Most Russian crude oil exports to Europe are now banned, marking the boldest effort yet by the West to ramp up financial pressure on President Vladimir Putin. Brutal war in Ukraine He is entering his tenth month.
The oil embargo that was agreed In late May, it entered into force in the European Union on Monday. It was accompanied by a new cap on the price of Russian crude developed by the G7 countries. This is designed to limit Kremlin revenue while allowing countries like China and India to continue buying Russian oil, provided they pay no more than $60 a barrel.
what happened after that It is likely to hinge on the response of Moscow, which has vowed not to cooperate with the price cap and could cut its production, upsetting global energy markets. world crude prices It rose 2.6% on Monday as investors nervously awaited the next move.
Here’s what you need to know about the oil embargo, price cap, and… potential effect.
The EU now bans imports of Russian crude oil by sea, phasing out the bloc 90% of oil imports are from Russia. It’s a big step considering Europe received approx Third of its oil imports from Russia in 2021. More than half of Russia’s exports went to Europe 12 months ago.
There are a few exceptions. Bulgaria received a temporary cutoff. Nor does the ban target pipeline imports. This means that the Druzhba pipeline can continue to supply Hungary, Slovakia and the Czech Republic. (Germany and Poland are ending pipeline imports from Russia As soon as possible.)
But the ban is big. In 2021, the European Union imported 48 billion euros ($50.7 billion) worth of crude oil and 23 billion euros ($24.3 billion) worth of refined petroleum products from Russia. Two-thirds of these imports arrived by sea.
A ban on Russian refined petroleum products, such as diesel fuel, imported by sea will begin in early February.
The European Union, as well as the other members of the G7 – the United States, Canada, Japan and the United Kingdom – and Australia on Friday also agreed to Russian crude oil price ceiling at $60 a barrel, a policy aimed at Moscow’s other customers. This measure went into effect on Monday as well.
The price cap, which can be adjusted over time, is designed to be imposed by companies that provide shipping, insurance and other services for Russian oil. If the buyer pays more than the maximum limit, he will withhold his services, In theory it prevents oil from charging. Most of these companies are based in Europe or the United Kingdom.
Despite unprecedented sanctions from the West, Russia’s economy and government coffers have been stuffed with its lucrative position as the world’s second largest exporter of crude oil after Saudi Arabia.
In October, Russia exported 7.7 million barrels of oil per day, just 400,000 barrels less than pre-war levels, according to the International Energy Agency. Revenue from crude oil and refined products is currently $560 million per day.
By rapidly phasing out imports, Europe hopes to reduce flows into Putin’s war chest, making it harder for him to continue his war in Ukraine.
But states love China and India I went up in buying surplus barrels. This is where the price cap comes into play.
The G7 countries do not want to withdraw Russian oil from the market completely, as that would raise global prices at a time when high inflation is hurting their economies. By enacting a price cap, they hope to keep the barrels flowing but make business less profitable for Moscow.
This is far from certain. Countries like Poland and Estonia wanted a lower price ceiling, asserting that $60 is too close to the current market price for Russian oil. At the end of September, Russia’s Urals crude was trading just below $64 a barrel.
“Today’s oil price cap agreement is a step in the right direction, but it is not enough,” said Estonian Foreign Minister Urmas Rainsalo tweet Friday. “Why are we still willing to fund the Russian war machine?”
Implementation can also be difficult. Russia and its customers could start using more ships and insurers outside of Europe and the UK to circumvent the rules, relying increasingly on the so-called “shadow fleet”.
“The capacity of this fleet is growing, and it will likely handle Russian volumes for a while,” said Richard Bruns, head of geopolitics at research firm Energy Aspects.
Kremlin spokesman Dmitry Peskov said on Monday that Moscow “will not recognize any price ceiling”. Russian Deputy Prime Minister Alexander Novak said Sunday that Russia will not export oil to countries adhering to the cap, even if it means cutting production.
Oil prices have fallen sharply since the spring as concerns about a global recession could hurt demand. Now, all eyes are on Russia’s response. Peskov said the price cap was a step towards “destabilizing global energy markets.”
Moscow needs to find replacement customers for the 1.1 million barrels per day of crude oil that was still flowing to Europe, according to the International Energy Agency. This may not be easy, especially as coronavirus restrictions and slowing growth in China weigh on demand from the world’s second-largest economy.
The price cap adds to the uncertainty. Potential customers may decide that buying Russian goods has become too risky and complicated, driving another group of buyers out of the market.
As the Kremlin has threatened, Russia may cut its oil production as a result. The International Energy Agency has estimated that Russia will cut its production by 1.4 million barrels per day by early 2023.
Other factors determine prices as well. The rare protests in China have raised questions about the country’s commitment to a “zero Covid” policy, and demand could increase if its economy accelerates.
The Organization of the Petroleum Exporting Countries (OPEC) could also change its production. The cartel decided on Sunday Commitment to previously announced production cutsgiving it more time to assess the effects of the ban and the price cap.
Europe’s ban on refined petroleum products in February could be a bright spot for energy prices, as the region remains dependent on Russian diesel. Finding alternative sources in just a couple of months can be challenging.
Anna Chernova contributed reporting.
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