“Impact of Oil Price Cap on Russia’s Economy and Sanctions Enforcement.”
For months, Ukraine’s Western allies imposed a $60 per barrel limit on Russian oil sales, but it was initially more symbolic than practical, as Moscow’s primary revenue source remained below that threshold.
The price cap was a precautionary measure in case oil prices surged, preventing the Kremlin from accumulating additional funds for its Ukraine conflict. Recent events have brought the price cap to a serious test.
Russia’s benchmark oil, often shipped by Western vessels adhering to sanctions, has been trading above the price cap since mid-July, injecting substantial daily amounts into the Kremlin’s war chest. Enforcement signs have emerged after ten months of the cap’s implementation, alongside rising Russian profits, global oil price spikes due to conflicts like the Israel-Hamas war, and evidence of traders evading the cap.
Sanction proponents argue that to truly affect Russia, cutting into its oil profits is crucial. Benjamin Hilgenstock, a senior economist at the Kyiv School of Economics, emphasizes the impact on Russia’s macroeconomic stability.
Oil income is Russia’s economic linchpin, sustaining military investments and stabilizing inflation and currency issues. While Russia manages to withstand sanctions better than expected, thanks to its ability to export more than it imports, recent actions by the U.S. Treasury Department and U.K. investigations indicate a desire to enhance enforcement.
Sanctions have already cost Russia $100 billion through August, with a significant portion stemming from Europe’s ban on Russian oil, which deprived Moscow of its primary customer. While the price cap policy faces challenges, reports suggest that vessels owned by Western nations have loaded Russian oil in Russian ports, even when prices exceeded the cap. The Helsinki-based Center for Research on Energy and Clean Air has highlighted such violations.
The price cap hinges on the shipping industry, where many entities fall under the jurisdiction of European or G7 democracies. To comply, shipping companies need information about Russia’s oil prices, but the cap only requires a good-faith disclosure on a simple one-page document, without the need to disclose the actual sales contracts, creating opportunities for price manipulation and potential violations.
Concerns of evasion grew as oil from Russia’s Kozmino port, with many Western-owned tankers, traded well above the cap. Recent U.S. Treasury Department actions have targeted tanker owners accused of transporting Russian oil priced above the cap, with warnings to insurers and calls for vigilance to prevent further circumvention.
Additionally, the cap may be bypassed through multi-stage buying and selling by Russian-affiliated trading companies in non-sanctioning countries, with added “transportation costs” allowing traders to pocket the difference.
Despite Deputy Prime Minister Alexander Novak’s claim that the cap is ineffective and harmful, U.S. officials view it as effective in conjunction with Europe’s ban on Russian oil. The ban forced longer voyages to Asia, doubling the need for costly shipping services. Together with Russia’s “shadow fleet” and added costs, the price cap has placed a $35 per barrel burden on Russian exporters, diverting funds away from military expenditures.
In conclusion, while the price cap has challenges, it’s impacting Russia’s economic stability. Advocates recommend urgent measures to steer oil from Russia’s shadow fleet back to mainstream shipping, including demanding proof of Western insurance and forcing tanker owners to accept shipments only from approved traders in sanctioning countries.
