The G7's intended implementation of a Russian oil price cap will not be global, but benefit many countries outside the group with or without joining the scheme by enabling them to buy Russian barrels cheaper, while trimming Moscow's oil revenue, top officials from the US Treasury Department said Sept. 9.
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Register NowThe Treasury Department's Assistant Secretary for Economic Policy Ben Harris said during a call with reporters that not all crude importing nations would be forced to formally join the price cap circle, but those countries choosing not to join would still be able to use the G7 price cap as a highly effective bargaining tool to negotiate supply and purchase deals with Russia at a sharp discount.
Since the US, the EU and others are already winding down imports of Russian oil, they will not effectively benefit from the price cap. Instead, low-income countries would be able to purchase Russian oil at a very cheap price, according to Harris.
"Regardless of which options the countries take, the price cap helps us achieve our objectives by putting a downward pressure on the cost of Russian oil exports," Harris said.
"Ultimately, we believe the price cap would be successful in our goal in substantially hurting Russia's main source of revenue," he added.
Harris also stressed that the oil price cap "should not be regarded as a global cap on Russian oil."
"It's more accurate to describe this as a condition under which G7 services to be used to trade Russian oil," Harris said.
He added that the oil price cap would be effective because of "the extent of global reach of G7 services, so anywhere where the G7 services present and trade Russian oil, the price cap will apply."
During the call, the Treasury's Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg spoke about the reach of the oil price cap to be significant because G7 countries provide an overwhelming majority of payments and financing services for the global oil trade.
G7 countries agreed Sept. 2 to "urgently" finalize and implement a price cap on imports of Russian oil as part of efforts to hit Moscow's vital oil revenues and ability to fund the war against Ukraine.
Finance ministers from Canada, France, Germany, Italy, Japan, the UK and US said they "commit to urgently work on the finalization and implementation" of the prohibition of maritime transportation of Russian-origin crude oil and petroleum products globally unless the oil is purchased at or below a price cap.
No detail of the price cap level or timing was given by the G7 ministers, who said they aimed to align the implementation of the cap with the timeline of measures in the EU's sixth sanctions package, which bans most Russian oil imports by early 2023.
EU sanctions on Russian-related services such as financing and tanker insurance also go into effect Dec. 5.
Deciding scheme
"Coalition countries will come together in coming weeks and arrive a point of price" for the price cap ahead of the enforcement date in December, giving sufficient time for purchasers of Russian oil to be able to make plans and place compliance frameworks, Rosenberg said.
"The price is greater than marginal costs of production for Russia so there is a clear economic incentives for Russia to continue to produce oil and sell it. We will be making a process," Rosenberg said.
Once decided, the G7 coalition will provide "information ongoing basis including technical guidance to market participants," she added.
The oil price cap policy will be applied to cargoes of Russian oil and refined products no matter how many times the cargoes having moved from ship to ship, or transshipped from an initial purchaser to another as long as the cargoes are on the water, Rosenberg said.
It is still possible for countries to work entirely outside of the oil price cap, using services outside the G7 price cap coalition but it might be "economically difficult" to do so, she added.
Asia's Russian crude trades
Feedstock managers and sweet crude traders at several Southeast Asian refiners cheered Harris' idea of taking advantage of the G7 price cap to negotiate a steep bargain on Russian oil.
"The flexibility is there and it's a relief that the US does not wish to force all Asian countries to formally join the price cap scheme, yet the move allows everyone to gain that bargaining-power and the trading edge when dealing with Russian oil," said a crude and condensate trader at a Southeast Asian refiner, who declined to be identified due to the sensitive nature of international diplomacy and corporate trading relationship.
"My guess is that the US and G7 would come up with a price cap level that would just about cover Russia's oil production costs ... Russian crudes such as Urals and ESPO Blend are already trading at discounts of $20/b or more against benchmark prices and the price cap level could potentially set the new standard for buyers to ask for a much steeper discounts," said a feedstock trader at another Southeast Asian refiner.
Several Southeast Asian refiners, including Indonesia's Pertamina, had hinted that they were increasingly tempted to pick up a few ESPO and Sokol crude cargoes as Indian refiners actively purchase sweet and sour Russian crudes at steep discounts.
Among the most recent trade deals conducted in the Far East Russian spot market, a September-loading Sokol crude cargo is set to be shipped to India, with state-owned Bharat Petroleum Corp. Ltd., or BPCL, heard to have fixed a vessel to lift 700,000 barrels for its Mumbai refinery. Once rare, shipments of Far East Russian crude to India have become a common feature in the market, given that South Korean and Japanese refiners continue to abstain from buying Russian crude.