The effectiveness of the price cap on Russian oil, implemented by the G7 and EU last year to limit Moscow’s energy revenues, has been diminishing, according to a report by the Wall Street Journal. The $60 per-barrel price ceiling on Russian seaborne oil exports was agreed upon by the EU and G7 countries in December 2022. In February, similar restrictions were placed on exports of Russian petroleum products. Under this mechanism, Western companies are only allowed to transport, trade, or insure Russian oil if it is sold at or below $60 a barrel.
The initial enforcement of the price cap led to a 46% year-on-year decline in Moscow’s oil and gas revenues in January, dropping to 426 billion rubles ($4.6 billion). However, revenues have since rebounded significantly. The latest data from the Russian Finance Ministry shows that oil and gas revenues stood at 1.635 trillion rubles ($17.6 billion) in October, more than double the previous month and up by over a quarter from October 2022.
The Wall Street Journal attributes this turnaround to Russia’s successful efforts to bypass the price caps, which it claims violate global market rules. Russia has reportedly been using a fleet of aging tankers, known as the shadow fleet, to move crude exports. These tankers operate outside the reach of the price caps. According to a report by the Kiev School of Economics, Russia’s shadow fleet consisted of 180 vessels as of September, ensuring that most Russian exports are not subject to the price cap.
Additionally, Russia has redirected more of its oil previously destined for the West to its largest buyers: China, India, and Türkiye. These countries have not joined the Western price cap, providing Russia with secure markets. As a result, Russia has been gradually reducing the discounts on its exports that were introduced earlier this year.
Recent data from S&P Global reveals that over half of Russia’s oil exports are now shipped with non-G7 insurance, up from 35% in January. This further demonstrates the diminishing relevance of the price cap mechanism.
Natasha Kaneva, head of commodities strategy at JPMorgan Chase, stated that while the price cap initially worked as intended, it has now become obsolete. Enforcing the mechanism would require stricter control from the G7 and EU, including harsher punishments for violations, more detailed documentation requirements to prevent fraud, and investigation of inflated shipping and insurance costs.
In conclusion, the Wall Street Journal’s report highlights the waning effectiveness of the price cap on Russian oil exports. Russia’s successful tactics to bypass the caps, the redirection of its exports to non-G7 buyers, and the use of non-G7 insurance have all contributed to the diminishing relevance of the mechanism. Stricter enforcement and control would be necessary for the price cap to regain its effectiveness.