Takeaways
- The G7 has announced consensus on a price cap for Russian origin oil and petroleum products to be implemented across a wide coalition of countries.
- The cap would be implemented by prohibiting services related to the maritime transportation of Russian-origin crude oil and petroleum products unless the products are purchased below the capped price, and thus impacts a broad array of industries.
- The capped prices have yet to be determined and are proposed to be aligned with the implementation of restrictions in the EU’s sixth sanctions package, which will reportedly go into effect by December 5, 2022.
On September 2, 2022, the Group of 7 (G7) nations formally announced its consensus to implement a global price cap on Russian oil and petroleum products in response to the ongoing conflict in Ukraine. The Joint Statement does not provide a specific timeline for implementation of the price cap, but notes that it seeks to align implementation with related measures within the EU’s sixth sanctions package, which will come into effect on December 5, 2022. (See here for prior analysis of this package.) The initial capped price has not been announced, and will be decided by the full coalition in advance of implementation.
The measures proposed to implement the price cap are described as a “comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally.” Thus, the cap is expected to impact a wide range of industries, including energy, insurance, shipping and ports, and banking.
Background on the Price Cap
The price cap has been under negotiation for several months and is designed to address unintended side effects of the G7 and broader coordinated sanctions, export controls and import bans implemented in response to the ongoing situation in Ukraine. Specifically, it is meant to address disruption to energy markets, higher oil and gas prices, and Russia’s ability to stockpile cash reserves from the sale of its oil and gas supplies.
Import bans on Russian origin oil and gas have proven controversial, particularly in Europe. The EU’s sixth sanctions package, published on June 3, 2022, included a ban on seaborne Russian oil imports, but established a transition period of six months for the phase out crude oil and eight months for the phase out other refined petroleum products. Oil supplied through a pipeline from Russia into a member state continues to be permitted. Simultaneously, the sanctions package prohibited the insurance and reinsurance of maritime transport of crude oil and certain petroleum products originating in or exported from Russia.
Partly in response to such measures, the cost of oil and gas has risen sharply in recent months, leading to concerns over global energy prices and their impacts.
Analysis of the G7 Joint Statement
The price cap seeks to prohibit Russia from profiting off historically high oil and gas prices while easing the global concerns of an energy crisis. It does this by creating a wide coalition of countries that agree to import Russian oil and petroleum products exclusively at or below a certain price cap. The cap would only allow services related to the maritime transportation of Russian-origin crude oil and petroleum products if the products are purchased below the capped price. The statement indicates that practical implementation will be “based on a recordkeeping and attestation model covering all relevant types of contracts.”
The specific price levels for the initial cap were not announced and will be “based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction.” The G7 envisions coordinated policies implemented by the several jurisdictions that, once established, will be publicly communicated in a “clear and transparent” manner and will be subject to change based on its effectiveness and impact.
Following implementation, the Joint Statement reflects the need to contemplate enforcement against efforts to circumvent the price cap regime. U.S., EU and UK sanctions measures merit watching and may include the use of secondary sanctions.
Next Steps
In order for the price cap to be implemented, the coalition of countries must agree on a set price. Further, the European Union must amend its sixth sanctions package, which requires the agreement of all EU member states.
The U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) has stated it anticipates publishing guidance on the implementation of the price cap in September, which will include a high level overview of the pricing scheme and how U.S. persons should comply.
The efficacy of such a cap bears watching and will likely be impacted by how many countries are willing to join the coalition beyond the G7, as well as by the effectiveness of enforcement mechanisms. Russia has stated that it will not sell oil and gas products to countries participating in the pricing scheme.