On December 5 the European embargo on the supply of Russian oil by sea comes into force and in February this measure will be extended to petroleum products. Russian expert Ivan Timofeev explains how sanctions will increase costs for Russia, as well as why the participants of the Western coalition don’t need the support of larger number of countries.
The idea of introducing an oil price cap for Russia appeared in early autumn and was announced by the finance ministers of the G7 countries. The initiative was supported by Australia, the UK and the EU countries. The United States and Europe have already developed legal mechanisms for new restrictions.
As Timofeev reminds, the price cap is a relatively new measure of economic sanctions. Its introduction is due to the inability to impose blocking sanctions on Russian oil. The latter — along with export and import restrictions — are the most common instruments of economic sanctions and it implies a complete ban on financial transactions with persons or entities included in the list. After the Russian invasion in Ukraine, a number of top managers and companies fell under blocking sanctions, but companies in the oil sector were not blocked due to Russia's high importance in the global oil market.
«The price cap was proposed as a compromise. The bet is on the fact that Western companies control significant volumes of transportation and insurance, as well as on the dominance of the US dollar in global financial transactions», Timofeev writes.
In this situation, the formal support of the sanction regime by countries such as India or China is not necessary — Western carriers simply will not deliver Russian oil there. The Western countries themselves have already largely abandoned Russian supplies.
There are several possible schemes for evading the price cap. One of them is manipulations with the price of transportation or other related services with formal compliance with the price cap. Another — manipulations with the transaction documentation. Finally, Russian oil can be mixed with oil of other origins.
Timofeev notes that the initiators of sanctions are fully aware of the possible violations and the US is very experienced in detecting such violations. For example, in order to prevent price manipulation the US Treasury warned carriers, insurers, bankers and other market participants in advance that commercially unjustified prices will be considered as a sign of violation of the price cap regime. Also, the US regulator recommends that carriers keep all documentation about the transaction for five years to avoid document manipulation. These measures by themselves cannot completely exclude violations of the sanctions regime, but they make it much harder to do it.
Source — Valdai Discussion Club
