Russian Oil Price Cap: Explained

June 24 2024

It has been over two years since the Russian-Ukrainian War started in February 2022.

The war has received a mixed response from the international community. Whilst the Western nations, led by the United States and United Kingdom, have been ratcheting up economic sanctions to put pressure on Russia to end the war, countries such as China, Iran and North Korea have supported Russia’s actions. There are then a vast number of countries, such as India, which have taken a much more nuanced stance by calling for peace but not supporting the stringent sanctions imposed by the Western nations.

Oil, perhaps the most important commodity in today’s world, has found itself in the midst of this all. This is unsurprising considering that Russia is one of the top five exporters of oil in the World and its economy is heavily dependent on revenues generated from its oil exports.

Whilst the Western countries have sought to gradually move away from its reliance on Russian oil imports, Russia has been increasing its oil exports to countries such as India and China.

In an interview to an Austrian public broadcaster, Indian Foreign Minister explained that India “is not in a position to pay high prices for oil”. These comments came against the backdrop of him explaining that the per capita income in Europe was around €60,000 as compared to $2,000 in India. Therefore, India had to consider the needs of its population, and its need for energy, against pressure on it to stop oil purchases from Russia.

Whilst the United Kingdom has completely banned the entry of Russian crude and oil products into the United Kingdom, insofar as purchase of Russian oil by third countries, such as India, is concerned the United Kingdom has only banned the provision of UK maritime transportation, and associated services, if the price at which the Russian oil is traded, by third countries, is above a certain price (commonly referred to as the “Oil Price Cap”). A similar position has been adopted by UK’s coalition partners including the United States and European Union. Hence, finding a balance between the need to curtail the revenues generated by Russia, through the sale of its Oil, but at the same time to ensure that the global supply of Oil is met at affordable prices.

Oil Price Cap

The ban prevents persons in the UK and any UK Persons (meaning UK Nationals and UK incorporated or constituted bodies) anywhere in the World from (a) supplying or delivering Russian crude oil or oil products by ship or (b) providing financial services, funds and brokering services to anyone who is supplying or delivering Russian crude oil or oil products by ship, from a place in Russia to a third country, or from one third country to another third country, if the Russian crude oil or oil products are traded at a price above those set by the United Kingdom.

The price, below or at which provision of maritime transportation and associated services is allowed, is set by the United Kingdom by issuing a General Licence and following a consultation with its coalition partners including the United States. It is subject to change and therefore those who want to avail UK maritime transportation and associated services need to constantly keep the price cap set by the UK under review.

The current price levels caps (from February 2023 onwards) are as follows:

  • Crude oil: $60/barrel
  • Discount to crude - $45/barrel
  • Premium to crude - $100/barrel

Broadly speaking, ‘Premium to Crude’ includes gasoline, motor spirits, aviation spirits, motor fuel blend stocks, gasoil and diesel fuel, kerosene and kerosene-type jet fuel, and vacuum gas oil. All other products are classed as ‘Discount to Crude’.

The price cap is applicable from receipt of the Russian crude oil or oil products (as cargo) on a ship, up to the point where it is delivered and passes through customs controls in a third country or is substantially processed off the water. If the Russian crude oil or oil products pass customs in a third country and subsequently re-enter trade by maritime transportation without being substantially processed, the price cap once again applies. In other words, if the Russian crude oil or oil products are substantially processed in a jurisdiction other than Russia, they are no longer considered to be of Russian origin, meaning the oil price cap no longer applies. It is for this reason that countries, such as India, have been able to buy Russian crude, process/refine it into oil products and then ship it to markets which have otherwise completely banned the entry of Russian oil products.

The following are exempt from the maritime transportation and associated services ban: (i) trading in derivates and futures in relation to Russian crude oil or oil products, and (ii) provision of bunkering services to a ship carrying Russian crude oil or oil products.

Conclusion

According to a Press Release published by Office of Financial Sanctions Implementation (OFSI) on 9 August 2023, the Russian Ministry of Finance posted a 45% plunge in government energy revenues between January and March 2023 compared to a year ago.

According to a Financial Times Article in September 2023, almost three-quarters of all seaborne Russian crude was reported to have travelled without western insurance in August 2023.

According to a Financial Times Article in November 2023, almost none of the shipments of Russian crude in October was executed below the $60 price cap. This is corroborated by reports that state that estimates for Urals cargoes loading from Baltic ports in October 2023 were close to $80 per barrel for Indian customers, a price significantly above the price cap.

This begs the question as to whether Russia and/or those countries which continue to trade in Russian Oil have, over time, been able to finds ways to avoid the use UK maritime transportation and/or associated services for the trade of Russian Oil. If so, is the Russian Oil Price Cap, in its current form, still effective.

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