing the plan: A new wave of European sanctions on Russian oil exports takes effect, prompting a sudden contraction. Keeping millions of barrels of Russian oil flowing into global markets while avoiding the possibility of skyrocketing gasoline and heating fuel prices in the United States and around the world.

The limit of $60 a barrel is about to lock in a significant discount that buyers of Russian oil can now pay compared to other oil sources on the global market. Russia’s export revenues, vital to the war effort in Ukraine, would not be significantly reduced, but it could still hurt Russia’s finances. The cap comes with light enforcement, but European allies agreed that a new round of sanctions against Russia would come quickly.

Determining the price was not easy. European Union ambassadors in Brussels have met numerous times over the past two weeks to discuss the cap. Some countries claimed prices much lower than $60, while others claimed higher caps. The price of oil to is $60 to $65 per barrel.

Oil traders use the plan to show that the EU’s ban on Russian oil imports, which takes effect on December 5, is unlikely, if at all, to significantly withdraw Russian oil from global markets. seems to be looking at Global oil prices fell on news of the cap, down about 10% from a month ago. Biden administration officials say the cap is evidence that the cap was already working to negate the premium oil prices Russia enjoyed earlier this year.

EU diplomats agreed that prices should be reviewed every two months, or more frequently if necessary, by a panel of policymakers from G7 countries and allies. Scheduled to take place on March 15, the goal is to keep the cap at least 5% below the price at which Russian crude is traded on the market, officials said. This approach ensures that the cap price fluctuates following market price fluctuations using the International Energy Agency price as a benchmark.

A G7 statement said the price changes would be enacted with a grace period to minimize disruption to oil markets. We will consider further actions to ensure the effectiveness of the cap.”

The plan places the burden of enforcing and cracking down on price caps on the companies that help sell oil, namely the global shipping and insurance companies, mostly based in Europe.

The European Union’s embargo on Russian oil includes a ban on European services shipping, financing or insuring Russian oil shipments to off-block destinations. This is a measure that disables the infrastructure that moves Russian oil to buyers around the world.

For example, about 55% of the tankers that transport Russian oil out of the country are owned by Greece, according to maritime data and analysis by the Institute for International Finance.

In order to enforce the price cap, these European carriers will instead be allowed to transport Russian crude oil out of the block only if the shipment complies with the price cap. It is up to them to make sure that the Russian oil they transport or insure is sold below the cap price. Failure to do so will expose the provider to legal liability for violating sanctions.

“The good news is that the West has important tools to put pressure on Putin,” said Simone Tagliapietra, a senior fellow at Brussels think tank Bruegel.

Russia has repeatedly said it will ignore the policy and refuse to sell oil at ceiling prices. By setting a level close to the market price, you can avoid making Moscow look like it is sinking.

Earlier this year, economic forecasters expressed concern that Russia’s withdrawal from the oil market could push U.S. gasoline prices above $7 a gallon by the end of the year.

“Our motive is to hold back Russia’s revenues and hinder its ability to fight a war,” Yellen said in an interview last month. “And second, to make sure there is enough oil available globally to keep global oil prices from skyrocketing, as that would likely exacerbate inflation and trigger a recession. is.”

U.S. officials are celebrating the cap’s introduction. Treasury Department Assistant Secretary for Economic Policy Ben Harris said in an interview, “Many doubted the resolve of the G7 and Europe in particular. But he said the cap would help stabilize markets. .

Prolonged negotiations in Brussels were evidence that Cap had sown discord in Europe. For much of the process, her EU officials and diplomats in some member states worked to remedy two kinds of concerns.

One group of three EU maritime nations – Greece, Cyprus and Malta – called for a very high price cap of over $70 a barrel so that business interests would not be compromised. Another group of three hard-line pro-Ukrainian nations – Estonia, Lithuania and Poland – called for ultra-low caps of around $30 a barrel to slash the Kremlin’s oil revenues. .

Russia’s oil price benchmark, known as the Ural Blend, traded at $60 to $70 a barrel in the year before the pandemic, close to global benchmark prices. Shortly after Russia’s invasion of Ukraine in February, a discount of more than 20% to world prices began, but Russia was able to sell Ural crude for around $100 a barrel at its peak post-invasion.

Since then, global oil prices have fallen, and Russia has signed deals to sell its crude oil to China, India and others at further discounts. These price drops are putting pressure on Moscow’s finances, at least to some extent.

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