*Editor’s note: On March 4, Russia enacted a law that criminalizes public opposition to, or independent news reporting about, the war in Ukraine. The law makes it a crime to call the war a “war” rather than a “special military operation” on social media or in a news article or broadcast. The law is understood to penalize any language that “discredits” Russia’s use of its military in Ukraine, calls for sanctions or protests Russia’s invasion of Ukraine. It punishes anyone found to spread “false information” about the invasion with up to 15 years in prison.
The U.S. Department of Treasury has released a guidance clarifying the terms of its proposed price cap on Russian oil.
The guidance confirms the position taken by the U.S. Treasury Department that traders in Russian oil—both buyers and sellers—must report their transactions to the United States.
The document contains language that is susceptible to multiple interpretations, but some provisions merit attention.
The Treasury guidance confirms that the price cap will apply to the first maritime transport of oil beyond the borders of the Russian Federation, but not to any subsequent onshore sales. If, however, Russian oil is reshipped in its unrefined state using maritime transport, the price cap will continue to apply. This will put a stop to any direct speculation in Russian oil at the port of destination.
On the other hand, the price cap will not apply to Russian oil that has been substantially processed outside the Russian Federation. Consequently, for all practical purposes, foreign refineries can export petroleum products derived from Russian oil — such as gasoline, jet fuel and diesel fuel — without any restrictions and to any destination they please.
At the moment, Europe and the United States are primarily concerned about the risk of a serious shortage of petroleum products.
This policy ensures them a soft landing in the event of a fuel shortage while simultaneously dealing a blow to the Russian oil refining industry.
Russia refineries have historically exported nearly half of the petroleum products they produce. This has been true first and foremost for diesel fuel and fuel oil. Now there will be an additional incentive for foreign refineries to buy cheap Russian oil; they can, with impunity, process it and sell the resulting petroleum products at market prices. In the past, fear of future sanctions prevented many refineries in Europe and Asia from buying Russian crude oil.
It does not, however, follow that this measure will immediately lead to a decrease in oil refining in Russia, observed Konstantin Simonov, head of the National Energy Security Fund.
The import ban on Russian petroleum products does not come into effect until Feb. 5 of next year. At that point, Russia will have to find alternatives to Europe for its exports. In the meantime, Russia’s task is to redirect its crude oil — approximately 1.1 million barrels per day — from Europe to other markets.
According to Kirill Melnikov, head of the Center for Energy Development, the U.S. Treasury’s guidance will not single-handedly resolve the problem of exporting Russian crude oil. But it will enable Turkish and Indian refineries, for example, to increase the supply of diesel fuel to Europe, where alternative supplies will be in high demand if the embargo on Russian petroleum products goes into effect in February.
At the same time, Simonov believes that the Treasury Department policy might lead to problems for Russian refineries in the long run, and those problems could be exacerbated by Russia’s dependence on imported equipment for making annual repairs at the nation’s refineries.
Another interesting provision in the U.S. Treasury guidance is the authority granted for financial transactions related to the supply of Russian oil to Bulgaria, Croatia and a number of other landlocked countries in the European Union. At first glance, this concession appears to make it easier to speculate in Russian crude oil and its entry into the European market. But, according to Simonov, the European Union is unlikely to turn a blind eye to attempts to re-export Russian oil.
Melnikov concurs, adding that the U.S. is harmonizing its sanction policies with those of the EU, which permitted Hungary, the Czech Republic and Slovakia to import Russian oil by sea in the event that supplies via the Druzhba pipeline in Ukraine were interrupted.
And, finally, the U.S. Treasury guidance stipulates that the maximum price for Russian oil will not include the cost of transportation or insurance. Traders can, if they choose, allocate part of the cost of oil to transportation and insurance expenses.
But itemizing a portion of oil profits as shipping expenses (insurance included) carries some risk. The U.S. Treasury guidance states that such expenses must be “commercially reasonable,” Melnikov notes. Few market participants are likely to risk violating sanctions by taking advantage of such a broad provision whose meaning the U.S. Department of Treasury has yet to interpret.
Simonov is of the same opinion. He emphasized that Russia should not regard these concessions as grounds for optimism about the future. Europe and the United States have realized that they had not properly considered all the economic consequences of sanctions against Russia. That is why they are now being extra cautious. The United States is gathering information about the Russian oil trade, and it will use that information to adjust the barriers to trade in a way that minimizes any harm to itself. According to Simonov, it is foolish to expect the need for Russian energy to force anyone to break down and lift the sanctions.