Members of the European Union agreed on a price at which to cap Russian oil on Friday, aimed at preventing a spike in energy costs and restricting an important source of financing for Russia, the Associated Press reported.
Europe reached a tentative decision setting the price at $60 just ahead of a Monday deadline, when an EU-wide embargo on Russian oil imports by sea enforcing the cap was set to come in force, the AP reported.
It adds an adjustment mechanism that would manipulate the price to remain at 5% below market, ensuring the mechanism continues to stifle Russia’s oil profits as long as it remains active, Reuters reported, citing diplomats and a document seen by the outlet.
“Crippling Russia’s energy revenues is at the core of stopping Russia’s war machine,” Estonian Prime Minister Kaja Kallas said, according to the AP.
Under the price cap, countries can continue to import Russian crude using Western-insured carriers and seaborne services as long as the transporting companies sell at or below the set price. Russia supplies 10% of the world’s oil, and most of its exports transit through Europe using European maritime services and insurance firms, Reuters reported.
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Each dollar the cap strips from the market price of Russian oil should amount to a $2 billion loss for Russia, Kallas said, the AP reported, although some experts have expressed skepticism the mechanism will actually crush Russia’s finances sufficiently to convince it to pull out of Ukraine.
Russian President Vladimir Putin has pledged to halt exports from countries that participate in the price cap. Other major importers, such as Russia and China, are not likely to accede, possibly mitigating the policy’s intended effect, CNBC reported.
Industry leaders and a U.S. official say the plan could backfire if Russia is able to summon its own ships and secure new export destinations, according to Reuters.
Russian crude oil prices fell below $60 a barrel in November, sparking concerns the price cap may not drain Russia’s war chest as much as hoped, the AP reported. However, the price must be high enough to incentivize Russia to continue selling, as Brent crude prices reached $87 per barrel Friday.
The deal awaits written approval from the EU and final endorsement from the Group of Seven (G7) wealthy democracies, but is expected to go through, according to the AP.
Last week, the G7 floated a cap between $65 and $70 per barrel with no adjustment mechanism, Reuters reported. A senior official said the organization had come “very, very close” to finalizing a deal by Monday.
Poland, Lithuania and Estonia had argued that the G7’s proposal would not significantly cripple Russia’s ability to finance its war in Ukraine.