November 24 ------ The U.S., EU, UK, Canada and Japan are closing in on a deal to put a price cap on seaborne shipments of Russian crude oil, and an announcement is expected as early as Wednesday. The U.S. Treasury has already published the framework for the American implementation of the cap in advance.
The price cap will likely be in the range of $60-70 per barrel, according to the Wall Street Journal and the New York Times. This is approximately in line with current Russian pricing, which already incorporates a steep discount to entice buyers. Russia's marginal cost of oil production is believed to be in the range of $20, and given that this is far below $70, several EU members have pushed for a much lower price cap to cut deeper into Russian profits.
The $60-70 price preferred by the United States is designed to be low enough to reduce Russia's financing for the war in Ukraine, but high enough to incentivize Moscow to continue pumping and selling to the world market - thereby staving off the supply shortage and price spike that would result from an outright ban. The dollar figure will be periodically revised to reflect changing market conditions and the practical effectiveness of the policy, which is the first attempt of its kind to calibrate sanctions based on pricing. The U.S. Treasury's cap is now set to take effect December 5, the same date as the EU's current Russian oil transport services ban. Russia has pledged not to participate in the scheme. If Moscow refuses and insists on selling oil above the cap price, the most consequential outcome would be loss of access to EU and UK-domiciled shipping insurance for Russian oil cargoes after December 5, including the 95 percent of the global P&I market domiciled in Europe. European-owned tankers would also have to depart Russian trades.
This would force Russian cargoes to seek alternative (and less well-capitalized) insurers and reinsurers. notably Russia's Ingosstrakh Insurance Company and the Russian National Reinsurance Company. Top importers like China and India may also seek to self-insure using domestic risk pools, like the $60 million fund set up by Indian national reinsurer GIC Re. Under U.S. pressure, the EU has agreed to soften the penalty for tankers found in breach of the cap, according to the Wall Street Journal. Instead of a permanent ban on brokerage and insurance services for vessels that carry full-priced Russian oil, these ships will now be subject to a 90-day pause in access - and only if it is proven that the breach was deliberate.
The U.S. version of the price cap covers U.S. nationals engaged in trading/commodities brokering; financing; shipping; insurance, including reinsurance and P&I; flagging; and customs brokering. Three different foreign-flag registries are administered by U.S.-domiciled corporations and would appear to be covered by the regulation. However, most U.S. service providers will face a relatively lenient enforcement standard under "safe harbor" provisions, which are designed to protect and encourage well-meaning market players. Treasury guidance issued in September sets up three tiers of service providers for seaborne Russian oil transport: refiners and oil brokers with direct access to price data (Tier I); bankers and shipowners with occasional access to price data (Tier II); and those who have no access to price data in the normal course of business, like insurers and P&I clubs (Tier III).
All have to keep records of compliance, and all are required to do due diligence on their customers, but shipowners, bankers and insurers can lawfully rely on their customers for price data. If that data is fraudulent, they are not liable for accidentally participating in a sanctions violation.