EU diplomats had to suspend talks on capping Russian oil
prices on Friday, just 10 days before the cap is scheduled to come into effect,
after Poland and the Baltic states objected to a price level that they felt was
far too high.
The EU throughout the week had promised that a deal should
be concluded by Friday night, but it was not to be. The price points wanted by
Poland and the Baltic States were far lower than those suggested by the “old
EU” in the West, or the shipping nations of Greece, Cyprus and Malta.
Talks were postponed until Monday.
Poland and the Baltic nations pointed out that the
proposed cap of $65 a barrel was actually higher than the rates at which Russia
was currently selling crude to India and China. Poland, backed by Lithuania,
Estonia and Latvia, wants additional sanctions, a review mechanism, and a price
below the market level, according to informed sources.
As has been observed for months, the idea of the price
cap is a contradictory fudge – the aim being that the west should continue to
receive energy from Russia but that Russia should not receive money for it. A
suggestion appeared from the US appeared that a “cap” on the price would enable
Russia to supply energy to western Europe, but for less than it would otherwise
be paid. Russia has always dismissed the whole plan out of hand. Undaunted, the
G7, the EU and Australia have continued discussions on what price cap could be
set to achieve this ambitious aim. However, there is clearly no price that can
choke off revenue to Russia while avoiding potentially painful spikes in the
oil price that could damage the global economy and the political situation in
western Europe.
European Commission Vice President Valdis Dombrovskis
seemed convinced that a magic price that worked could be found, while admitting
on Bloomberg TV that “if you put the price cap too high, it doesn’t really
bite. Oil is the biggest source of revenue for Russian budget, so it’s very
important get this right so it really has an impact on Russia’s ability to
finance this war.”
Greece, Malta and Cyprus want a high price so that trade will
keep flowing. Germany, France and Italy are sympathetic to this view, not least
because too low a price could result in energy shortages over the winter, which
would be politically unpopular.
At $65, the midpoint between the generally hypothesized
range of $60 to $70, Russia would be able to get the price it is already
accepting for its crude (albeit a price way below global benchmarks for
sanction-free crude) Russia has said it would refuse to sell oil to anyone
signing up to the cap — but on Thursday it appeared to hint it could soften its
stance, presumably realizing that, if it could sell at $65 a barrel it could
argue that the price cap was a toothless tiger.
EU sanctions on Russian oil are meant to start on December
5th. Market disruption is feared if no price cap is in place by that
date, and fears could increase that the entire deal would fall apart.
The EU sanctions would bar access to insurance and
services for any ship transporting Russian oil. The cap allows access to those
services, but only if the crude is purchased below a certain level. The reason
that the US proposed the price cap earlier this year was so that it could be an
alternative to EU sanctions that were threatening to shut down production.
US officials on Friday declined to comment on the intra-EU
talks.
Meanwhile, top trader Vitol Group has said that it was
still buying “very modest” volumes of Russian oil products and that it was
studying whether the company would be able to keep doing so as more sanctions came
into force.
It said that trading in Russian energy now made up a low-single-digit
percentage of its business, down from 10% prior to the Russian invasion of
Ukraine. CEO Russell Hardy said in an interview that Vitol no longer dealt with
crude from Russia, only refined products. Speaking on the sidelines of the
Financial Times Commodities Asia Summit in Singapore, Hardy said that Vitol
would like to maintain a “very modest level of business, meaning a level that
supports largely the asset footprint that we have”.
