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Monday, January 30, 2023

Cap on Russian oil price, a mechanism tested in markets

The cap imposed on the price of Russian oil, approved by the European Union (EU), G7 countries and Australia from Monday, seeks to limit Moscow’s earnings, but without preventing it from continuing to supply crude.

Kremlin spokesman Dmitry Peskov said on Monday the measure could have “an impact on the stability of the world energy market”, but “will have no impact” on Russia’s invasion of Ukraine.

confiscation and price cap

The mechanism’s launch coincided with the entry into force of the European Union’s embargo on Russian oil supplied by sea, several months after similar measures were adopted by the United States and Canada.

Russia is the world’s second largest exporter of crude and without that limit, it would be easier for it to find new buyers at market prices.

The mechanism provides that only oil sold at or below $60 a barrel may continue to be supplied and companies based in the European Union, the G7 and Australia countries may continue to be eligible for sea transport (trade, freight, insurance). Prohibited from providing services. , ship owner, etc.).

The G7 countries provide insurance services for 90% of the world’s cargo, and the European Union is a major player in ocean freight.

A transition is planned (the cap will not apply to orders placed before 5 December) and an additional cap for oil products will come into effect from 5 February.

market effect

By imposing a cap of $60, Western countries opted for a price level much higher than the current cost of oil production in Russia to encourage Russia to keep pumping crude.

“Russia must continue to be interested in selling oil,” or else world supplies could be hit and prices could skyrocket, explained one European official, who does not believe the Kremlin’s threats to cut its supplies to countries that do not. apply cap.

According to him, Russia will try to keep its infrastructure in good condition—because if it stops production, they will deteriorate—and protect the trust of its customers such as China and India.

And although experts have expressed their concern about this “leap into the unknown” and are waiting to see how OPEC+ countries will react, Brussels assured that the cap would “contribute to stabilizing markets” and “directly impact emerging markets”. economies and developing countries” by allowing cheaper crude to be purchased.

Russian oil prices are currently around $65, so the short-term impact of the move may be limited.

a reviewable hat

The cap will be re-examined every two months from January, and may be revised based on changes in prices, but should always be at least 5% below the average market price.

Any amendment would require agreement from the G7 countries, Australia and the European Union.

effectiveness and countries involved

All countries have been invited to implement the cap measure. If they don’t, they will be able to continue buying Russian oil at a higher price but they will not be able to use Western services to buy and transport it.

“We have clear indications that many emerging economies, particularly in Asia, will adhere to cap principles,” said a European official.

Furthermore, customers in Russia would find it very difficult to find alternatives to European companies in charge of freight and security, he said.

fraud risk

EU and G7 states have to monitor companies based in their territory. And if a ship flagged by a third country is found to be carrying Russian oil at a price higher than the cap, Western operators would be barred from looking after its security and financing for 90 days.

Instead, Moscow could build its own fleet of freighters operated and insured by Russian companies, but “creating a maritime ecosystem from one day to the next would be too complicated,” said Brussels, who questioned whether it could. The solution can persuade customers.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
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