European oil sanctions are set to kick in on December 5th. The idea is to reduce Russia’s oil revenues in light of its war in Ukraine.
Andrei Rudakov Bloomberg | Getty Images
Analysts have warned that the upcoming sanctions on Russian oil will be “really devastating” to energy markets if European countries fail to set a price ceiling.
Twenty-seven European Union countries agreed in June to ban the purchase of crude oil from December 3. 5. In practice, the European Union—along with the United States, Japan, Canada, and the United Kingdom—wish to cut Russia’s oil revenues dramatically in an effort to drain the Kremlin’s war chest after the invasion of Ukraine.
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However, fears that a complete embargo could lead to a rise in crude oil prices prompted the Group of Seven major industrialized nations to consider setting a cap on the amount they would pay for Russian oil.
An outright ban on Russian imports could be “really devastating” to markets, said Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group.
Glostein told CNBC on Wednesday that the prospect of higher oil prices is “why there is pressure from the United States” to agree on a cap.
The price fixing could lead the G-7 countries to buy Russian oil at a lower price, in an effort to reduce Russia’s oil income without raising crude oil prices around the world.
However, the European Union countries have been in a dispute for several days over the appropriate level of the price cap.
appropriate oil cap
A proposal discussed earlier this week suggested a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to agree to it, arguing that it was too high to affect Russia’s revenues. These countries have been among the most vocal in pressing for action against the Kremlin over its aggressions in Ukraine.
Speaking to CNBC’s Juliana Taitelbaum on Wednesday, the Dutch energy minister said capping Russian oil prices is a “very important next step.”
“If you want effective sanctions that really harm the Russian regime, we need the oil cap mechanism. So we hope we can agree on it as soon as possible,” said Rob Gettin.
On Wednesday, Russian oil was traded at about $66 a barrel. Kremlin officials have repeatedly said that setting a price cap is anti-competitive and they will not sell their oil to countries that have implemented the cap.
They hope that other major buyers – such as India and China – will not agree to the cap, and therefore will continue to buy Russian oil.
China and India
The G7 nations agreed to curb Russian oil back in September, and have been working on the details since then. At the time, the EU’s energy chief, Kadri Simsun, told CNBC that she was hoping China and India will support the price ceiling very.
The two countries stepped up purchases of Russian oil after Moscow’s invasion of Ukraine, benefiting from lower prices. Their participation is seen as essential if the restrictions on Russian oil are to work.
“China and India are crucial because they buy the bulk of Russian oil,” Jacob Kierkegaard, a senior fellow at the Peterson Institute for International Economics, told CNBC.
“But they will not abide, for political reasons, because the cap is a policy sponsored by the United States and [for] Commercial reasons, because they already get a lot of cheap oil from Russia, so why risk it? It was always naive to think that they would join voluntarily because Ukraine is not important to them.”
India’s Petroleum Minister Shri Hardeep S Puri told CNBC in September that he has a “moral duty” to consumers in his country. “We will buy oil from Russia and we will buy from anywhere,” he added.
As such, there is growing suspicions About the real impact of the restrictions on Russia.
“Energy sanctions against Russia have come too late and too timid,” Guntram Wolf, director of the German Council on Foreign Relations, said via email.
“This is just a continuation of an unfortunate series of timid decisions. The longer sanctions wait, the easier it will be for Russia to get around them.”
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