«The mechanism is more flexible, but less predictable»
European Union countries are nearing agreement on a new dynamic mechanism for setting a price cap on Russian oil. The initial level is proposed at $47 per barrel, which would be automatically reviewed every six months based on the average market price minus 15%. While this measure might seem imposing, questions remain about its practical implementation, administrative effectiveness, and control mechanisms.
Initially, the European Commission suggested lowering the cap from $60 to $45 in June. However, this was reportedly put on hold amidst concerns that escalating Middle East tensions could increase global oil prices. Opposition from three Mediterranean nations – Greece, Malta, and Cyprus – also arose; they were hesitant to support a lower limit without G7 approval. Slovakia presented another hurdle, threatening to veto the 18th EU sanctions package (which includes the new cap) unless it received energy security assurances from Brussels and concessions regarding the alliance`s gradual phase-out of Russian gas.
According to Reuters, citing unnamed sources in Brussels, EU member states are now close to a compromise on a «dynamic mechanism» for the price cap. One source stated the initial price would be $47 per barrel, calculated based on the average cost of Russian crude over the past 22 weeks minus 15%. This price would then be reviewed semi-annually based on the average oil price. Experts, however, view the new system`s prospects as uncertain. They agree it offers little benefit to the global market, and certainly none for Russia.
Financial analyst Igor Rastorguev suggests the cap reduction is a necessary move for the European Commission, as the previous $60 limit, set when Brent crude was $77, had become obsolete. Updating the ceiling to $47 with potential future revisions will introduce uncertainty in oil export trade, especially as Russian oil companies already face high logistics costs associated with chartering a «shadow fleet.»
Rastorguev speculates that major buyers like China and India will likely push for even more favorable terms (Russian export crude, Urals, is already sold at a significant discount). Overall, this will negatively affect state budget revenues and the National Welfare Fund.
Denis Astafyev, managing director of the fintech platform SharesPro, points out that the $47 cap, being significantly lower than both the market price and the previous ceiling, poses a substantial negative impact on the Russian economy. He forecasts it will reduce export earnings and revenues from the mineral extraction tax (NDPI) and export duties. Preliminary estimates suggest annual budget losses could reach 1.5 trillion rubles. Consequently, the government might be forced to increase borrowing or seek alternative income sources, potentially raising taxes on other sectors.
Simultaneously, the European Union risks facing political and organizational challenges. The plan to review the cap every six months based on the average price over 22 weeks minus 15% is hindered by practical implementation issues and opposition from member states like Malta and Slovakia. Control also remains problematic: verifying contract prices and actual transactions is difficult, making the entire mechanism susceptible to circumvention.
Andrei Loboda, an economist and top manager in financial communications, suggests the new limit could pressure Russia`s export revenue, provided the mechanism is effectively managed. He notes the uncertainty surrounding its implementation. Given Brussels` strong push for the 18th sanctions package, efforts will likely be made to translate decisions into reality. This would require a high degree of coordination within the EU and with trading partners. In the medium term, he anticipates increased domestic volatility for Urals and other Russian oil grades.
According to Loboda, the requirement to review the cap every six months makes the mechanism more flexible but less predictable. Its actual impact will depend on current market conditions, demand for oil in Asia, and the availability of alternative logistics routes.
Denis Mirolyubov, an expert in the energy sector and geo-economics, points out that the EU is still struggling to agree on the 18th sanctions package due to Malta`s stance (disagreeing with the 15% below market proposal). However, he believes Malta, not being a major exporter, will likely be pressured to agree. Regarding the consequences, he primarily sees an impact on the stability of energy markets. Russia, having learned to bypass similar restrictions, will likely find ways to minimize the negative effects this time as well.
Mirolyubov reminds that the previous $60 cap didn`t achieve its intended goals, although it did compel Russia to expand its «shadow fleet.» He predicts the situation will repeat. However, he adds that if the EU were to block the Danish straits to tankers, transit through the Baltic Sea would become impossible, and the $47 cap would then pose a significant blow.
Anton Sirotinkin, an analyst at AVI Capital, comments that while any formula for the cap can be introduced, its success hinges on compelling buyers to comply with the restrictions. He sees this as only partially successful because the buyers include major trading partners of the sanctioning countries, who are also suppliers of important products derived from Russian hydrocarbons. According to Sirotinkin, this represents the main challenge for the initiators of the sanctions.
