The conflict in Ukraine has had far-reaching economic consequences, and western governments have sought to curb Russia’s ability to finance its expansionist war. One key strategy has been the implementation of a $60 oil price cap, designed to limit Russia’s profits from its oil exports while minimizing global supply disruptions. However, recent investigations suggest that Russia is finding ways to adapt to this mechanism, potentially undermining its effectiveness.
The $60 Oil Price Cap:
The $60 oil price cap focuses on limiting the price that Russia can charge for its seaborne crude oil exports, which make up a significant portion of its oil revenue. The cap aims to align the selling price more closely with Russia’s estimated extraction cost per barrel. While it prevents the Kremlin from excessive profit, it still provides an incentive to maintain oil production.
Enforcement of this cap relies on the G7 group of industrial nations overseeing marine insurers responsible for underwriting cargo, including oil shipments, and their re-insurers, many of whom are based in western countries.
Russian Adaptation:
An investigation by the Financial Times has revealed that nearly three-quarters of Russian crude oil shipments in the past month did not rely on western insurance. This suggests that Russia may now be charging the full market price for its oil at a time when global benchmark Brent crude is nearing $100 per barrel.
The reasons for this shift are not entirely clear. While some western-backed ships may be avoiding the necessary documentation to deal with the hassle of compliance, it remains unclear how Russia has adapted so swiftly since the introduction of the price cap in December.
Challenges in Enforcement:
Enforcing the price cap in the future may become increasingly difficult due to these shifts in Russia’s oil shipping practices. Commercial ships, including oil tankers, typically require protection and indemnity (P&I) insurance due to the substantial value of their cargo. If Russia or its allies are stepping in to offer guarantees in the event of loss, it would mean they are assuming the associated risks, potentially impacting their taxpayers.
Ben Hilgenstock from the Kyiv School of Economics highlights the challenge of meaningfully enforcing the price cap in the future, given these developments. He also notes that missed opportunities to enforce it more effectively in the past may have weakened the cap’s overall impact.
Separate $100 Price Cap on Premium Petroleum Products:
In addition to the oil price cap, there is a separate $100 price cap on premium petroleum products such as gasoline and diesel. However, Russia’s refining capacity appears to be struggling to meet internal demand, exacerbated by the war effort. Putin’s government has imposed export bans to redirect resources domestically and alleviate the economic impact of the conflict on Russian citizens.
Fuel prices in Russia, denominated in the depreciating ruble currency, have surged, with record-high prices reported for premium gasoline on commodities exchanges.
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Conclusion:
The $60 oil price cap aimed at curbing Russia’s ability to profit from its oil exports is facing challenges as Russia adapts its shipping practices. The ability to enforce the cap effectively in the future is uncertain, and missed opportunities for stronger enforcement may have weakened its impact. As the conflict in Ukraine continues, the economic repercussions, including those related to energy markets, will remain a complex and evolving issue with global implications.
