December 2, 2022
Following agreement by the 27 Member States of the European Union (EU), the members of the G7 (the United States, Canada, France, Germany, Italy, Japan, and United Kingdom) and Australia (collectively, the “Price Cap Coalition”) are joining the EU in adopting a price cap of $60/barrel on seaborne crude oil of Russian Federation origin. The price cap is an important tool to restrict the revenue Russia receives to fund its illegal war in Ukraine, while also maintaining a reliable supply of oil onto global markets. This policy is especially critical to make oil supplies available in low- and middle-income countries hit hard by the effects of Russia’s war.
Next week, the Price Cap Coalition will ban a broad range of services—including maritime insurance and trade finance—related to the maritime transport of crude oil of Russian Federation origin (“Russian oil”) unless purchasers buy the oil at or below $60/barrel. Importers who purchase Russian oil at or below the price cap will maintain access to an array of Coalition-country services vital to the oil trade. On February 5, 2023, this ban on services will extend to the maritime transport of Russian-origin petroleum products unless the products are sold at or below a price cap to be announced before February 5, 2023.
The price cap policy is intended to maintain the supply of Russian oil to the global market while reducing the revenues the Russian Federation earns from its oil sales, particularly in light of elevated prices caused by Russia’s war of choice. To accomplish this goal, the EU and the other countries in the Price Cap Coalition designed the price cap to maintain the flow of Russian oil at a discounted price.
The price cap will be of particular benefit to emerging markets and low-income economies that are highly exposed to rising energy prices. Russia’s unconscionable war in Ukraine has disrupted energy markets and caused widespread economic hardship, from natural gas shortages in Europe to elevated oil prices around the globe. The rise in energy prices has proven especially harmful to those economies with heightened vulnerability to energy price shocks. These economies are well-positioned to benefit from the price cap’s stabilizing effect on prices for two reasons. First, countries in the Price Cap Coalition, are already committed to prohibiting or phasing out imports of Russian oil and will not directly benefit from a lower price. Accordingly, it is prospective buyers elsewhere—especially emerging markets—that stand to gain directly from low-cost Russian oil. Second, emerging market and low-income economies are generally more exposed to price shocks than advanced economies. The price cap therefore particularly benefits importers from these countries by helping stabilize global oil prices.
The price cap’s operation depends on a vital element of the global oil trade: the maritime services industry, which includes insurance, trade finance, and other key services that support the complex transport of oil around the globe. Traders, brokers, and importers rely on these services to protect and finance their trade, and vessel-owners rely on insurance to protect their ships. Moreover, almost all ports and major canals require ships to carry protection and indemnity insurance. Companies based in the G7 control around 90 percent of the market for relevant maritime insurance products and reinsurance. The price cap works by allowing access to these critical services from Coalition-country providers for Russian oil only if that oil is purchased at or below the cap.
The price cap policy establishes a “safe harbor” for G7 service providers that comply with a simple recordkeeping and attestation process, designed to allow each party in the supply chain of Russian oil shipped via maritime transport to demonstrate or confirm that the Russian oil has been purchased at or below the price cap. On November 22, 2022, the Office of Foreign Assets Control (OFAC) issued guidance on the U.S. implementation of the price cap policy for Russian crude oil. As this guidance makes clear, this “safe harbor” for service providers through the recordkeeping and attestation process is designed to shield such service providers from strict liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of Russian oil sold above the price cap owing to falsified or erroneous records provided by those who act in bad faith or make material misrepresentations. The U.S. government anticipates working with other members of the Coalition to enforce the price cap, including by sharing information.
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