G7 and allies run into trouble over price cap on Russian oil

Talks to set a cap on Russia’s oil price, long in the works by the United States and pro-Ukrainian allies, suffered a setback on Wednesday when a meeting of senior European Union diplomats over the exact price and other details ended with no agreement.

The plan is nearing completion and must be in place before an EU embargo on Russian oil imports comes into effect on December 5.

EU diplomats from all 27 member states met until Wednesday evening to iron out the final details, most notably at what price the cap should be set.

They could not agree because their views on exactly where the price should be set were too far apart, and some countries called for additional policy changes. It was not immediately clear when they would meet again to begin negotiations.

At stake is a complicated, difficult effort by Ukraine’s allies to limit the Kremlin’s oil export revenues while averting fuel shortages that would push up prices and worsen a cost-of-living crisis around the world.

EU ambassadors, representing the bloc’s 27 nations, have been asked to set a price of between $65 and $70 a barrel and approve soft enforcement methods.

The benchmark Russian oil price, known as the Ural compound, was trading between $60 and $70 a barrel the year before the pandemic. It spiked as high as $100 a barrel shortly after the Russian invasion of Ukraine in February, but has settled between $65 and $75 a barrel over the past three months. It has traded at the lower end of this range this week.

A senior Treasury Department official said on Tuesday that the coalition is expected to announce the price in the coming days, and the United States indicated it is not trying to influence the European Union’s negotiations on the price. The price is likely to change over time, the official said, based on regular reviews that take into account changing market conditions.

Despite delays in setting a price, the G7 have tried to prepare energy market participants for how the price cap will work. It will put the burden of implementing and monitoring the cap on the companies that help sell the oil: global shipping and insurance companies, mostly based in Europe. Most of the tankers transporting Russian oil are Greek-owned, according to maritime data; London is home to the world’s largest marine insurance companies.

On Tuesday, the Treasury released new guidance declaring that Russian oil sold below the cap but then “substantially transformed” or refined outside of Russia would no longer be subject to the sanctions. It also provides for a “safe harbor” clause that shields insurers and other financial service providers from liability for violating sanctions based on falsified oil price information in shipping transactions.

Some EU diplomats, notably from Poland and other staunch Ukraine allies, said that the price range proposed by the G7 is too high and that the cap should be set much lower to hurt Russian revenues, several EU diplomats said directly involved or informed were said about the talks.

Greece, Cyprus and Malta, which are seriously involved in politics due to their large maritime industries, called for an even higher cap – which would have actually raised the price above current trade levels – and some even demanded compensation for potential loss of income from their maritime businesses.

France, Germany and Italy, the three EU nations who are members of the Group of 7 developed countries pushing Russia’s oil price cap, argued for the featured price range and softer enforcement mechanisms, and backed the US position that these were necessary to avert a supply crisis .

Russia has said it will not honor a formal price cap; Fixing it around the current market price could save face and keep exporting.

The European Union embargo on Russian oil, which takes effect on December 5, also includes a ban on European services shipping, financing or insuring Russian oil shipments to destinations outside the bloc, a measure that would cripple infrastructure, which transports Russia’s oil to buyers the world.

Below the price cap, these European shipping providers would instead be allowed to ship Russian crude oil off the bloc only if shipments meet the cap. In other words, they would be left to ensure that the Russian oil they were transporting or insuring was sold at or below the cap price; Otherwise, they would be held legally liable for violating sanctions.