Most Russian crude oil exports to Europe have now been banned, marking the boldest attempt yet by the West to put economic pressure on President Vladimir Putin as the brutal war in Ukraine enters its tenth month.
The oil embargo, which was agreed at the end of May, came into force in the European Union on Monday. It was accompanied by a new price ceiling for Russian crude set by the G7 countries. This is designed to limit the Kremlin’s revenue while allowing countries such as China and India to continue buying Russian oil, provided they pay no more than $60 a barrel.
What happens next will likely depend on the response of Moscow, which has vowed not to cooperate with the price cap and could cut its output, roiling global energy markets. Global crude prices rose 2.6% on Monday as investors nervously watched for the next move.
Here’s what you need to know about the oil embargo, the price cap and the potential implications.
The European Union now bans imports of Russian crude oil by sea, creating the bloc to have phased out 90% of oil imports from Russia. It’s a huge move given that Europe will get about a third of its oil imports from Russia in 2021. More than half of Russia’s exports went to Europe 12 months ago.
There are a few exceptions. Bulgaria received a temporary cut-off. The embargo also does not target pipeline imports. This means that the Druzhba pipeline can continue to supply Hungary, Slovakia and the Czech Republic. (Germany and Poland are working to end pipeline imports from Russia as soon as possible.)
But the embargo is important. In 2021, the EU imported 48 billion euros ($50.7 billion) of crude oil and 23 billion euros ($24.3 billion) of refined petroleum products from Russia. Two-thirds of these imports arrived by sea.
A ban on Russian refined oil products such as diesel fuel imported by sea will begin in early February.
The European Union, along with the other G7 members – the United States, Canada, Japan and the United Kingdom – and Australia also agreed on Friday to cap the price of Russian crude oil at $60 a barrel, a policy aimed at other customers of Moscow. That measure came into effect on Monday.
The price cap, which can be adjusted over time, is designed to be imposed by companies that provide shipping, insurance and other services for Russian oil. If a buyer paid more than the cap, it would withhold its services, theoretically preventing the oil from being shipped. Most of these companies are based in Europe or the UK.
Despite unprecedented Western sanctions, Russia’s economy and government coffers have been buoyed by its lucrative position as the world’s second-largest crude oil exporter behind Saudi Arabia.
In October, Russia exported 7.7 million barrels of oil a day, just 400,000 barrels below pre-war levels, according to the International Energy Agency. Revenue from crude oil and refined products currently stands at $560 million per day.
By phasing out imports, Europe hopes to limit inflows into Putin’s war chest, making it harder for him to continue the war in Ukraine.
However, countries such as China and India have moved to buy surplus barrels. That’s where the price cap comes in.
The G7 countries do not want Russian oil off the market entirely, as that would push up global prices at a time when high inflation is hurting their economies. By imposing a price cap, they hope this can keep the barrels flowing, but make the business less profitable for Moscow.
This is far from certain. Countries such as Poland and Estonia wanted a lower price ceiling, stressing that $60 is too close to the current market price for Russian oil. At the end of September, Russian Urals crude was trading just below $64 a barrel.
“Today’s agreement on the maximum oil price is a step in the right direction, but it is not enough,” Estonian Foreign Minister Urmas Reinsalu tweeted on Friday. “Why are we still willing to fund Russia’s war machine?”
Enforcement could also prove difficult. Russia and its clients could start using more ships and insurance providers outside Europe and the UK to circumvent the rules, increasingly relying on what is called a “shadow fleet”.
“The capacity of this fleet is growing and could probably handle Russian volumes for a while,” said Richard Bronze, head of geopolitics at Energy Aspects, a research firm.
Kremlin spokesman Dmitry Peskov said on Monday that Moscow “will not recognize any price ceiling”. Russian Deputy Prime Minister Alexander Novak said on Sunday that Russia will not export oil to countries that adhere to the cap, even if it means cutting output.
Oil prices have fallen sharply since the spring as fears of a global recession that could weigh on demand have come to the fore. Now, all eyes are on Russia’s response. Peskov said the price cap was a step towards “destabilizing global energy markets”.
Moscow must find replacement customers for the 1.1 million barrels a day of crude oil that was still flowing to Europe, the IEA said. That may not be easy, especially as coronavirus restrictions and slowing growth in China weigh on demand from the world’s second-largest economy.
The price cap adds to the uncertainty. Prospective customers may decide that buying Russian cargo has become too risky and complicated, pulling another batch of buyers out of the market.
As the Kremlin has threatened, Russia may cut its oil production as a result. The IEA estimates that Russia will cut production by 1.4 million barrels per day by early 2023.
Other factors will also dictate prices. Rare protests in China have raised questions about the country’s commitment to its “zero Covid” policy, and demand could increase if its economy picks up pace.
The Organization of the Petroleum Exporting Countries, or OPEC, could also change its output. The cartel on Sunday decided to maintain previously announced production cuts, giving it more time to assess the effects of the embargo and price cap.
Europe’s embargo on refined oil products in February could also be a flashpoint for energy prices as the region remains dependent on Russian diesel. Finding alternative sources in just two months can be difficult.
— Anna Chernova contributed reporting.
