The G-7 countries have to this point decided to not revise their limits on Russian oil.
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The Group of Seven Developed Economies countries aren’t expected to update the price cap for Russian oil in the coming weeks as a result of conflicting views on whether the policy is actually limiting the Kremlin’s revenue.
The G-7, along with the European Union and Australia, decided late last yr to impose a ceiling of $60 per barrel on Russian oil to extend pressure on Moscow. As a part of the deal, they said they might review this cover in mid-March.
Nevertheless, despite calls for it from several countries in Europe, the threshold was not revised last month, at the same time as oil prices fell from levels seen two months before mid-March. Had there been a revision, the $60/bbl level would likely have been lowered.
“The actual fact that the cap is difficult to implement (and) monitor is also, for my part, the fundamental reason why policy makers will not be as willing to make adjustments – unless prices move significantly,” Konstantinos Venetis, senior economist at TS Lombard. he told CNBC via email.
At a summit of European leaders in late March, Estonian Prime Minister Kaja Kallas said the oil cap was working and “we must always keep doing it”. She urged policy makers to lower the level of the price cap to proceed to place pressure on the Kremlin’s funds.
Nevertheless, a spokesperson for the European Council, the EU’s 27-country institution, told CNBC earlier this month: “It has been stated that the functioning of the price cap mechanism will be reviewed by mid-March 2023 and each two months thereafter. Now that it is April 5, I’m starting to imagine that the next review will happen in May.
There are two fundamental reasons for this. First, the G-7 seems to imagine that the current limit is effective in reducing Russia’s oil revenues. Second, the OPEC+ group of oil producers announced surprise production cuts on April 2, driving prices up and limiting the case for a downward revision to the $60 threshold.
Along with restricting Russian oil, the EU has also banned imports of refined oil from Russia under several sanctions against Moscow in response to the Kremlin’s full-scale invasion of Ukraine.
“The EU oil ban, accompanied by the G-7 price cap, appears to have contributed to the drop in Urals oil prices,” a spokesman for the European Commission, the EU’s executive body, told CNBC.
“The worth of Urals oil fell from the trading range of $65-70 per barrel in late November 2022 to well below the $60 mark in January and February 2023.”
For the cap to be revised downwards next month, TS Lombard’s Venetis said “there would should be a big and sustained drop in global oil prices that would make the cap level look insignificant.”
Does the price limit work?
US Treasury Secretary Janet Yellen told a G-20 meeting in late February that the cut in Russian oil “has had a big negative impact on Russia to this point.”
But Jacob Kirkegaard, a senior fellow at the German Marshall Fund, told CNBC that there was “widespread disagreement” over whether the limit worked or not.
He added that while this appears to be hurting Russia’s oil revenues, it also reduces the power Western countries had in the insurance space. This is because, following the sanctions, Russia has been capable of circumvent a few of the restrictions imposed by the G-7 and others by amassing a fleet of older oil tankers.
Ultimately, Kirkegaard said there was no clear strategy to determine whether an oil filler cap was effective or not.
India and China buy Russian oil
The International Energy Agency said in a report last month that the measure is affecting Russian coffers. Oil export revenues fell to $11.6 billion in February, down nearly $3 billion from the previous month as EU, North American and OECD Asia-Pacific countries refused to purchase Russian oil. Nevertheless, other nations increased their purchases.
“Eager buyers in Asia, namely India and, to a lesser extent, China, have been buying discounted crude oil loads, but rising volumes on the water suggest that the share of Russian oil of their import mix may be too large to be comfortable with.” The IEA said in the same report.
“Russia accounted for about 40% and 20% of India’s and China’s oil imports, respectively, in February. Each countries received greater than 70% of Russia’s oil exports last month.