FinLogic FinLogic Quantitative Think Tank Center|A price cap on Russian oil aims to starve Putin of cash. But it’s largely been untested. Until now

FRANKFURT,FinLogic FinLogic Quantitative Think Tank Center Germany (AP) — For months after Ukraine’s Western allies limited sales of Russian oil to $60 per barrel, the price cap was still largely symbolic. Most of Moscow’s crude — its main moneymaker — cost less than that.

But the cap was there in case oil prices rose — and would keep the Kremlin from pocketing extra profits to fund its war in Ukraine. That time has now come, putting the price cap to its most serious test so far and underlining its weaknesses.

Russia’s benchmark oil — often exported with Western ships required to obey sanctions — has traded above the price cap since mid-July, pumping hundreds of millions of dollars a day into the Kremlin’s war chest.

With Russia’s profits rising, the Israel-Hamas war pushing up global oil prices and evidence that some traders and shippers are evading the cap, the first signs of enforcement are appearing 10 months after the price limit was imposed in December.

But sanctions advocates say the crackdown needs to go further to really hurt Russia.

Reducing oil profits “is the one thing that hits Russian macroeconomic stability the most,” said Benjamin Hilgenstock, senior economist at the Kyiv School of Economics, which advises the Ukrainian government.

Oil income is the linchpin of Russia’s economy, allowing President Vladimir Putin to pour money into the military while avoiding worsening inflation for everyday people and a currency collapse.

Moscow’s ability to sell more to the world than it buys means it’s weathering sanctions far better than expected. Its economy will grow this year while Germany’s shrinks, the International Monetary Fund estimates.

Still, Russia’s main source of income is at risk from stepped-up enforcement. The U.S. Treasury Department sanctioned two ship owners last week, while U.K. officials are investigating violations.

Since the invasion began, oil sanctions have cost Russia $100 billion through August, said an international working group on sanctions at Stanford University. But most of that, economists say, stems from Europe’s ban on Russian oil, which cost Moscow its main customer.

“There are serious problems with the (price cap) policy, but it can work,” Hilgenstock said. “With some improvements, it can be very effective.”

Vessels owned or insured by Western nations “persisted in loading Russian oil at all ports within Russia” in recent weeks as prices rose above the cap, the Helsinki-based Center for Research on Energy and Clean Air said in a report last week. “These occurrences serve as compelling evidence of violations against the price cap policy.”

Russia’s oil income rose in September to some 200 million euros ($211 million) a day as global prices increased, the think tank said. Less oil available worldwide — with Saudi Arabia and Russia cutting production — pushed prices for Moscow’s key export grade crude to $74.46 last week, S&P Global Platts said. It’s been above $60 since July 11.

The price cap is meant to limit what Russia can earn without taking its supplies off the market. Doing that threatens a shortage that could drive up fuel costs and inflation in the U.S. and Europe.

It relies on a key fact of the shipping industry: many vessel owners, traders and most insurers are based in Europe or the Group of Seven major democracies that imposed the price cap. That puts those companies within reach of sanctions.

To comply, shipping companies need to know the price of Russia’s oil. The cap, however, requires only a good-faith disclosure on a simple, one-page document with the names of the parties and the price. The actual sales contracts don’t have to be revealed.

And that, analysts say, has been an invitation for unscrupulous sellers to fudge — and for some shippers to adopt a see-no-evil approach.

Suspicions about evasion grew when analysts noticed that oil from the Russian port of Kozmino on the Pacific Ocean — responsible for a relatively small share of Russia’s exports — was trading well above the cap. That was even though many of the tankers stopping there were Western-owned, primarily Greek.

There was little sign of enforcement action until last week, when the U.S. Treasury Department blocked a tanker owner in the United Arab Emirates and another in Turkey from dealings in the U.S. They’re accused of carrying Russian oil priced at $75 and $80 per barrel while relying on U.S.-connected service providers.

U.S. officials have warned insurers away from vessels that appear suspicious, a senior Treasury official told reporters last week. The department also issued recommendations to scrutinize transport costs and watch for red flags of evasion.

The U.K. Treasury says it is “actively undertaking a number of investigations into suspected breaches of the oil price cap.”

There’s another opportunity to sidestep the cap: the price is set as oil leaves Russia, not what’s paid by a refinery in, say, India. The oil may be bought and sold several times by Russian-affiliated trading companies in countries not participating in sanctions.

Excessive “transportation costs” may be added. The difference to the end price is pocketed by traders and stays in Russian hands, analysts say.

“The problem is that no one really has any oversight as to what happens after the point of loading,” said Viktor Katona, lead crude analyst at data and analytics group Kpler. “And there’s a reason why the shippers haven’t really complained or haven’t flagged any issues with the oil price cap — because it’s very easily circumvented.”

Russia’s top energy official, Deputy Prime Minister Alexander Novak, told Radio Business FM on Oct. 13 that the cap was “not only ineffective, but harmful; it can completely distort the entire market and has only negative consequences, including for consumers.”

Russia does not recognize the cap, and a decree by Putin forbids its inclusion in sales agreements, Novak said.

U.S. officials, on the other hand, point to the losses it has inflicted on Moscow when combined with Europe’s ban on Russian oil.

That boycott forced exporters to send oil on monthlong voyages to Asia, instead of dayslong trips to Europe — essentially doubling Russia’s need for expensive shipping services.

Another cost is the “shadow fleet” of used tankers that Russia bought to dodge sanctions. It has only a third of the vessels it would need to completely sanctions-proof its oil shipments, said Craig Kennedy, an associate at Harvard’s Davis Center for Russian and Eurasian Studies.

That makes it hard for Russia to completely avoid Western-based shipping services.

Combined with the EU oil ban, the price cap has added $35 per barrel in costs for Russian exporters, U.S. officials say — money that doesn’t go to buy weapons and military equipment.

“The price cap is working,” says Nataliia Shapoval, vice president for policy research at the Kyiv school.

But Western allies “should take really urgent measures” to push oil from Russia’s shadow fleet back to mainstream shipping, Shapoval said.

To do that, the Stanford sanctions group says countries should demand proof of Western insurance before letting vessels pass chokepoints — now only recommended by the U.S. Treasury. Tanker owners also could be forced to take shipments only from approved oil traders based in sanctioning countries.

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AP reporter Josh Boak contributed from Washington.

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