On December 5, a $60 per barrel price cap on Russian seaborne oil – agreed upon by the European Union, the G7 and Australia just a few days earlier – came into effect, marking the beginning of a new phase in the economic war between Russia and the West.
The price cap may be one of the most significant ripostes to Russia’s weaponisation of its energy reserves since the beginning of its all-out invasion of Ukraine, but what it entails and hopes to achieve appear to be widely misunderstood.
Despite what many seem to believe, the price cap is in no way an effort to end Russian crude exports. On the contrary, it aims to ensure that they continue to flow despite ever-tightening regulations and sanctions – albeit not to Western markets. Indeed, China, India and many other third countries who have been purchasing Russian crude in large quantities and at heavily discounted prices since February are still free to do so. The purpose of the cap is not to stifle these purchases but to limit Russia’s profits – which are mainly used to finance its war effort – by ensuring the current discounts are permanent.
Agreeing on the move has not been easy for the international coalition resisting Russia’s war on Ukraine – its final terms were only accepted by all parties on December 2. The sticking point was where to set the cap. The countries eventually decided to set it at $60 – above the price point where most Russian crude was trading on the eve of the restriction. As the European nation arguably most supportive of Ukraine following Russia’s invasion, Poland was the last holdout. Warsaw joined Ukrainian President Volodymyr Zelenskyy’s criticism that setting the cap at that level would mean Russia still makes some profit from the barrels it sells.
But in the end, all parties agreed to a cap of $60, because they saw that at that level Russia’s profits can be vastly restricted without causing a major disruption to global oil markets that could send prices skyrocketing for everyone. Indeed, any lower price cap would have likely forced Russia to take drastic action – such as stopping all exports – and damaged all oil-importing nations alongside Russia.
Since February, the Kremlin – for all its cawing and carping about any such price caps being an unacceptable violation of its sovereignty – has already been exporting its oil at substantial discounts. Therefore, in real terms, a cap of $60 is just an effort to make the existing arrangement permanent.
The West will implement the cap simply by refusing to provide essential services, such as ship brokerage and insurance, for Russian crude that is sold above the limit.
Moscow only has itself to blame for this sad state of affairs. When he launched his war against Ukraine and decided to take on the international economic order, President Putin made several grave miscalculations.
First and foremost was, of course, his deadly and devastating misreading of Ukraine – Putin thought Russian troops would be welcomed by most Ukrainians and his “special military operation” would end in victory in a matter of days.
His second miscalculation was the extent of Russia’s ability to disrupt the international economic order without facing pushback. He assumed that his country’s influence over the energy market would allow him to easily fracture the West and prevent his adversaries from agreeing to multilateral measures – such as the price cap – that could severely limit his ability to wage economic warfare.
But Russia is in no position to take on the West economically.
As recently as in June, for example, roughly two-thirds of Russia’s seaborne crude exports were still being carried by ships that belong to nations that have imposed sanctions on it.
To address this crippling dependency and blunt oil sanctions, the Kremlin has sought to swiftly build a “shadow fleet” to transport its own crude. But that shadow fleet also found itself dependent on Western services – such as the insurance nations require to be in place to accept oil shipments – and thus subject to sanctions.
To avoid being dependent on multinational insurers who comply with Western sanctions, Putin’s Kremlin has sought to develop its own insurance. But many nations, most notably China and Turkey, have refused to accept this Russian workaround insurance.
The impact of Chinese and Turkish denial was significant given the former is Russia’s principal purchaser, and the latter is the country that controls the Bosphorus – Russian exports’ primary way out of the Black Sea.
Neither Beijing nor Ankara is a member of the West’s sanctions regime, let alone its price cap. China almost certainly could use its own insurance giants to help Russia mitigate some of the pain. But it is not willing to do so. Despite declaring its relationship with Moscow had risen to the level of “friendship without limits” on the eve of the war, Beijing has since revisited this position. The new deal is that Beijing will not actively help Russia to undermine the sanctions though it won’t enforce them either – as it has realised that Putin’s aim to destroy the international economic order clashes with its own desire to displace Washington and rise to the top. In short, it is very happy to lock in the discount for Russian crude precipitated by Russia’s war and which the oil price cap seeks to make permanent.
Putin’s increasing isolation – and realisation that his supposed friends are no real allies – may cause him to lash out. The one arrow left in Russia’s oil quiver is to throttle exports to all markets. Doing so, however, runs the risk of burning the few bridges the Kremlin still has, given the likely impact of such a move on international oil prices. And Saudi Arabia, which has been cooperating with Moscow through OPEC+ to keep oil prices from falling too far, could seek to take advantage of the situation – their partnership nearly collapsed in 2020 in a fight for market share that sent prices negative within a month as Riyadh’s ability to ramp up production is far greater than Russia’s. It has already been positioning itself for a greater role in Europe’s energy markets by investing in Poland’s refinery network.
All in all, this month’s price cap on Russian crude marks a turning point in the economic war between Russia and the West. Of course, this war is still far from over, and we will likely experience many more disruptions caused by it in the near future. But it is increasingly looking like the beginning of the end for Putin’s ambitions to uproot the world economic order.
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