European oil sanctions are due to come into force on December 5. The idea is to reduce Russia’s oil revenues given its war in Ukraine.
Andrei Rudakov | Bloomberg | Getty Images
Upcoming sanctions on Russian oil could be “really disruptive” for energy markets if European countries fail to set a cap on prices, analysts have warned.
The 27 countries of the European Union agreed in June to ban the purchase of crude oil from December 5. Concretely, the EU — along with the United States, Japan, Canada and the United Kingdom — wants to drastically reduce Russia’s oil revenues in an attempt to empty the Kremlin’s war chest after its invasion of Ukraine .
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However, concern that a full ban could send crude prices skyrocketing has led the G-7 to consider setting a cap on how much it will pay for Russian oil.
An outright ban on Russian imports could be “really disruptive” to markets, according to Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group.
The potential for higher oil prices is “the reason the United States is pushing” to agree a cap, Gloystein told CNBC on Wednesday.
A price cap would see G-7 countries buy Russian oil at a lower price, with the aim of reducing Russia’s oil revenue without raising crude prices around the world.
However, EU countries have been arguing for several days over the right price cap level.
The right oil cap
A proposal discussed earlier this week suggested a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to accept it, arguing it was too high to hurt Russia’s revenue. These nations have been among the most vocal in pushing for action against the Kremlin for its aggression in Ukraine.
Speaking to CNBC’s Julianna Tatelbaum on Wednesday, the Dutch energy minister said a cap on Russian oil prices was “a very important next step.”
“If you want effective sanctions that really harm the Russian regime, then we need this oil cap mechanism. So hopefully we can agree as soon as possible,” Rob Jetten said.
On Wednesday, Russian oil was trading at around $66 a barrel. Kremlin officials have repeatedly said that a price cap is anti-competitive and that they will not sell their oil to countries that have the cap in place.
They hope that other major buyers – such as India and China – will not agree to the limit and will therefore continue to buy Russian oil.
China and India
The G-7 countries agreed to put a limit on Russian oil in September and have been working on the details ever since. At the time, EU energy chief Kadri Simson told CNBC she hoped China and India would also support the price cap.
Both nations stepped up their purchases of Russian oil after Moscow invaded Ukraine, benefiting from reduced rates. Their participation is considered essential for the restrictions on Russian oil to work.
“China and India are crucial because they buy most of Russia’s oil,” Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, told CNBC.
“They won’t engage, however, for political reasons, because the cap is a US-sponsored policy and [for] commercial reasons, because they already get a lot of cheap oil from Russia, so why jeopardize that? To think that they would join voluntarily was always naive because Ukraine is not that important to them.”
Indian Oil Minister Shri Hardeep S Puri told CNBC in September that he has a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy anywhere,” he added.
As such, there are growing doubts about the true impact of the restrictions on Russia.
“The energy sanctions against Russia came too late and are too timid,” Guntram Wolff, director of the German Council on Foreign Relations, said by email.
“This is just the continuation of an unfortunate series of half-hearted decisions. The longer and the later the sanctions, the easier it will be for Russia to circumvent them.”
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