Will the price cap on Russian oil work?

RUSSIA ENERGY / FINANCE - In Brief 09 Sep 2022 by Marcel Salikhov

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Last week G7 Finance Ministers issued a statement confirming their intention to implement a price cap on Russian oil and petroleum products. Details of the proposal are not clear, so it's difficult to give quantitative estimates. But the overall idea is clear. The restrictions include a ban on providing services such as insurance and financing to ships carrying Russian oil if its price is above the agreed "price cap". The current version of the agreement looks like an easing of the 6th package of EU sanctions. The package stipulates that after the expiration of the transition period (roughly by early 2023), European companies will not be able to provide financial, intermediary, insurance, and other services for Russian companies that export oil and oil products to third countries. The current version allows such transactions in case of sale below the price cap. The introduction of a price cap is likely to be a cornerstone of the sanctions policy of Western countries until the end of 2022. The West will try to “pull” other big counties to their side. Given that after the EU embargo on Russian oil supplies, world prices may further increase, fixing at a level above $100/bbl. It will allow Russia to provide even more generous discounts (currently roughly ~$25/barrel ). Insurance and international shipping are the major challenges Insurance looks to become a key instrument of pressure on Russian oil exports since most counterparties use the European and US insurance and reinsurance infrastructure. The ban on insurance coverage for all tankers carrying Russian oil limits the possibility of chartering ships insured by the international P&I group, whose members cover 90% of t...