Russia's Response to G7 Price Cap Takes Shape

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Details are starting to emerge about how Russia will implement President Vladimir Putin's ban on sales of Russian crude oil and refined petroleum products that comply with or are linked to the G7 price cap mechanism.

Business newspaper Kommersant reported that the government is preparing a regulation that would prohibit references to the G7 price cap in sales contracts and make Russian producers responsible for ensuring broad compliance with the ban.

Putin signed a decree on Dec. 27 prohibiting exports of Russian crude oil and petroleum products that comply directly or indirectly with the G7 price cap. The government is expected to implement the decree by Feb. 1.

The G7 price cap for sales of Russian crude oil took effect on Dec. 5 and was initially set at $60 per barrel. A separate price cap for refined products is scheduled to take effect on Feb. 5, but its level has not yet been set.

The EU and G7 countries have banned imports of oil from Russia in response to its invasion of Ukraine last year.

The price cap seeks to limit Moscow's oil revenues by allowing western tankers and insurance to be used to ship Russian oil to other countries, but only if it is purchased at or below the price cap.

Review of Contracts

According to Kommersant, the new regulation will require Russian oil companies to ensure that their contracts do not include any provisions related to the price cap.

They will also be required to ensure that foreign buyers — including traders — fulfill this condition if the oil is subsequently resold.

Companies will also have to send their contracts and other documents related to prices to the Federal Customs Service (FTS).

The FTS would be authorized to block shipments — including oil moved by pipeline or train — if companies are found to violate the regulation.

Industry sources say that the customs service already has access to export contracts, including price information, so it should be an easy matter to track any violations.

However, they add that it would be difficult for companies to enforce the new price regulation for the resale of Russian oil.

Willing Buyers

Long before the import ban and price cap for Russian crude oil took effect, European buyers started to turn their back on Russian oil, forcing producers there to offer big price discounts to willing buyers such as India, China and Turkey.

Meanwhile, most of the countries that continue to import Russian oil since Moscow's invasion of Ukraine do so without using western tankers and insurance.

The Russian price regulation could perhaps provide some support to Russian producers in negotiations with buyers. But recent discounts for Russia's Urals crude have remained at a hefty $30-$40/bbl versus the North Sea Brent benchmark.

There had previously been talk about a much tougher Russian response to the price cap, including the possibility of a price floor.

But Moscow appears to have backed away from such a move, opting instead to stick to market principles and allow its oil to flow freely to those that still want it.

Separately, by April of this year the country's energy ministry will start keeping track of crude export prices on the basis of actual sales data provided by companies.

Oil Supply, Sanctions, Ukraine Crisis
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