The oil refinery of the Lukoil company in Volgograd, Russia
An oil refinery in Volgograd, Russia. EU member states have paid Moscow more than €13bn for oil since the invasion of Ukraine started, according to CREA © Reuters

EU member states are looking at whether to impose a ceiling on what they would pay for Russian oil as a way to hit Kremlin revenues, as they shy away from agreeing an immediate blockade on Moscow’s crude exports.

An oil price cap is one of a number of proposals being discussed as EU ambassadors prepare for talks in coming days about more sanctions on Moscow — the sixth such package since Vladimir Putin ordered the invasion of Ukraine two months ago.

“[The talks are about] finding the best way to deny [Putin] the revenue that he needs,” said one person familiar with the conversations.

Another alternative would involve imposing an EU tariff on Russian oil, analysts say, forcing Russia to cut prices to stay competitive.

EU member states are divided over how aggressively to move against Russian energy, which is at the heart of the country’s economy. Russia provides more than a quarter of EU crude oil imports and member states have paid Moscow more than €13bn for oil since the war with Ukraine started, according to CREA, a research organisation.

Germany and other countries have ruled out an overnight ban on Russian oil imports because it would harm their own industry, while EU officials fear a ban could drive up oil prices and even increase the Kremlin’s revenues.

Berlin is also wary of alternatives including the notion of a price cap on Russian oil. Nevertheless discussions about new EU curbs on Russian energy have gathered pace, including on the sidelines of meetings of the IMF and World Bank last week.

The US halted energy imports from Russia last month but has refrained from pushing the EU to do the same, recognising many countries’ dependence on Russian energy and the risk of damage to the world economy.

But Washington could help to enforce any EU cap on Russian oil prices by making it more difficult for Moscow to sell to others, possibly by threatening sanctions against any purchasers contemplating buying Russian oil at higher prices.

“In the absence of this threat, we might expect European tariffs or price caps on Russian oil to cause that oil to be diverted to buyers in China, India and elsewhere who are willing to pay a higher price than Europe,” Krishna Guha, analyst at Evercore ISI, wrote in a note at the weekend. “The threat of secondary sanctions may limit the speed and extent of this adjustment process.”

Some EU member states including Germany have traditionally been hostile towards US extraterritorial sanctions, however, and might not be willing to countenance such an escalation.

The biggest question is still over whether the EU will agree on a price cap or tariffs in the first place. Italy is among the member states to have spoken in favour of seeking to cap the price of Russian energy.

But German officials say the government is sceptical. “Trying to set a price would be difficult, and also in breach of contract,” said one senior German official.

Another official in Berlin said Russian oil was imported into Germany by private companies and so “any price cap implies that someone will have to pay the price difference — so it operates as a subsidy . . . The price cap idea is not being taken seriously here”.

Berlin is instead focusing its efforts on a gradual phaseout of Russian oil. The economy ministry has said import volumes will be halved by the summer and that by the end of the year, Germany will be “virtually independent” of Russian oil.

Since the invasion of Ukraine began, Russian seaborne oil exports have recovered and are currently 100,000 barrels a day higher than the 2021 average, according to Vortexa, an oil cargo tracking company. More volumes are heading to Asia, primarily India and China.

In the case of an EU oil embargo Natasha Kaneva, head of global commodities research at JPMorgan, said Russia would only be able to reroute a further 1mn b/d to other markets, out of the roughly 4mn b/d of oil and product exports that would be affected. Approximately 0.7mn b/d of oil that previously flowed to Europe has already been rerouted.

Additional reporting by Amy Kazmin in Rome

Copyright The Financial Times Limited 2023. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article