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Russian Oil Price Cap Reduction: US and G7 Grapple With Tough Decision

Russian oil price cap reduction? - Big question remains. (Photo: The New York Times)

Western sanctions advocates push for Russian oil price cap reduction amid ruble’s decline. 

 Russian oil price cap reduction? – Big question remains. (Photo: Reuters)

Ruble’s Plunge Fuels Urgency for G7: Pressure Mounts to Cut Russian Oil Price Cap Amid Sanctions

In an article published by Radio Free Europe, the impact of Western sanctions on Russia following the Ukraine invasion is underscored by the ruble’s decline. Advocates within the G7 propose a swift reduction of the Russian oil price cap to tighten Kremlin revenue and guide Putin toward economic stability. Amid the ongoing conflict, Russia’s central bank raised interest rates by 3.5% to address the 30% drop in the ruble.
Experts, Robin Brooks and Aleksandra Prokopenko concur, advocating measures like adjusting the Russian oil price cap to weaken Putin’s economy. However, experts urge caution against hastily reducing the cap, as it could lead to oil price hikes with minimal impact on Russian revenue. G7 leaders remain wary of inflation’s potential effect on Biden’s reelection.
The effectiveness of the Russian oil price cap is debated, influenced by factors like embargoes and OPEC+ cuts. The price-cap policy restricts Western involvement if Russian crude exceeds $60 per barrel. Russia is adapting through parallel infrastructure and evasion. Historically, energy sanctions, including the Russian oil price cap, lose impact over time due to inventive evasion. To counter evasion, suggestions include creating a “whitelist” for authorized traders, banning tanker sales, and closely monitoring Saudi Arabia’s actions and the response of Asian buyers to potential cap changes.

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Enforcement Challenges Surrounding Russian Oil Price Cap: Lack of Centralized Mechanism Raises Concerns

According to Reuter published article, the lack of a centralized enforcement mechanism leaves countries responsible for implementing the Russian oil price cap to decide on punishments for exceeding it. The U.S. Treasury issued a warning to service companies about potential evasion or fraud by Russian oil buyers, including deceptive shipping practices and refusal to share price information.
Falsifying documentation or concealing the true origin or price of Russian oil would lead to consequences under the implementing jurisdictions’ domestic laws. The coalition agreed that the cap applies up to the first landed sale of sea-borne oil or when offloading from a ship to a land tank.
Concerns exist about potential tanker owner sanctions due to lack of due diligence mechanisms, which could also lead traders to avoid deals, potentially raising oil prices.

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