The United States and its allies are about to deliver a double blow to Russia aimed at starving its oil revenues.
First, the European Union will ban all seaborne imports of Russian oil, a move that takes effect Monday.
Also, the U.S. and other members of the Group of Seven leading economies will attempt to impose a price cap on the oil Russia continues to sell to other parts of the world. On Friday, the EU tentatively agreed to set a price ceiling at $60 per barrel.
The two moves are intended to limit Russia's ability to fund its war in Ukraine but are designed to prevent disruptions in oil supplies that could cause higher prices.
Analysts say the price cap, spearheaded by the U.S. Treasury Department, could be difficult to enforce.
Ben Cahill, senior fellow at the Center for Strategic and International Studies in Washington, says a price cap on Russian oil has never been tried before. Most energy sanctions, like those against Iran and Venezuela, target volume, not price.
"What policymakers are trying to do is cut the world's largest oil exporter out of the market to a large degree," he says. "They're trying to cut Russia off from Europe, which has always been one of its largest export destinations."
Most of EU will stop buying any Russian oil
The EU ban on seaborne Russian oil imports was part of a package of sanctions passed in June. It also includes barring maritime services — such as shipping insurance and financial services — on any tanker carrying Russian crude. Hungary and a couple of other countries can continue to import Russian oil through pipelines.
Most of the world's maritime services for oil tankers are based in the U.K. and the European Union, so that ban would apply to virtually all tankers plying the world's waters.
The U.S. was concerned that the EU ban on oil and insurance could remove at least a million barrels a day of Russian crude off the market, causing a sharp spike in the price. Russia supplies about 10% of the world's oil production.
"The EU sanctions package created concerns that there would be a potential supply shock," Cahill, the energy analyst, says. "And so the proposed price cap is a way to try to keep those volumes on the market, but still curtail Russia's revenue."
The price cap is meant to keep supply coming — but limit Russia's profits
Allowing oil sales under a price limit is a way to make sure the insurance ban doesn't stop the oil from flowing. Under the plan, shipping services and insurance could be provided to tankers carrying Russian crude as long as it is purchased for a price set by Western nations.
All 27 members of the EU needed to agree on the price. Poland pushed for around $20 per barrel, a figure rejected by many EU countries as too low. The final price was agreed at $60 per barrel, which could fluctuate over time. A mechanism that Poland pushed for was included in the final deal — the price cap would be kept at least %5 below the market rate.
It was a balancing act between finding a price low enough to limit Russia's profits but high enough to keep it producing oil.
Russian crude oil already sells well below other global oil market prices.
China and India buy Russian oil and it's unclear how they view the price cap
There's skepticism that the price cap will work. For one thing, it will need other countries beyond the G-7 and the EU to sign on to the plan.
China and India are key. Both have gone on a buying spree of Russian oil since the war in Ukraine.
Arkady Gevorkyan, a commodity strategist at Citi Research, says India imported very little oil from Russia before the conflict. Now, it's helping fill the Kremlin's coffers, importing about 900,000 barrels a day, which he says is substantial. "That allowed Russians to divert some of the oil initially going to Europe, to India," Gevorkyan says.
China, India and Turkey have been getting Russian oil at a big discount -- about $20 less per barrel. They'll continue to hammer out a good price if they believe they have leverage once the price cap sets in.
Cahill says efforts to get countries outside the G-7 on board with the plans have not been successful, in part because they're wary of the complicated plan.
"I think there's also some irritation with Western sanctions and the idea that, you know, the U.S. and the EU are really pushing countries to do this and they're interfering with the global oil market," Cahill adds. "They have a lot of skepticism. And I don't think that India and China will sign the plan and fully endorse it."
And according to Gevorkyan, there's some doubt Russia can find enough tankers willing and able to work around the sanctions.
And then there's the question of insurance. "Russia started to work on developing its domestic insurance company," he says. "It has been in discussion with China and India and other trade partners of having a different insurance that would allow them to continue to import."
Enforcing the price cap will be a challenge
The G-7 price cap plan depends heavily on documentation and proof about where the oil on a tanker is coming from and how much it costs.
Michelle Wiese Bockmann, an analyst with London-based Lloyd's List, a maritime news agency, says there's already a lot of illicit oil trade, especially moving sanctioned oil from Iran and Venezuela. She says it involves everything from falsifying documents to clandestine ship-to-ship transfers in the middle of the night.
"The evasion tactics used by Iran and Venezuela can be easily met and borrowed by Russia to continue shipping without that compliance to the price cap," she says. "It's very likely that sanctions evasion is going to be a hallmark of what happens post Dec. 5."
Russia could try to exact some retaliation, using fuel for leverage
Analysts and officials have warned that the West's new actions could provoke Moscow to retaliate by cutting off remaining natural gas supplies to European countries.
Russian President Vladimir Putin has said he will not sell oil to any country that is compliant with the price cap and that Russian oil will find other customers, willing to risk breaking sanctions.
Other countries could help him. OPEC+, an alliance of oil producers that Russia co-chairs along with Saudi Arabia, is concerned about the idea of buyers colluding — countries banding together to try to influence the oil market and target certain producers. They worry that if the West can do it to Russia, then it could someday do the same against other oil producers.
Members of the oil cartel are due to meet in Vienna on Sunday, one day before the EU oil embargo and the price cap are due to begin.
