HomeEuropeEU ministers insist it'll work despite Kremlin's opposition

EU ministers insist it’ll work despite Kremlin’s opposition

G7, the EU and Australia implemented on December 5 a cap on Russian oil prices. Market players have doubts the measure will be effective.

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BRUSSELS — A price cap on Russian seaborne oil will work, EU ministers told CNBC, despite attempts from the Kremlin to escape sanctions and a broad market skepticism over the measure.

The EU, alongside the G-7 and Australia, agreed on Friday to limit the purchases of Russian oil to $60 a barrel as part of a concerted effort to curtail Moscow’s ability to fund its war in Ukraine.

The price cap came into force on Monday. In essence, the measure stipulates oil produced in Russia can only be sold with the necessary insurance approval at or below $60 a barrel. Insurance companies are mostly based in G-7 nations.

However, Russia has already said it will not sell oil to nations complying with the cap and that it is ready to cut production to maintain its revenues from the commodity.

In addition, reports suggested that it has been putting together a fleet of about 100 vessels to avoid oil sanctions. Having its own so-called “shadow fleet” would allow the Kremlin to sell its oil without needing insurance from the G-7 or other nations.

When asked if the oil cap can work in reducing Russia’s oil revenues, Irish Finance Minister Paschal Donohoe said, “Yes, it can.”

It is “the right message at the right time,” he said in an interview with CNBC on Monday.

One of the big open questions is the role of India and China in the implementation of this price cap.

Both nations have stepped up their purchases of Russian oil in the wake of the invasion of Ukraine, and they are reluctant to agree to the cap. India’s petroleum minister reportedly said Monday that he “does not fear” the cap and he expects the policy to have limited impact.

However, France’s Finance Minister Bruno Le Maire told CNBC on Monday: “I think it’s worth trying.”

“Then we will assess the consequences of the implementation of this oil cap,” he added.

Market players remain skeptical

The level of the cap will be reviewed in early 2023. This revision will be done periodically and the aim is to set it “at least 5% below the average market price for Russian oil,” according to the agreement reached by EU nations last week.

European Commission President Ursula von der Leyen said over the weekend that the limit on oil prices will help the bloc stabilize energy prices. The EU has been forced to abruptly reduce its dependence on Russian hydrocarbons due to the Kremlin’s war in Ukraine.

Market players, however, remain wary about the integrity of the policy.

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Analysts at Japan’s Mitsubishi UFJ Financial Group said in a note Monday that the scale of the price cap’s impact “remains ambiguous.” They added, “we have been sceptical on the practicalities of its success.”

There is a risk that nations buy Russian oil at the agreed cap but then resell it at a higher price to Europe, for example. This would mean that Russia would still make money from the commodity sales while Europe would be paying more at a time when its economy is already slowing down.

“The introduction of the cap on the price will probably not remove all the volume, some will find its way to the markets,” Angelina Valavina, head of EMEA Natural Resources and Commodities at the Fitch Group, told CNBC’s “Street Signs Europe” Monday.

Oil prices traded higher Tuesday morning in London.

Both international benchmark Brent crude futures and West Texas Intermediate futures traded 0.4% higher at around $83 a barrel and $77 a barrel respectively.

Crude futures traded higher Monday morning, following a decision by OPEC+ nations to keep output targets unchanged, but moved lower in afternoon trading.



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