U.S. Scrutinizes Foreign Banks if They Abided by Russian Oil Cap

Russian oil cap price ceiling is heavily monitored by the U.S. as they scrutinize foreign banks

Pictured are several oil wells taken from The Associated Press

A US government agency is investigating whether international banks with operations in the country complied with the G7 price ceiling for Russian oil of $60 per barrel.

Mint News posted that the Office of Foreign Assets Control (OFAC) of the US Treasury Department had requested information about recent purchases of Russian oil by Indian firms. Indian firms that are presently conducting business with the U.S. are the State Bank of India (SBI), Bank of Baroda, and Bank of India.

The Group of Seven, sometimes known as the G7, is an association of political and economic heavyweights from Canada, France, Germany, Italy, Japan, the UK, and the US as explained by CNN.

The Russian oil cap on seaborne crude oil was instituted by the G7 in December to restrict Russia’s export revenue, which would therefore have an influence on its defense spending. The action forbids both the import and purchase of Russian crude at prices higher than the price ceiling. It is part of the West’s goal to isolate Russia and maintain a constant supply of oil to control rising global oil prices brought on by Russia’s invasion of Ukraine in February 2022.

According to a Mint News article, SBI is taking precautions to prevent accidentally processing payments for Indian oil refiners that may have bought Russian oil beyond the $60 per barrel price of the Russian oil cap established by a US-led coalition. This is done to avoid breaking US sanctions.

The change occurs as crude oil prices have increased globally over the past three months after declining from multi-year highs in late 2017. Brent for December is presently trading at $93.49 a barrel on the Intercontinental Exchange, up 1.20% from the previous close. It has risen by 17% since July’s levels.

With a request for anonymity, a person reported to Mint News and said, “The oil marketing companies (OMCs) have shared the information with SBI. OFAC had asked for this information from banks having operations in the US.”

According to Prashant Vashisht, vice president of corporate ratings at Icra, “Indian banks will not do transactions above the price cap because if they were to do so, their overall businesses may be impacted.”

According to figures from the commerce ministry, India purchased 7.63 million tons of Russian crude oil worth $4.15 billion in August, at a cost of almost $74 per barrel. The price includes freight, insurance, and customs duty, which are not covered under Russian oil capping. Over the past six months, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, notably Russia, have repeatedly declared production cuts, driving up oil prices. Prices have also increased as a result of the current Israel-Hamas conflict and the potential for a wider confrontation.

Inquiries were made to the US Treasury Department, SBI, Bank of Baroda, Bank of India, Indian Oil Ltd., and Hindustan Petroleum Corp., as well as the ministries of petroleum and natural gas and external affairs. Bharat Petroleum Corp. and Ltd. Sanctions are in force for these organizations for ignoring the Russian oil cap and carrying Russian crude oil beyond the price ceiling agreed upon by the coalition service providers. They were announced by OFAC on October 12th, listing two of their boats as “blocked property”.

Meanwhile, BNN Breaking calls the implementation of these policies “weak” and having “multiple loopholes.”

BNN states that the Russian oil cap hasn’t been strictly enforced, and there have been cases of dealers and ship owners dodging the rule, mainly in the US and the UK. Punishment on ship owners for exceeding the cap, but proponents call for harsher actions to drain Russia’s oil riches and undermine its economy. Russia’s oil revenues are to be reduced by the price cap strategy without creating a scarcity on the market. It relies on the fact that a large number of ship owners, dealers, and insurers are based in Europe or among the Group of Seven major democracies that put the quota in place. However, the policy includes gaps that can be exploited.

However, some who support sanctions claim that further measures must be taken to genuinely punish Russia.

The mainstay of Russia’s economy is oil revenue, which enables President Vladimir Putin to invest heavily in the military without risking a currency collapse or rising inflation for the general populace. According to a Stanford University international working group on sanctions, oil restrictions have cost Russia $100 billion since the invasion started until the end of August. However, experts claim that a large portion of that is due to Europe’s embargo on Russian oil, which cost Moscow its largest client.

As a result, last week, the U.S. Treasury Department imposed sanctions on two shipowners, while the U.K. Authorities are looking into the infractions.

In order to improve compliance with price caps on crude oil and petroleum products with origins in the Russian Federation that were implemented by the G7, the European Union, and Australia, OFAC also produced an advisory on behalf of the Price Cap Coalition that outlined “specific best practices” in the maritime oil industry.

The russian oil price cap program has significant flaws, but it still has potential, according to Hilgenstock. “It can be very effective with some improvements.”