BRUSSELS — After months of lobbying by the United States and days of fraught negotiations, Ukraine’s allies agreed to a plan to cap the price of Russian oil starting next week, but the cap was set so close to current prices that it is not clear if it will hit the Kremlin’s war chest.
At meetings in Brussels, European diplomats agreed to $60 per barrel as an upper limit, with regular reviews to make sure the ceiling stays at least 5 percent below average market prices for Russian oil. Friday night, the Group of Seven nations and Australia agreed to that proposal. The cap is set be implemented starting Monday, the day the European Union’s embargo on Russian seaborne crude goes into force.
The idea of the cap, pitched hard by U.S. Treasury Secretary Janet L. Yellen, is to limit how much Russian President Vladimir Putin can make on the oil he diverts elsewhere in the world without creating a massive disruption in global supply. Participating countries would ban the provision of maritime services — such as finance and insurance — for shippers transporting Russian oil that do not comply with the cap.
Most such maritime services are handled by Western nations, including Greece and Britain. Those transporting oil traded above the cap would face penalties.
“The price cap will particularly benefit low- and medium-income countries who have already borne the brunt of elevated energy and food prices exacerbated by Putin’s war,” Yellen said in a statement after the deal was reached. “Whether these countries purchase energy inside or outside of the cap, the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in global energy markets.”
Yellen added: “With Russia’s economy already contracting and its budget increasingly stretched thin, the price cap will immediately cut into Putin’s most important source of revenue.”
The figure diplomats agreed to, however, is well above Russia’s cost of production and close to where its oil is currently trading — meaning it may not have much of a direct impact, analysts said. “A number that is 60-plus, under current market conditions, is not going to hurt Russia,” said Simone Tagliapietra, an energy expert at Bruegel, a Brussels-based think tank.
“This is all about the U.S. administration wanting to prevent oil prices from increasing,” he added.
Biden administration officials have stressed that the fact of the cap — allowing Russian oil flows to continue but ensuring Moscow could not benefit from a price surge — is more important than the actual cap level.
While the United States and its Western allies have sought to punish Russia for its invasion of Ukraine with some of the farthest-reaching economic sanctions in history, they have struggled to hit the Kremlin’s coffers, partly because of steep rises in gas and oil prices this year. As Western nations shunned Russia, other buyers stepped in, propping up Moscow’s revenue.
Even if the impact of the cap itself is muted, the E.U. embargo is expected to hit the Kremlin’s bottom line. According to Sergei Guriev, provost at France’s Sciences Po, the embargo will send the Russian economy into uncharted territory.
“The main losses will be from the embargo,” said Vladimir Milov, a former Russian deputy minister of energy who is now a leading opposition politician in exile. “Because the E.U. will stop buying, Russia will have to send crude to Asia. This is more expensive, and there will be big losses on price.”
Janis Kluge, senior associate at the German Institute for International and Security Affairs, said Russia will struggle to divert all its embargoed oil — an estimated 2.4 million barrels a day — and will probably see exports drop 10 or 20 percent. “This will impact additionally the already not very bright outlook for the Russian budget,” he said. “Over time, it adds to the pressure.”
As far as the price cap plan, there are still questions about how the rules would be interpreted and enforced.
Russia has warned that if a price cap is implemented, it will retaliate, potentially cutting off what remains of its pipeline exports to Europe as the continent braces for winter and battles an energy and cost-of-living crisis. “Companies that impose a price cap will not be among the recipients of Russian oil,” Kremlin spokesman Dmitry Peskov said in September.
If Russia responds to a cap by withholding oil from the international market, the West could suffer. But the United States and its allies are banking on Russia’s own need to sell its oil at whatever price it can get.
The decision on the price cap level comes after months of fraught debate and diplomacy about the best way to hit the Kremlin’s energy revenue without wreaking additional havoc on markets.
In March, in the immediate aftermath of Russia’s invasion of Ukraine, Biden announced a U.S. ban on Russian oil and gas, but the E.U., which was vastly more reliant on Russian energy, did not sign on.
In the months that followed, the European Commission slowly and painfully worked to convince member states that the bloc should stop buying Russian oil altogether. In late May, E.U. leaders agreed to phase out most Russian oil.
But the Biden administration was already pushing for a different approach: a price cap. Through the spring and summer, Yellen and other U.S. officials pressed European officials and leaders to consider creating a “buyer’s cartel” to limit Russian oil revenue without threatening supply.
Key countries, including Germany, opposed the plan, arguing that a buyer’s cartel works only if all major market players sign up. Russia will just keep selling oil to China and India, some warned. But the U.S. side persisted in its lobbying.
In September, the coalition agreed to move forward. “Today’s action will help deliver a major blow for Russian finances and will both hinder Russia’s ability to fight its unprovoked war in Ukraine and hasten the deterioration of the Russian economy,” Yellen said then.
Proponents of the cap see it as a sort of safety net, a way to offset the strict E.U. sanctions on Russia by keeping the market moving.
One of the final steps was setting the price cap level. In drawn out negotiations, E.U. ambassadors struggled to find common ground. E.U. officials proposed something in the range of $65 to $70 per barrel. One camp, led by Poland, pushed hard for a drastically lower cap, with an eye to inflicting maximum economic pain. Another group, led by countries with major shipping industries, including Greece and Malta, fought for something higher, according to E.U. diplomats.
To seal the deal and overcome Polish objections, the price cap was lowered to $60, and the regular review was added to make sure the cap has teeth, according to E.U. diplomats.
In an email to The Washington Post, Estonian Prime Minister Kaja Kallas said her country was hoping for a lower ceiling, but welcomed the deal. “Every dollar counts,” she said.
The difficult negotiations underscore division within the 27-member bloc as the war enters its 10th month and the continent grits its teeth through an energy crisis.
The oil price cap news comes the week after the European Commission proposed a separate temporary price cap on natural gas that was quickly dismissed as a “non-cap” because it was so high and may never be used.
The E.U. has haggled for months over coordinated emergency measures to lower energy prices for households and industry, including calls from more than a dozen member states for a gas price cap.
The commission’s price cap proposal, which it called a “market correction mechanism,” is supposed to help the bloc avoid further price spikes.
But under rules laid out by the commission, even this summer’s record-breaking prices would not have triggered the cap, leading some to wonder about its purpose.
“After months of waiting, the European Commission finally unveiled its formal proposal for a gas price cap to help the E.U. avoid exorbitant energy prices next year,” Politico’s Brussels Playbook ventured, “but it’s clear Brussels doesn’t want to use it.”
E.U. Energy Commissioner Kadri Simson conceded last week that the cap was “not a silver bullet.”
Belton reported from London and DeYoung from Washington. Missy Ryan in Washington contributed to this report.