Russia poised to largely skirt new G7 oil price cap

Industry participants and a U.S. official told Reuters that Russia has access to enough tankers to ship the majority of its oil outside the scope of a new G7 price cap, highlighting the limitations of the most ambitious plan yet to reduce Moscow's wartime revenue.

The major players in the global oil industry were alarmed by the Group of Seven countries' decision to cap Russian oil sales at a forced low price by December 5 and expressed concern that the move could shut down trade globally.

The United States and those insurance, trading, and shipping companies have been in talks for months to allay concerns about their exposure to sanctions, but everyone now realizes that Russia can largely get around the plan with its own ships and services.

The assessments of the Russian oil market's resilience and the specifics of the conversations between Washington and the international oil and services industries have not previously been made public.

According to a U.S. Treasury official, estimates that 80–90% of Russian oil will continue to flow outside of the cap mechanism are not outlandish.

Accordingly, only 1 to 2 million barrels per day (bpd) of Russian crude and refined product exports could be stopped if the nation rejects the cap, according to the official, who wished to remain anonymous due to the delicate nature of the situation.

In September, Russia exported more than 7 million bpd.

That might cause Russia technical and financial problems, but it would also deprive the world of 1% to 2% of its total supply at a time when inflation is on the rise and a recession is approaching.

The official continued, "The United States is aware that some ships are changing their countries of origin and that trading entities are being relocated outside the G7 in an effort to evade the plan.

According to the official, Russia would incur costs from having to make longer voyages and being restricted to inferior insurance and financing, which gives the United States hope that Russia will eventually be forced to sell within the price cap.

SHADOW FLEET

Veterans of the business and political world have seen the limitations of a strategy that initially seemed to have the entire Russian oil trade in its sights but whose reach may now be significantly narrowed.

According to Andrea Olivi, global head of wet freight at commodities trading behemoth Trafigura, there is theoretically a sizable enough shadow fleet to maintain Russian crude flows after December 5.

He continued, referring to protection and indemnity insurance, "A lot of these shadow vessels will be able to self-insure or they will be able to be insured by Russian P&I."

Bank According to JP Morgan, the price cap's effects will be minimal because Russia will be using Chinese, Indian, and its own ships, many of which are relatively old by shipping standards and almost entirely evading the ban.

According to the bank, this could result in a mere 600,000 bpd decrease in Russian exports in December compared to September.

According to Norbert Rucker, head of economics at Swiss asset manager Julius Baer, not only are ships moving, but also the services required to keep them and their oil cargoes flowing.

"Russian oil is no longer traded by oil traders in Switzerland, Geneva, or London. More of them are coming from the Middle East "told Reuters Rucker.

If you take a look at the Asian buyers of oil, ships, and insurance, you'll notice that they seem to be coming from Asia more and more.

SHOT IN THE FOOT?

The United States sold the G7 price cap agreement to industry participants as a safety valve to the total EU bans on Russian shipments ratified in June.

Services P&I 95% of the world's shipborne oil trade is protected by EU law, so the EU's action may have stopped the majority of Russia's exports.

That might have backfired on the countries that imposed sanctions, driving up energy prices in the midst of a severe cost-of-living crisis as a potential global recession looms.

Even with the G7 price cap workaround, figures from the insurance and shipping industries still saw themselves as vulnerable to sanctions that could disrupt trade. The price cap was approved by the EU this month, but more information on its implementation is still awaited.

According to the U.S. official, the policy has been specifically designed to make it simple for businesses to confirm or attest that prices were sold below the cap.

According to the official, the cap won't penalize the industry and will let businesses keep their attestations without being required to turn them in to a centralized registry.

This would be permissive enough for insurers to request written guarantees from buyers of Russian oil that sales would take place at or below the price cap for the duration of their policy period.

This attestation policy, in the opinion of one industry insider with knowledge of the situation, is "positive" and signals to Washington that insurers are unable to enforce the rule on their own.

Another person stated that, with six weeks until the sanctions go into effect, the insurance industry is still seeking clarification on the attestations' mechanics and is concerned that EU regulations have not yet addressed the procedure or specified their responsibilities.

The nations sanctioning Russia overestimated their dominance over the world oil market, according to Daniel Ahn, a former chief economist at the U.S. State Department, and they should change and clarify their policy to reduce self-harm.

Ahn, a global fellow at the Woodrow Wilson International Center for Scholars, claimed that it would only reroute oil and make life difficult for everyone else, which is already the case.

"It won't have as much of an impact as a total seaborne import ban. They accidentally shot themselves in the foot, but they're now making an effort to patch it up a little."