The Biden administration is gearing up to intensify its outreach to western trading houses, insurers, and tanker owners, reminding them of the Group of Seven’s price cap on Russian oil as it trades above the set level, according to insiders and experts.
In an effort to uphold the $60 per barrel cap imposed by the G7, the European Union, and Australia in response to Russia’s actions in Ukraine, Washington aims to encourage buyers to comply voluntarily. The administration is expected to adopt “soft” tactics to avoid disrupting energy markets with aggressive enforcement.
An undisclosed source familiar with the administration’s approach revealed, “The initial inclination on the part of Treasury is to be soft on it, not to come down like a hammer on tankers and tanker owners, to enforce, but enforce quietly with letters, phone calls.”
The U.S. officials are likely to enhance communications with trading houses, tanker owners, insurers, and others, stressing that if western maritime services are utilized, proof must be retained to demonstrate Russian oil was bought below the $60 limit.
A Biden administration source affirmed that ongoing conversations with service providers regarding the requirements have been constant since the implementation of the price cap.
The imposed price cap prevents Western companies from offering services like transportation, insurance, and financing for oil sold above the set limit.
As per Reuters data, Russian Urals crude has been trading at or above the cap for nearly two weeks. The Treasury uses a monthly average of prices to calculate the Urals price, making it potentially some time before the Russian oil price is deemed over the cap.
The Treasury’s Office of Foreign Assets Control (OFAC) has warned that individuals or companies evading, avoiding, or violating the cap could face civil or criminal enforcement actions, including fines. Furthermore, the Treasury will collaborate with other countries to exchange information on evasion to ensure market integrity.
However, the administration treads cautiously, concerned about disrupting the market and driving global oil prices higher. Interfering with the movement of oil could have adverse effects, making it a challenging “policy pickle.”
The price cap has two primary objectives: reducing Russia’s oil export revenues and ensuring a continued flow of oil to global markets. The administration is adamant that the cap is effective.
To enforce the cap, Deputy Treasury Secretary Wally Adeyemo has engaged with countries possessing significant shipping fleets and trade. At the same time, Elizabeth Rosenberg, Treasury’s assistant secretary for terrorist financing and financial crimes, has reminded protection and indemnity insurance providers (P&I clubs) of the requirements related to Russian oil purchases.
The high Urals price is partly attributed to recent deals with countries outside the cap, like India and China, which are expensive for Russia. The country has incurred additional expenses in shipping oil over long distances instead of using pipelines, primarily directed towards Europe.
Last month, Adeyemo noted that the Russian central bank guaranteed approximately $9 billion in a reinsurance scheme intended to replace western reinsurance, as a consequence of the price cap. This sum represents money that the Kremlin cannot invest in its military endeavors in Ukraine.
The State Department maintains a close watch on all vessels involved in loading crude oil and petroleum products from Russia, monitoring potential evasion or non-compliance, including deceptive practices to access coalition services for oil traded above the caps.
Should Urals prices continue to rise above the cap, Washington may urge fellow G7 countries and the EU to raise the limit. However, this would be a diplomatic and political endeavor that could face resistance from Eastern European countries and U.S. lawmakers.
In terms of enforcement, energy security and climate expert Ben Cahill predicts a gradual process that may involve better tracking of the tanker fleet and ownership of vessels, as well as improved paperwork attestation. Nevertheless, any significant changes are unlikely unless oil prices remain high for an extended period.
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