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Here’s What You Need to Know About Russia Oil Sanctions, Effective Today

After months of planning and negotiations, the bulk of sanctions on Russian oil so far come into force on Monday. How big their impact will be remains uncertain.

The Group of Seven struck a last-minute deal to cap the price of Russian crude at $60 a barrel. Anyone who wants access to key services the block provides — especially insurance — will have to pay that price or less. The same goes for European tankers, especially the giant Greek fleet.

But there are still enormous unanswered questions that will shape the impact of the measures on the oil market, including the depth of non-European insurance markets, the appetite of some tanker owners to participate in trade with Russia, and just how effective enforcement of the cap can be

The UK and the EU will also impose a ban on maritime services for the transport of Russian oil, including to third countries. The list of banned services includes insurance, brokerage and, in particular, the EU-based tanker fleet, including ships owned in Greece and Cyprus. These restrictions will not apply if oil is purchased at or below the restricted price.

Here’s everything you need to know about what could change for Russian oil.

Who sanctions what?

The European Union will ban the import of crude oil produced in Russia and transported by sea from Monday. There is an exemption for Bulgaria, which can continue to import Russian crude oil by sea until the end of 2024, under contracts concluded before June 4, 2022.

Pipeline flows are not affected, although Germany and Poland have both said they will stop such imports by the end of 2022.

The UK and the EU will also impose a ban on maritime services for the transport of Russian oil, including to third countries. The list of banned services includes insurance, brokerage and, in particular, the EU-based tanker fleet, including ships owned in Greece and Cyprus. These restrictions will not apply if oil is purchased at or below the restricted price.

How will the global cap work?

If crude trades at or below $60, countries participating in the cap, which include the Group of Seven nations, the European Union and Australia, will allow access to key services.

There is one price limit for all of Russia. The $60 level would be about $10 above the key Urals grade – shipped from the country’s western ports – but below ESPO, which is loaded onto tankers at Kozmino in Asia. That grade is above $70, according to data provided by Argus Media.

The cap price is the value when the crude oil is loaded onto a vessel. This does not include the cost of transport and legal fees. This will apply from the receipt of a cargo on a ship until it moves through customs in a new country. Once the oil is refined, it will no longer be subject to the cap, but if it is mixed with another type of crude oil, it still is.

The cap will be reviewed regularly.

How will insurance work?

Traditionally, ships get cover for disasters such as oil spills through a London-based organization called the International Group of P&I Clubs. The IG, as it is known, uses a reinsurance program that is heavily dependent on the EU, meaning that its services will only be allowed if oil is shipped under cover.

But there are some alternatives. Russia’s Ingosstrakh Insurance Co. was the top Russian underwriter of P&I coverage in October, and could be an option. However, the company has given no indication that it is in a rush to fill the void. And the depth of Russia’s insurance market is small compared to traditional ones.

Chinese authorities have yet to recognize Russian insurance, Russia’s deputy transport minister said last week, but India and Turkey do. An Indian refiner previously said Russia was securing its crude shipments.

Russia’s response

Russia has consistently said it will not sell oil to countries participating in the price cap. Deputy Prime Minister Alexander Novak said last week the plan could result in significant risks to commodity markets, including market shortages.

But Foreign Minister Sergei Lavrov said Thursday that Russia would continue to negotiate “directly” with its partners on the pricing of crude sales, noting that “there is always an element of balancing interests,” including about prices. This leaves Russia room to make sales below the limit, while claiming it is irrelevant.

The countries Russia currently sells to have not signed up to the cap, but the US and allies hope they will use it as leverage to extract discounts.

A host of countries continue to import oil from Russia along the Druzhba pipeline, Europe’s largest, while up to 1.5 million barrels of oil a day are shipped from Kazakhstan from a terminal near Russia’s Novorossiysk port. These are not prohibited.

It is not clear what Russia can or will do to punish companies that participate in the cap. Doing so may harm its interests.

Who sends off?

A burgeoning shadow fleet of oil tankers has emerged to ship Russian crude. Whether that fleet will be large enough to maintain a full rate of exports in the long term is not yet clear.

A growing number of vessels are being registered to unknown owners, and the scrapping of old tankers has almost come to a standstill. Still, the growing risk of transporting Russian oil has boosted tanker earnings for cargoes loaded after December 5.

This has already been fed into the Ural crude oil prices.

Since the war broke out, a series of new traders have marketed Russian oil to buyers in Asia as traditional entities have walked away. This includes companies such as Coral Energy, Wellbred and Montfort. Businesses trading out of Dubai without links to the EU are not subject to the bloc’s sanctions, but will still need key services such as insurance and finance.

What was released?

The price cap should only apply to deliveries of Russian oil at sea – flows via the key Druzhba pipeline to Europe are still allowed. There is also a carve-out for Kazakhstan’s CPC crude oil blend exported from a Russian port.

However, further discussions may yield some adjustments to the rules.

Bulgaria has an exception that allows it to continue importing crude oil due to its “specific geographic exposure”, according to the EU’s sixth sanctions package. In addition, Japan received an exemption for oil destined for Japan from the Sakhalin-2 project.

The UK, which has been waiting for the EU, has an exception in place for environmental emergencies, which allows the clean-up of spills. The EU is likely to follow suit. It came after Turkey said it planned tighter insurance controls because of the risk of environmental damage.

–With assistance from Dylan Griffiths, Kari Lundgren and Alberto Nardelli.

Photo: Oil pump jacks, also known as “knickers”, in an oil field near Neftekamsk, in the Republic of Bashkortostan, Russia, on Thursday, November 19, 2020. Photo credit: Andrey Rudakov/Bloomberg

Copyright 2022 Bloomberg.

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Russia Energy Oil Gas

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