12/8/22, 3:33 PM How the ‘Price Cap’ on Russian Oil Works - The New York Times

https://www.nytimes.com/2022/12/02/world/europe/russia-oil-price-cap-
explain.html

Here is how the so-called price cap on Russian oil will

work.
The plan to curb Moscow’s oil revenues relies heavily on European shipping and insurance
companies, but experts point to major loopholes.

By Matina Stevis-Gridneff, Jim Tankersley and Alan Rappeport

Dec. 2, 2022

European Union diplomats have agreed on a $60-per-barrel limit on the price at which
Russian oil can be traded outside the bloc, the latest effort by Western allies to try to deprive
Moscow of revenue to finance its war in Ukraine.

But there are serious questions over whether such a plan can be enforced, and whether
Russia and its main buyers, including China and India, will go along with the price set by the
Group of 7 industrialized nations.

Here is a look at some key elements of the plan:

It aims to let Russia keep selling oil, but earn less from it.

Western allies don’t want Russia to stop selling oil, its main export. Doing so would put a big
dent in the global supply and drive prices up at a time of already soaring global inflation. It
would also affect countries such as India and Turkey — key buyers of Russian crude —
whose support the West is hoping to leverage to maintain pressure on Moscow.

Instead, the United States and allies have negotiated a plan aimed at reducing the revenue
Russia earns from each barrel that it ships. The effort is a reflection of how Western
sanctions have failed to weaken Moscow’s energy exports: Russia is on track to earn more
this year from oil sales than in 2021, buoyed by a surge in the global price after the war
began, despite often selling to China and India at discounts.

It is not really a price cap; it’s a restriction on shipping and insurance companies.

The U.S. Treasury secretary, Janet L. Yellen, has described the plan as a price cap, but it’s
nearly impossible to manipulate the price of a global commodity such as oil. Instead, the
plan relies heavily on European dominance of the maritime insurance industry, a web of
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12/8/22, 3:33 PM How the ‘Price Cap’ on Russian Oil Works - The New York Times

companies that provide coverage for ships and their cargo, liability for potential spills and
reinsurance, a form of secondary insurance used to defray the risk of losses.

Most of the major shipping companies and insurers are based in Group of 7 countries. The
plan prohibits those companies from handling Russian crude unless the shipment has been
sold at or below the price set by the Group of 7. If it is not, they will be held liable for
violating sanctions.

Oil tankers in Novorossiysk, Russia, in October. Associated Press

The price has been set higher than some of Ukraine’s closest allies had wanted.

The $60-per-barrel price is a disappointment for some European countries, including

harder-line pro-Ukraine nations such as Poland, that wanted to see the Kremlin lose much
more revenue from its oil sales. With Russia’s oil production costs estimated at $20 per
barrel — and the benchmark for the price of Russian oil having traded at between $60 to
$100 per barrel in the past three years — the agreed-upon price still allows Moscow to reap
substantial profits.

E.U. diplomats involved in the negotiations were bothered by what they saw as an
American-led process that left them with complex and difficult implementation costs
without significantly altering Russian revenues.

U.S. officials argued that it would be better to set a price high enough that Russia would
comply with it by continuing to ship much of its oil exports using European and American
infrastructure, like ships and insurance.

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12/8/22, 3:33 PM How the ‘Price Cap’ on Russian Oil Works - The New York Times

Experts are skeptical, and Russia’s customers may find ways around the cap.

Industry officials have questioned the feasibility of the plan, which relies on each party in
the supply chain of Russian oil to attest to the price of shipments. Insurers and shippers
have warned that records could be falsified by Russia and trading partners intent on
keeping oil flowing.

The Kremlin has said it will not sell to countries that comply with the pricing mechanism,
meaning those intent on buying its oil may find ways around it. One method could be side
payments — for example, overpaying Russia for wheat or other commodities not subject to
sanctions — which occurred during the 1990s when the United Nations tried to impose a
similar plan on Iraq.

China, India and others could buy Russian oil at any price if shipped or insured by non-
European companies, which a senior U.S. Treasury official said would most likely be more
expensive, but not subject to penalties. And guidance issued by the Treasury Department
said Russian oil that had been sold under the pricing mechanism but then “substantially
transformed” or refined outside Russia would not be subject to the sanctions.

Companies that are found to have knowingly violated the policy will be barred from offering
services for Russian oil for three months — a penalty that critics say is far too lenient to
make the policy effective.

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