December 02, 2022

At $60, the Cap on Oil Prices Will Build Pressure on Russia

By: Rachel Ziemba

The international effort to impose costs on Russia for its invasion of Ukraine is nearing a major milestone: the first major sanctions on oil trade. A long-planned European Union embargo on purchasing and facilitating shipments of Russian seaborne crude is set to come into effect on Monday. Just days before implementation, EU nations finally coalesced on the price—$60 per barrel—needed to trigger an exemption to that embargo. The so-called price cap will allow the sale of Russian oil to other countries using Western services. Coming so close to implementation, companies will take time to assess compliance and wait to see how Russia responds. While the deal is unlikely to cut Russia’s revenues sharply, the compromise is likely to add to the gradually increasing pressure on Russia’s economy and, policy makers hope, to do so in a way that limits ruptures between the Western allies.

With the price cap, the G7 hopes that Russia’s war machine continues to hurt more than the global economy.

Reaching agreement on the price reduces the risk that millions of barrels of Russian oil would struggle to find buyers in the coming months or enter a growing black market and potentially incentivize the swift development of non-G7 service channels. It also avoids an even bigger public rupture within the EU and G7 over the admittedly divergent policy goals of the oil sanctions, namely, to keep oil flowing and cut Russia’s revenues. Until last week, the EU had been considering a higher figure of $65-70 per barrel. But that price risked failing to meaningfully cut Russian revenues, was a less-attractive carrot for buyers (such as China and India) to partly comply, and implied a lot of increased due diligence and monitoring for a smaller payoff. Countries including Poland were calling for a price as low as $20.

Read the full article from Barron's.

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