Not Giving In – Is the G-7’s Price Cap on Russian Crude Oil Exports Having Its

When the Group of Seven (G-7) countries placed a $60/bbl cap on the price of Russian crude oil in December 2022 — one of many responses to Russia’s February 2022 invasion of Ukraine — there were two primary goals. The first was to keep Russian barrels flowing to the market to help keep global prices in check, and the second was to slash the profitability of Russian oil exports and thereby reduce its ability to wage war against Ukraine. In today’s RBN blog, we look at how effective the sanctions have been and how Russia has tried to work around the price cap. 

As we discussed last winter in Like a Rolling Stone, the U.S. was among the first to respond to Russia’s invasion of Ukraine with sanctions, announcing just days after the war began that it would prohibit imports of Russian oil and certain refined products (along with LNG and coal) and ban U.S. investment in Russia’s energy sector. Similar measures were soon adopted by Australia, Canada, Japan and the U.K., and Russian banks were banned from the SWIFT system, which enables financial transactions and plays a crucial role in the global oil trade. In addition, integrated oil companies such as BP, Equinor and Shell announced their intention to exit upstream oil and gas projects in Russia. The U.S. and the U.K. also rolled out foreign investment restrictions on several Russian companies and key figures in Russia’s energy industry were targeted for individual sanctions.

On the oil side, the European Union’s (EU) partial embargo against Russian imports went into effect on December 5, 2022. It prohibits the purchase, import or transfer of seaborne Russian crude unless it is purchased at or below a price cap established by the EU and the G-7 members — Canada, France, Germany, Italy, Japan, the U.K., and the U.S. The price cap was set at $60/bbl, a target intended to be high enough to incentivize Russian production but low enough to hurt financially. 

[There was also a big push to rein in Russia’s significant exports of finished refined products (mostly diesel) and intermediates (vacuum gasoil — aka VGO, naphtha, and resid/fuel oil). While Europe has been the primary destination for most of the finished products and an essential consumer of intermediates, Russia had also grown to be an important source of VGO and resid feedstocks for U.S. refineries. The EU’s embargo on those imports — which went into effect February 5, 2023 — was paired with a separate price cap, set at $100/bbl for products (like diesel) that trade at a premium to crude oil and $45/bbl for products (like naphtha and fuel oil) that typically trade below the price of crude.]

Here’s how the $60/bbl cap on Russian crude is supposed to work. Each party in the supply chain is required to demonstrate or confirm that Russian oil has been purchased at or below the price cap. This begins with so-called Tier 1 market participants, namely refiners, importers, commodity brokers, traders, and customs brokers. They are expected to share price information and provide an attestation about cap compliance with Tier 2 or Tier 3 entities. Tier 2 entities (financial institutions and shippers), in turn, are expected to retain and share as needed that pricing information — or an attestation from a Tier 1 entity when direct receipt of price information is not practicable. Lastly, Tier 3 entities (insurance brokers, insurers and reinsurers) are expected to receive attestations from Tier 1 and Tier 2 groups about compliance with the price cap.