Geopolitical Monitoring Report | October 21, 2022

Global

Russian Oil Price Cap Unlikely to be Effective, According to US Officials

Background:

Members of the G7 – which includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – and the European Union agreed on capping the price cap of Russian oil imports at a fixed low price back in September, with the cap set to take effect on December 5. Moscow has stated it will refuse to sell oil to countries that have agreed on the price cap and – according to comments made by US officials to Reuters – they likely have access to enough tanker ships by leveraging vessels from countries like China and India, which are not participating in the price cap despite pressure from the G7 and EU to join.

Approximately 80-90% of Russian oil will continue to flow out of Russia and to non-price cap countries, which renders the price cap moot when one considers that the decrease in Russian exports to the global market will result in rising oil prices. These rising pieces will further aid Moscow in circumventing the price cap. Russia has already been circumventing sanctions on its oil industry by blending its oil and petroleum productions with that of other countries and selling it as what is known to oil traders as a “Latvian Blend”  on the market as oil or petroleum that are not officially of Russian origin.

A renewed nuclear deal between the West and Iran would provide Russia with another opportunity to export oil to Europe through another sanctions backdoor. While the limitations of the price cap are apparent in the short-term, however, the cost of longer voyages for oil tankers, coupled with Russia’s aging tanker fleet and a lack of quality maritime insurance, could force Russia to eventually sell to Europe within the price cap.

Impact:

While the G7’s oil price cap may eventually have some marginal impact on Russia’s oil industry in the long-term, the agreement is unlikely to be effective and may even end up benefiting Russia through its disruption of global oil markets that result in price increases. In addition, any positive effects of the price cap would naturally require Russia to submit to the G7’s demands and sell their oil to Europe and the US. The chances of Moscow reversing course and engaging in rapprochement with the West are extremely low, and the Kremlin is only going to resume exports to price cap countries if the policy is dropped or Russia no longer has the means to export oil to non-price cap countries.

The price cap’s implementation in December –  which with further complicate oil transport and result in an increased regulatory burden for oil shipping companies, importers , and refiners – coupled with the OPEC+ production cuts that will begin taking effect in November will almost certainly result in high oil prices as a possible recession threatens the global economy.

Mitigation:

Maritime insurers that provide coverage for vessels shipping petroleum productions, oil importers, and refiners should prepare for the increased regulatory requirements, as they will be required to demonstrate any oil or petroleum products they are carrying adhere to the price cap. These companies should ensure they have conducted proper third-party due diligence on suppliers – especially those from countries that are not observing the Russian price cap – to ensure they do not run afoul of the price cap or other sanctions on Moscow.

Companies and organizations should prepare for higher fuel costs as a result of the price cap’s disruption of global oil markets, which could result in an increase in shipping charges and prompt further supply chain disruptions.

In addition, those that maintain vehicle fleets or store fuel at company facilities should prepare to mitigate and respond to organized fuel theft rings, which have begun to spring up across the United States and will almost certainly  increase if the economy slides into a recession while fuel costs remain high. Organizations that may be targets of these criminal outfits should ensure that they have the ability to identify potential threat actors before they are able to strike and are aware of the various technologies that is used to pull off these heists.

In addition, in the event they do become a victim, companies should also ensure they have third-party intelligence capabilities in place that are able to assist them with potentially identifying the perpetrators and preventing future incidents.

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