When Western leaders announced on Dec. 2 that they had agreed on a $60 price cap on Russian oil exports, they trumpeted it as a bold multinational achievement in energy diplomacy. But anyone who thinks this will be a significant hit to Russian oil revenues—and the Kremlin’s ability to finance its genocidal war to subjugate Ukraine—is likely to be disappointed. The price cap agreed on by the European Union and quickly endorsed by the United States, G-7, and Australia is not bold enough to significantly affect Russian revenues or impede the conduct of the war.
After all, Russian oil has sold at prices in the $60 range for much of the last several years. Moreover, since Russia’s February invasion of Ukraine, global energy traders have already limited their offtake of Russian crude to some extent. When countries such as India and China snapped up the surplus, they negotiated steep discounts. But the discount for Urals crude, the main Russian benchmark—nearly $40 per barrel compared with Brent oil in the early months of the war—has slowly dropped into the low $20 per barrel range, allowing Moscow to continue cashing in.
Russian President Vladimir Putin’s recent escalation of the war with missile strikes against Ukrainian energy infrastructure, water supplies, and other civilian targets should have been met with an equally aggressive price cap. The $60 cap certainly won’t keep Putin up at night. The markets don’t seem to be worried, either: On Dec. 8, three days after the cap went into effect, the price of Brent oil actually fell to $76.15, the lowest level of the year.
The price is wrong if the objective of the cap is cutting off the funds Russia is using to run its war machine. Simply locking in the current price for Russian oil will not put much pressure on the Kremlin. Even if it is successfully implemented, it may not materially affect Russia’s ability to wage war.
The price cap is the energy sanctions equivalent of Western countries trying to have their cake and eat it too. While they wanted to sanction Russia, they were also worried that any interruption of Russian supply to the global market could drive up energy prices and inflation for Western consumers and companies, which in turn could undercut popular support for aiding Ukraine. Although this is a valid concern, the problem is that these two goals are mutually exclusive: Sharply reducing Russia’s revenues cannot be had without less Russian oil going to market.
The good news is that the EU, which initiated the policy and negotiated the price, will review the cap as soon as mid-January. Several Eastern European and Baltic governments have already called for a lower number. Warsaw has argued for a price cap as low as $30 per barrel, barely above production costs, currently estimated at around $20 per barrel. “It’s no secret we wanted the price to be lower,” Estonian Prime Minister Kaja Kallas lamented on Twitter. “Our experts estimate that a price between 30-40 dollars is what would substantially hurt Russia.” Meanwhile, EU member states with substantial shipping fleets—in particular, Greece, Cyprus, and Malta, which have collectively doubled their trade in Russian oil since the war began—reportedly argued for higher price cap levels.
The divide reflects similar splits among EU member states related to the bloc’s own embargo on Russian oil, which went into effect on Dec. 5. The embargo only affects seaborne imports, which the EU says represent roughly two-thirds of oil imports from Russia. The rest reaches the EU by pipeline. Pressure from Hungary, Slovakia, and the Czech Republic led to oil imported via Russia’s Druzhba pipeline to be exempted from the embargo. Germany and Poland can also get Russian oil via the pipeline but have vowed to stop importing that oil even without a formal embargo.
These disagreements over both the price cap level and oil embargo magnify concerns that the EU may find it difficult to maintain unity on sanctioning Russian oil. As much of the bloc goes cold turkey on Russian oil without much likely effect on the Kremlin’s finances, it’s only a matter of time for complaints from various member states and their citizens that the entire scheme is ineffective and only hurts Europe.
The price cap and maritime oil embargo, however, are only two parts of the picture. The third is a ban on European shipping and insurance companies servicing Russian oil cargoes bound for anywhere in the world unless they meet the cap level. That’s significant: According to a report by the Carnegie Endowment for International Peace, 95 percent of tankers carrying Russian oil have been covered by insurers operating under EU law, while a majority of the oil was carried by Greek shipping firms. The insurance issue is especially relevant, since few seaports will allow uninsured vessels to dock for fear of uncovered accidents. Similarly, Turkey has stopped oil tankers transiting the Bosphorus from the Black Sea since the ban went into effect on Dec. 5 in order to ensure insurance compliance, even when the oil appears to originate from non-Russian sources. Turkey may not be especially eager about the EU’s embargo, but it is very concerned about maritime accidents in the narrow straits it governs.
Closing loopholes is paramount. For example, guidance issued by the U.S. Treasury Department on Nov. 22 shields U.S. maritime service providers from secondary sanctions should one of their suppliers provide false claims of compliance with the price cap. This is a potential major loophole for the Kremlin and should be dropped. Washington should deter service providers from even considering interactions with companies of less-than-sterling reputations.
Disagreements among EU members over the price cap and oil embargo magnify concerns that the bloc may find it difficult to maintain unity on sanctions.
The unprecedented scope of the Russian oil price cap will require extensive and vigilant monitoring of compliance. Participating governments should be joined by civil society actors—including NGOs, investigative reporters, shipping industry watchers, academia, and think tanks—in reporting illicit activity that might be circumventing the price cap. Russia unfortunately has a long and sordid track record of sanctions-busting, including via the use of strategic corruption, elite capture, and kleptocratic schemes. Open-source intelligence tools, including oil-trading platform reports or vessel-tracking tools such as MarineTraffic, can be useful here.
Shippers engaging in sanctioned trades will inevitably try to obscure their activities, for example by transferring the oil from one ship to another at sea to hide the cargo’s provenance or by switching off their transponders so they cannot be tracked by platforms such as MarineTraffic. Tracking these so-called dark ships or ghost fleets is where private research services, such as TankerTrackers.com, could help. The private satellite sector, too, could make a vital contribution by rapidly releasing optical and radio-frequency data that can provide ship locations even when transponders have been deactivated.
Many price cap skeptics have argued that Moscow will simply not sell to entities adhering to the price cap. For his part, Putin warned of “serious consequences for the global energy market” and threatened to slash Russian oil production as a form of revenge. But if the price cap is implemented and Russia refuses to sell, that would be all for the better. It would reduce the Kremlin’s revenues even beyond what the cap intends.
If the price cap starts to show an effect on Russia, it could create political space for further actions to throttle Russian energy revenues. The price cap should not be a one-off energy policy for as long as Russia continues to wage its war of choice. It should be seen instead as an interim measure until the next set of energy restrictions is imposed, including a lower price cap level. The ultimate objective should be an even broader oil embargo.
In the immediate term, making sure that the price cap is reduced as soon as it is next reviewed in January is vital to help Ukraine now. The West must freeze Putin’s financial lifeline faster than he can freeze Ukraine.
