A complex effort by Ukraine’s allies to deprive Russia of billions of dollars in oil revenue by capping the price paid for its crude is coming to a head this week.
European Union diplomats will meet on Wednesday to try to set the price after talks with the United States and other Group of 7 industrialized nations, two weeks before the cap is due to come into force.
The diplomats’ meeting in Brussels will mark the final step in the implementation of the policy which requires regulatory and logistical alignment in the complicated business of transporting fuel from Russia to markets such as India and China.
The policy must be in place by December 5, when the European Union’s near-total embargo on Russian oil begins, one of several measures the bloc has taken to shackle the Russian economy and limit its ability to wage war in Ukraine.
The idea behind setting a price cap is to limit the revenue Russia can earn from its oil exports while avoiding a fuel shortage, which would drive up prices and aggravate a cost of living crisis in the whole world.
The way the G7 countries want this to work is to put the burden of implementing and controlling the price cap on the companies that help sell the oil: the global shipping and insurance companies, which are mainly based in Europe.
This is why the regulatory framework to enforce this measure must be adopted in Europe as well as in other G7 members such as the United States, Great Britain and Japan, which also host companies active in transport. or Russian oil insurance.
The ambassadors to the EU will have to approve the price of the barrel unanimously. The decision is expected on Wednesday, several diplomats said, but there could be delays.
Because the cap would require a change to European Union sanctions against Russia, the unanimous consent of all 27 EU countries on the price is needed.
Seven senior EU diplomats said there was political support for the policy, but opinions differed on the price to pay. They spoke on condition of anonymity because they did not want to disrupt ongoing talks.
The idea is to set a price high enough relative to the cost of extracting the oil to induce the Russians to keep selling, but low enough to significantly reduce the profits they make.
The cost of extraction per barrel in Russia is estimated between 12 and 20 dollars; Russian oil recently traded near $70 a barrel in world markets. Treasury Secretary Janet L. Yellen and several European diplomats have cited $60 a barrel as a potential price. But European diplomats from countries closer to Ukraine who take an even tougher pro-Ukrainian line have indicated they would prefer a lower price.
The United States lets the European Union take the lead in determining a price likely to be approved there. A Treasury spokesman said the United States did not plan to privately offer a price to European partners.
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Diplomats from Poland and its Baltic Sea neighbors have said they would also like the price cap to be accompanied by sanctions commitments that would target still-protected European trade with Russia, such as diamonds and fuel for nuclear reactors.
The European Union’s embargo on Russian oil which comes into force on December 5 also includes a ban on European services from shipping, financing or insuring shipments of Russian oil to destinations outside the bloc, a measure that would disable the infrastructure that transports Russian oil to buyers. the world.
To implement the price cap, these European carriers will only be allowed to transport Russian crude out of the bloc if the shipment meets the price cap. In other words, it will be up to them to ensure that the Russian oil they transport or insure has been sold at or below the ceiling price; Otherwise, they would be held legally responsible for violating the sanctions.
Those shipping industries at the center of price cap enforcement remain in the dark about the price and other details of how the cap works. The marine insurance industry, which was skeptical of the idea from the start, said it would do its best to comply.
Lars Lange, general secretary of the International Union of Marine Insurance, an industry association based in Germany, said that whatever price was set, suppliers would ensure that insurance “is only granted for shipments below at this unit price”.
Rachel Ziemba, associate principal researcher at the Center for a New American Security, said G7 allies appear to have different priorities in setting the price cap. The United States has focused on keeping Russian oil on the market, while the European Union wants to deprive Russia of as much revenue as possible.
A delay in setting a price could disrupt the flow of Russian oil as the deadline approaches.
“The longer it is before a price is released, the greater the risk that more oil will be temporarily disrupted because buyers will wait and see,” Ms. Ziemba said.
In an interview this month ahead of the G20 summit in Bali, Ms Yellen said it was difficult for Europe to reach an agreement on price cap mechanisms.
“It requires the agreement of a large number of countries and the EU requires unanimity,” Ms Yellen said, adding that she is optimistic it will happen. “We are actively working to get it in place and it will definitely be done by December 5 and hopefully before then.”
The United States has resisted publicly offering a price for the cap, preferring instead to set broad parameters.
“We want to make sure it’s high enough that they maintain the motive to sell,” Ms Yellen said. “We don’t want it to be economically beneficial for them to just shut it down.”
Biden administration officials say they are confident the proposal has already achieved a key goal: appease oil traders ahead of potentially significant disruption as sanctions come into effect.
Oil prices have fallen in recent weeks and on Monday some briefly fell to their lowest level since January, before Russia invaded Ukraine. U.S. officials interpreted the prices as a sign that traders are not worried about Russia pulling millions of barrels off the market next month.
Keeping oil flowing — and minimizing the risk of another oil price spike — has always been the Biden administration’s main goal with the price cap plan. Denying revenues to Russia, potentially hastening the end of the war, would be an additional and welcome benefit for Mr. Biden.
Jim Tankerley contributed report.
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