On Tuesday, President Vladimir Putin announced that Russia would prohibit oil supply to Western countries with price caps.
The G7, which includes Australia, the European Union, and the UK, agreed to a $60 per barrel price cap for Russian seaborne crude oil effective Dec 5, in response to the war in Ukraine.
This cap is very close to the current Russian oil price, but it is well below the windfall Russian oil price that Russia was able to sell for this year. That helped to offset the financial sanctions against Moscow.
The United States, Britain, and the EU have all banned Russian oil imports.
Russia’s ban is so severe that countries that still buy oil from Russia would have to find it elsewhere.
Russia is the second-largest oil exporter in the world after Saudi Arabia. A major disruption to Russia’s sales could have serious consequences for global energy supplies. Russia has threatened to reduce supplies by 2023. This would increase the cost of non-Russian crude oil and possibly cause pain for consumers.
The conflict in Ukraine has caused significant volatility in global oil markets, sending prices soaring. This has led to European countries scrambling for cheaper Russian oil and gas.
The Kremlin website and a government portal published the decree as a response to “actions which are unfriendly or contradictory to international laws by the United States and other states and international organizations joining them”.
“Deliveries to foreign entities or individuals of Russian oil and products are prohibited, subject to the following conditions:
“The established ban applies at all stages of supply, up to the final buyer.”
In special cases, the ban can be overruled
The decree includes a clause that allows Putin the right to overrule the ban on special cases. It states: “This…comes into force on February 1, 2023, and will apply until July 1, 2023.”
Exports of crude oil will be prohibited starting February 1, but the Russian government will determine the date and may extend it later.
The purpose of the price cap, which was not seen in the Cold War between the West, and the Soviet Union, was to cripple the Russian state coffers as well as Moscow’s military efforts against Ukraine.
Analysts have stated that the cap will have very little impact on Moscow’s oil revenues.
Russia had been promising to respond to the cap for weeks. The final decree confirmed much of what officials had publicly stated.
Non-EU countries can continue to import seaborne Russian crude oil from the G7, but the price cap will prevent shipping, insurance, and reinsurance companies from handling Russian crude cargo around the world.
Separately, EU countries have implemented an embargo prohibiting them from buying seaborne Russian oil.
