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The contradictions of the Russian oil price cap

A significant number of ships are blatantly breaching the price cap against Russia, often sailing to countries that do not recognise it. To them, the G7 warning shots are the kind in which the shooters fire blanks

More Russian oil than ever before is being carried on sanctions-busting tankers exploiting regulatory loopholes. The entire scheme of sanctions stands or falls by an attestation mechanism that patently isn’t working

A POLICY designed to simultaneously restrict Russian oil revenues and maintain the flow of Russian oil was always going to be beset by an almighty inherent contradiction. Right now, that contradiction appears to be unravelling fast.

To summarise things as concisely as possible, the price cap imposed by the G7 and the EU in the wake of Vladimir Putin’s incursion into Ukraine in the past year precludes the provision of services such as transportation and insurance to cargoes of Russian crude priced above $60 per barrel.

The restrictions initially just about flew while grades such as Urals and Sakhalin Blend were trading at a significant discount to Brent. But with world prices nudging $90 per barrel, the chances of them holding are on a par with Alexei Navalny’s prospects of release from prison any time soon.

More Russian oil than ever before is being carried on sanctions-busting tankers exploiting regulatory loopholes, leaving the cap’s supposed enforcers struggling to make their flawed mechanism stick.

On Thursday this week, the US Treasury Department issued new guidance to shipping companies. Action against two entities said to have used unnamed service providers from price cap countries while carrying Russian crude priced above the permissible limit.

But as attempts to read the Riot Act go, this was akin to letting the sans-culottes know that Versailles is fine with revolution so long as the paperwork is in order.

Everything hinges on the process of attestation, which boils down to drawing up a piece of paper on which cargo interests swear on their mother’s lives that their cargo is cap compliant.

Underwriters are generally a law-abiding bunch and cognisant of reputational risk; certain tanker owners don’t need excessive persuading to accept the bona fides of contractual counterparties.

It is becoming embarrassingly obvious that attestations are worthless, which brings us back to the other aspect of the contradiction, namely that the world market simply cannot do without Russian oil.

In effect, blatant circumvention is ignored, save for token measures against two ships out of the more than 500 that make up the dark fleet. The whole system becomes at best irrelevant, if not a laughing stock.

Yesterday’s announcement can be seen a warning shot. But it was the kind of warning shot in which the shooters fire blanks.

For those companies already doing due diligence, the G7 says thank you and humbly asks you to continue. For those blatantly breaching the price cap, often sailing to countries that do not recognise it, nothing changes.

For companies whose procedures are sufficiently lax to have missed the multiple ship-to-ship transfers prior to taking on a cargo in breach of the cap, the stakes are higher. But if that description applies to you, take heart. The chances of regulators catching up with you are minimal.

If action against two vessels is the start of a wider trend of enforcement and emboldens the EU and UK to follow the US lead, things could start to change.

But there is no indication from US government and insurance insiders that this is the start of serious scrutiny. The lack of any penalty for the service providers is also noteworthy.

The line from Washington, Brussels and the other capitals involved until now has been that the price cap has been a success. The already frequent and now growing number of breaches undermine that narrative.

Russia’s economic wherewithal to wage its brutal onslaught is little abated. The International Monetary Fund is predicting that the country’s GDP will increase by 1.1% this year.

That is slower than previously predicted. But from Britain — where the IMF GDP growth forecast for 2023 is 0.4% — it does not look like the economic abyss.

There is no quibble with the price cap’s moral intent. Russia’s murderous assault on a sovereign state, characterised by multiple atrocities civilians, deserves appropriate retribution.

The question is the efficacy of the scheme. Unless fully functional, sanctions remain purely at the level of the symbolic. To date, this set of sanctions has not achieved the damage its advocates had been expecting. Indeed, it is difficult to see how they can be made to work.

As in formal logic, a contradiction is invariably a signal of defeat.


*Lloyd’s List defines a tanker as part of the dark fleet if it is aged 15 years or over, anonymously owned and/or has a corporate structure designed to obfuscate beneficial ownership discovery, solely deployed in sanctioned oil trades, and engaged in one or more of the deceptive shipping practices outlined by US State Department guidance issued in May 2020. The figures exclude tankers tracked to government-controlled shipping entities such as Russia’s Sovcomflot, or Iran’s National Iranian Tanker Co, and those already sanctioned. Download our explainer on the different risk profiles of the dark fleet here

Lloyd’s List Intelligence Seasearcher subscribers can add the Lloyd’s List dark fleet to their watchlists here


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