The EU Finally Caps Russian Oil. Russia Says It Will Find A Way Around The Cap

Let The Sanction Busting Games Begin

The EU has finally agreed to implement a $60 per barrel cap on Russian crude oil, and the G7 is expected to quickly move forward with enforcing the cap as well.

The cap will ban Western companies from insuring, financing or shipping Russian oil unless the oil is sold below $60 a barrel. The U.S. and its allies designed the system in an attempt to cut into Moscow’s oil revenues while keeping Russian crude—an important part of global supply—available on the market. It aims to leverage the concentration of maritime services in the West to curb Moscow’s ability to wage war in Ukraine.

Russia has threatened to withhold its oil from the global market if the cap moved forward, but, as of late yesterday, Russian oil supplies appeared to still be available.

How well the cap will work remains to be seen—and the markets are showing some skepticism. When word that the cap would be at $60 per barrel, the price for Russia’s benchmark Urals crude was $66.54 per barrel. By end of the trading day on Friday Urals crude was at $69.45 per barrel.

At the same time, Brent crude eased to $85.79 per barrel, lessening the market discount already imposed on Russian crude.

If the cap is deemed to be credible, we will likely see Urals crude trend towards the $60 per barrel price. If not, Urals crude may possibly reconverge with Brent Crude, as has historically been the case.

For its part, Russia is rejecting the idea that anyone can cap the price of Russian crude. As reported by Russian news agency TASS on their English website:

Russia will negotiate with partners directly, not paying attention to a possible oil price cap, Russian Foreign Minister Sergey Lavrov told a press conference on European security issues.

"We are not interested in what the price cap will be, we will negotiate with our partners directly, and the partners who continue to work with us will not look at these caps and will not give any guarantees to those who illegally introduce them," he said.

Similar sentiments can be found on TASS’ native Russian version.

The Russian side stated that it would not trade energy resources with the countries that accepted the ceiling. On October 12, Russian President Vladimir Putin stressed that Moscow would not indulge in "sharp tricks" and "shameless blackmail" by paying for someone else's well-being.

However, given that the cap is enforced by refusing insurance and other essential services to ship carrying Russian crude sold at greater than the capped price, how Russia intends to evade the sanctions remains unclear. One area where the EU dominates the world economy is in the realm of maritime insurance. It is unlikely that either Russia or any of its major customers have the financial depth necessary to insure and indemnify tankers carrying Russian crude to its customers. If tankers bound for Russian ports can’t get insurance, they won’t be bound for Russian ports.

One thing seems certain: Russia is going to do everything it can to evade the cap. How diligent EU firms will be in enforcing the cap remains very much an open question.