EU Price Cap on Russian oil finally decided. How much will it hurt Russia?

Lorenzo Bagnato

1 Dicembre 2022 - 18:33

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It took months only to agree if even doing a price cap on Russian oil, and then weeks to decide the precise amount. Negotiations, however, seem to be over.

EU Price Cap on Russian oil finally decided. How much will it hurt Russia?

Long negotiations may be coming to an end, as all EU members are finally approving a proposed $60 per barrel price cap on Russian oil. Friday is the final deadline for members to give their blessing. The proposal also includes a measure that locks the price cap at 5% below market price at any time.

Originally, a deal should have been struck already last week, but no agreement could be found. The initial proposal was around $65-70 per barrel, but Eastern European countries believed it was too low. Specifically, Poland and Estonia were adamant that a price cap that high would only benefit Russia as they would keep their revenue stream.

At the same time, however, the United States warned Europe not to set the price cap too low, otherwise global markets would have reacted badly. $60 per barrel seems like the compromise they managed to achieve.

At the moment, Russian crude is being sold at around $70 per barrel, while Brent sits at $88. Brent is an international benchmark that indicates the average market price of a barrel of oil. During negotiations, it was feared that a flexible price cap that was too close to Brent would benefit Russia rather than hurt them.

The price cap should be enforced from December 5th. Next week, negotiations should start to implement a price cap on Russian gas as well.

Will the price cap on oil work

It is still not clear what the exact effects of an oil price cap will be. Russia will still be able to sell oil, albeit at a much lower and possibly damaging price. Moscow funds the war in Ukraine mainly through the sale of fossil fuels, hence why this could really hurt them.

The real question, however, is what will China do. At the start of the war, Putin knew perfectly well that economic relations with Europe would come to a grinding halt. His bet was that China and India would make up for the European market.

Indeed, both countries kept buying oil and gas from Russia. Immediately, however, there was a problem: Russia lacked the infrastructure to send fossil fuels to China and India. While Europe was very well connected through a grid of pipelines, the Asian trade was seriously underdeveloped.

Furthermore, China was not a reliable ally. They actually stopped buying oil from Russia, waiting to see what the price cap would be. Beijing was willing to wait and see who would be the best offerer, undermining any facade of “alliance” they had with Russia.

India, on their part, is filling up their reserves with Russian oil before the price cap goes into effect. It is still not clear if they will keep buying it afterwards.

Vladimir Putin could have lost his bet, but China can always change its mind and go back. Losing the European market, however, is still an important blow to Moscow, especially for funding a costly war.

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