The cap on Russian oil is unlikely to change soon — despite opposing views on whether it’s working

G-7 nations have so far decided not to revise their cap on Russian oil.
Anton Petrus | Moment | Getty Images

The Group of Seven advanced economies is not expected to update its price cap on Russian oil in the coming weeks amid contrasting views on whether the policy is truly denting the Kremlin’s revenues.

The G-7, alongside the European Union and Australia, decided late last year to impose a cap of $60 a barrel on Russian oil in an effort to ratchet up the pressure on Moscow. As part of the agreement, they said they would review this cap in mid-March.

However, despite calls to do so from several countries in Europe, the threshold was not revised last month even as oil prices fell from the levels seen in the two months prior to mid-March. If a revision had taken place, the $60 barrel level would likely have been reduced.

“The fact that the cap is difficult to enforce (and) monitor is, in my view, also the main reason why policymakers will not be so keen to make adjustments — unless prices move a lot,” Konstantinos Venetis, senior economist at TS Lombard, told CNBC via email.

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At a summit of European leaders in late March, Estonian Prime Minister Kaja Kallas said the oil cap has been working and “we should continue with that.” She called for policymakers to lower the level of the price cap to continue to pressure the Kremlin’s finances.

However, a spokesperson for the European Council, an EU institution that brings together the 27 nations, told CNBC earlier this month: “It is stated that the functioning of the price cap mechanism will be reviewed by mid-March 2023 and every two months thereafter. Now being 5 April, this brings me to believe that the next review would happen in May.”

There are two main reasons for this. Firstly, the G-7 seems to believe the current cap is effective in reducing oil revenues for Russia. Secondly, oil producer group OPEC+ announced on April 2 surprise cuts to production, which pushed up prices and limited the argument for a downward revision to the $60 threshold.

On top of the cap on Russian oil, the EU also banned imports of refined petroleum from Russia as part of several sanctions against Moscow in response to the Kremlin’s full-scale invasion of Ukraine.

“The EU’s oil ban accompanied by the G-7 oil price cap appear to have contributed to a decline in Urals crude prices,” a spokesperson for the European Commission, the executive arm of the EU, told CNBC.

“The price of Urals crude declined from the trade range of $65-70 barrel at the end of November 2022 to well below the $60 cap in January and February 2023.”

For the cap to be revised lower next month, TS Lombard’s Venetis said “there would have to be a significant and sustained drop in global oil prices that makes the cap level look irrelevant.”

Is the price cap working?

U.S. Treasury Secretary Janet Yellen said in late February, at a meeting of the G-20, that the cap on Russian oil had “had a significant negative effect on Russia so far.”

But Jacob Kirkegaard, senior fellow at the German Marshall Fund, told CNBC that there was “widespread disagreement” about whether the cap is working or not.

While it does seem to be hurting Russia’s oil revenues, it is also diminishing the power that Western nations had in the insurance space, he added. This is because, in the wake of sanctions, Russia managed to circumvent some of the restrictions imposed by the G-7 and others by amassing a fleet of older tankers.

Ultimately, Kirkegaard said there was no explicit way to determine whether the oil cap is effective or not.

India, China snap up Russian oil

The International Energy Agency said in a report last month that the measure was having an impact on Russia’s coffers. Oil export revenues dropped to $11.6 billion in February, representing a fall of almost $3 billion from the previous month, as the EU, North America and the OECD Asia Oceania nations refused to buy Russian oil. However, other nations have increased purchases.

“Willing buyers in Asia, namely India and, to a lesser extent, China, have snapped up discounted crude oil cargoes, but increasing volumes on the water suggest the share of Russian oil in their import mix may be getting too big for comfort,” the IEA said in the same report.

“Russia accounted for around 40% and 20% of Indian and Chinese crude imports, respectively, in February. The two countries took in more than 70% of Russia’s crude exports last month,” the agency added.

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