EU ministers claim that price caps on Russian oil will work, despite skepticism

The cap on the price of Russian seaborne oil will work, despite attempts by the Kremlin to evade sanctions and widespread market skepticism regarding the measure, EU ministers told CNBC.

The EU, along with the G7 and Australia, agreed on Friday to limit the purchase of Russian oil to $60 per barrel as part of joint efforts to restrict Russia’s ability to finance its war in Ukraine. The price cap came into effect on Monday. Essentially, the measure stipulates that oil produced in Russia can only be sold with the necessary insurance approval at a price of $60 per barrel or lower. Insurance companies are mainly located in G7 countries.

However, Russia has already stated that it will not sell oil to countries that comply with the cap and is prepared to cut production to maintain its revenues from the commodity. Additionally, reports have suggested that the country has been assembling a fleet of around 100 ships to evade oil sanctions. Having its own ‘shadow fleet’ would allow the Kremlin to sell its oil without needing insurance from the G7 or other nations.

When asked whether the oil cap could affect Russia’s oil revenue reduction, Irish Finance Minister Paschal Donohoe said, ‘yes, it can.’ It is ‘the right message at the right time,’ he said in an interview with CNBC on Monday.

One of the major open questions is the role of India and China in enforcing this price cap. Both nations have increased their purchases of Russian oil following the invasion of Ukraine and are reluctant to agree to the cap. The Indian oil minister reportedly said on Monday that he is ‘not afraid’ of the cap and expects the policy to have a limited effect.

However, French Finance Minister Bruno Le Maire told CNBC on Monday that he thinks ‘it is worth trying.’

– Then we will assess the consequences of implementing these restrictions – he added.

The market remains skeptical

The level of the price cap will be reviewed in early 2023. This review will be conducted periodically, with the aim of setting it ‘at least five percent below the average market price of Russian oil,’ according to an agreement signed by EU member states last week.

European Commission President Ursula von der Leyen said over the weekend that the oil price cap will help the bloc stabilize energy prices. The EU, it should be noted, was forced to sharply reduce its dependence on Russian hydrocarbons due to the war in Ukraine.

Market players, however, remain cautious regarding the integrity of the policy. Analysts from the Japanese financial group Mitsubishi UFJ stated in a note on Monday that the scale of the impact of the price cap is ‘still ambiguous.’

– We have been skeptical about the practicality of its success – they added.

There is a risk that countries will buy Russian oil at the agreed price cap but then resell it at a higher price in Europe. This would mean that Russia would still earn from the sale of the commodity while Europe pays more at a time when its economy is already slowing down.

– The introduction of the price cap is unlikely to eliminate all volume; some will find their way to the market – said Angelina Valavina, head of natural resources and commodities for EMEA at Fitch Group, to CNBC.

Oil prices rose on Tuesday morning in London. Both international benchmark futures prices for Brent crude and West Texas Intermediate rose by 0.4 percent to around $83 per barrel and $77 per barrel.

Futures prices for crude oil traded higher on Monday morning after OPEC+ countries decided to keep their target production unchanged, but fell in afternoon trading.