EU reaches agreement on Russian fuel price caps

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European Union member states agreed Friday on price caps for Russian petroleum products ahead of an international embargo set to go into force over the weekend, Swedish officials said.

"EU ambassadors today approved the price caps on petroleum products ahead of final adoption by the European Council (representing EU member states)," Swedish officials tweeted in the name of their country's role holding the EU presidency.

Read: Price cap on Russian oil exports 'unviable, unenforceable': Expert

The agreement aims to target Russia's key exports and is the latest part of international pressure to limit Russian President Vladimir Putin's reserve of funds for his war in Ukraine.

In December, the EU imposed an embargo on Russian crude oil coming in by sea and agreed with its G7 partners to impose a price cap on Russian oil at $60 per barrel.

However, it was revealed in mid-January that the US was hesitant to approve a lower price cap on Russian oil, despite some EU countries urging for directing further cuts to Russia's energy profits.

According to the report, citing people with knowledge on the matter, Washington will review the price cap on Russia's crude oil only after the G7 adopts price caps on Russian oil derivatives, such as diesel.

The second round of sanctions on diesel, petrol, and heating fuel, arriving on ships by the EU is due to come into effect on February 5th.

The EU and the G7 group have agreed at the same time to impose a price cap on Russian shipments of those products to global markets.  

The price caps set a ceiling for the cost of fuel that can be transported on EU ships.  

The price cap agreed upon was an "important agreement as part of the continued response by EU and partners to the Russian war of aggression against Ukraine," the Swedish EU presidency said without providing details on the price cap levels for various petroleum products. EU officials were poised to brief the media on that later on Friday.

The 27-nation EU had been considering proposals from the European Commission to set a $100-per-barrel limit on more costly products, such as diesel, and $45 on the less expensive ones, like fuel oil.  

Diplomats said Poland and the Baltic states pushed for the price to be lowered to further curb Russia's income.

However, setting the levels is sensitive as the West does not want to cut off Russian supplies to world markets entirely and allow global prices to soar.

Oil sanctions are a fail for the West, a win for Russia: The Economist

Sales of Russian crude have not decreased as the West had hoped, and shipments have dodged European ports and headed to China and India instead.

In a report by The Economist, it is stated that this actually goes towards the point of the price cap: to keep Russian crude on the market and thus keep the market stable but to curb its profits through the price. 

This in turn offers buyers negotiating power, considering that the longer export routes also pose higher freight costs which Russia has to compensate. 

It is argued that Russian oil now sells at a 38% discount per price-reporting agencies, which Treasury Secretary Janet Yellen, who helped devise the price cap, sees as a success that the cap is working effectively. 

These price-reporting agencies haven't applied their techniques to areas where Russian oil is sold through channels that they are not aware of. For instance, European refiners report to these price-tracking agencies, but Indians do not.

Rates for ferrying oil from Russia to Asia are private and thus not available for these price-reporting agencies to evaluate. Hence, the discounts that Western analysts refer to are actually inaccurate. 

The Economist also adds that it is difficult to evaluate real pricing because everyone pretends the prices are low.

Russian export, as a result, has become less dependent on Western shipping and financing, which helped evade the sanction somewhat. More than half of western Russian crude was managed by a European shipping or financing firm, but that percentage has decreased to 36%.

What's in store for the Feb. 5 sanctions?

As of February 5, Europe will and can no longer purchase Russian diesel and will enforce the price cap on its shipping and insurance companies. 

Although Russia "won't find a replacement for their EU buyers," both China and India pose as possible candidates even though they have refineries of their own, according to reports. 

Moreover, a majority of Russian refined products amounting to a third of Russia's oil-export revenues could raise global prices even higher as they would go unsold.

But here's the twist: These outcomes may fade with time since Russia would make up for the loss of refined with crude instead. With that and with time, the West will find itself having to resort to Chinese and Indian diesel supply, which will come from Russian crude. 

That proves that Western-imposed sanctions will eventually become ineffective for the economy and the war in Ukraine.

Bloomberg revealed in mid-January that the US is hesitant to approve a lower price cap on Russian oil, despite some EU countries urging for further cuts to Russia's energy profits.

According to the report, which cited people with knowledge of the issue, Washington will review the price cap on Russia's crude oil only after the G7 adopts price caps on Russian oil derivatives, such as diesel.