Russian oil sanctions are about to kick in. And they could disrupt markets in a big way

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The European oil sanctions will take effect on December 5. The idea is to reduce oil revenues for Russia given the war in Ukraine.

Andrei Rudakov | Bloomberg | Getty Images

The upcoming sanctions on Russian oil will be “really disruptive” to energy markets if European countries fail to enact a price cap, analysts warned.

The 27 countries of the European Union agreed in June to ban the purchase of crude oil from December 5. Specifically, the EU – along with the United States, Japan, Canada and the UK – wants Russia’s oil revenues in an effort to drain the Kremlin’s war coffers following the invasion of Ukraine.

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However, concerns that a full ban would push up the price of crude oil led the G-7 to consider setting a cap on the amount it will pay for Russian oil.

According to Henning Gloystein, director of energy, climate and resources at Eurasia Group, a political risk consultancy, an outright import ban from Russia could be “really disruptive” for markets.

The potential for rising oil prices is “why there is pressure from the US” to agree on a limit, Gloystein told CNBC on Wednesday.

A price cap would make G-7 countries buy Russian oil at a lower price, in an effort to reduce Russian oil revenues without raising crude oil prices around the world.

However, the EU countries have been discussing the right level to limit prices for several days.

Europe's real energy crisis will come next winter - but it won't last forever either

The right oil cap

A proposal discussed earlier this week suggested a limit of $62 per barrel, but Poland, Estonia and Lithuania refused to agree, citing it too high to affect Russia’s earnings. These countries were among the most vocal in pushing for action against the Kremlin for its aggression in Ukraine.

Speaking to CNBC’s Julianna Tatelbaum on Wednesday, the Dutch energy minister said a cap on Russian oil prices was “a very important next step.”

“If you want effective sanctions that really hurt the Russian regime, then we need this oil cap mechanism. So hopefully we can agree on it as soon as possible,” said Rob Jetten.

Gas price cap proposed by EU could be 'deeply harmful' to supply chains, Dutch energy minister says

Russian oil was trading at about $66 a barrel on Wednesday. Kremlin officials have repeatedly said that a price cap is anti-competitive and that they will not sell their oil to countries that have implemented the cap.

They hope that other major buyers, such as India and China, will not agree to the limit and thus continue to buy Russian oil.

China and India

G-7 countries agreed in September to impose a limit on Russian oil and have been working on the details ever since. At the time, EU energy chief Kadri Simson told CNBC she hoped China and India would also support the price cap.

Both countries stepped up their purchases of Russian oil after Moscow’s invasion of Ukraine and benefited from reduced tariffs. Their participation is seen as essential for the restrictions on Russian oil to work.

“China and India are crucial because they buy most of Russia’s oil,” Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, told CNBC.

However, they will not commit for political reasons as the cap is a US sponsored policy and [for] commercial reasons, since they already get a lot of cheap oil from Russia, so why jeopardize that? To think they would join voluntarily was always naive, as Ukraine is not that important to them.”

India’s Petroleum Minister Shri Hardeep S Puri told CNBC in September that he has a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy anywhere,” he added.

As such, there are growing doubts about the real impact of the restrictions on Russia.

“Energy sanctions against Russia have come too late and too timid,” Guntram Wolff, director of Germany’s Council on Foreign Relations, said via email.

“This is just a continuation of an unfortunate series of timid decisions. The longer and later the sanctions come, the easier it will be for Russia to circumvent them.”

Watch CNBC's full interview with Indian Petroleum Minister Hardeep Singh Puri

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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