Russian Price Cap Having Some Success, but Compliance Unclear, Experts Say

The G-7 price cap on Russian oil, along with other trade restrictions, appears to be having a significant impact on the global price of Russian energy, experts said during an event hosted by the Center for Strategic and International Studies last week. But they also said it remains unclear whether the cap is limiting Russia’s export volumes and said it’s too early to tell how well industry is complying with the cap’s service restrictions.

Ben Cahill, a senior fellow with CSIS, said price cap countries will be closely monitoring how effectively the restrictions limit Russian oil sales over the coming year, which could lead them to adjust the cap, currently set at $60 per barrel. “I think what G-7 and EU policymakers are looking for is clear evidence that people in the value chain are abiding by the price cap and using the attestation process,” said Cahill, a former director in Energy Intelligence's research and advisory group. “If there's evidence that more people are taking that up, they’ll be quite happy with that in the coming months.”

So far, the crude oil cap, which took effect in December (see 2212050014 and 2211230047), is successfully limiting Russian oil revenues, especially because it’s being implemented alongside an EU embargo, Cahill said. Because Russia can’t sell its oil in Europe, the country has increasingly turned to Asia, he said.

“So you have to ship it over longer distances, and you have to pay more for freight and insurance,” Cahill said. “What that has done is extend and even deepen the differential or the discount between Russian oil and the world's oil price. So the price impact seems to be pretty considerable.”

But the cap hasn’t appeared to have “any impact on the quantity of exports of Russian oil, as of today,” said Russian economist Sergey Aleksashenko, a Boris Nemtsov Foundation for Freedom co-founder and board member. Cahill said he doesn’t yet know how export quantities will be affected long term, but he noted that Russia’s seaborne oil exports declined by about 12% to 14% in December.

“The question is, was that a one-off as the market adjusted to the price cap [and] tried to figure out all the mechanisms,” and as “bankers, traders, shippers and everyone else developed a comfort level with it?” Cahill said. “And if that's the case, will exports rebound?” He said: “I happen to think they probably will.”

Cahill also said “compliance with the price cap mechanism is a little bit unclear,” especially because the G-7 and EU cap on Russian petroleum products doesn’t take effect until next month (see 2212300034). “I haven't really seen strong evidence so far that price cap compliance is widespread, and that a lot of people in India and China are playing ball,” he said. “So far I think the price impact is a little bit more clear and visible in the marketplace than the actual compliance with the price cap.”

Another “layer of complication” is the lack of a clear guidance on the upcoming price cap for Russian petroleum products, Cahill said. “We're still awaiting guidance from the Treasury's Office of Foreign Assets Control and its counterparts in Europe on how this is going to work,” he said. “In terms of the mechanism and how this is going to be applied, it's going to be much more complicated, and we still don't really know all the details.”