G7 coalition to tighten 'price cap' rules for Russian oil trade

The imposition of "price cap" restrictions on exports of Russian oil by the US-led G7 coalition is aimed at tightening the mechanism further to clamp down on evasion by shippers and traders, according to a statement Dec. 20 from Japan, which currently holds the G7 presidency.

In its latest move, the G7 said it will soon require coalition shipping service providers to receive attestations from their counterparties each time they lift or load Russian oil. Oil supply chain participants could also be requested to share itemized "ancillary costs", such as insurance and freight, with entities "further down the supply chain," the G7 said.

The move follows a similar enforcement clampdown by the EU and a recent wave of enforcement proceedings by the US and the UK against some tanker owners and shippers who authorities say have cheated the price cap mechanism.

"These changes will support the implementation of the oil price cap and disrupt circumvention by reducing opportunities for bad actors to use opaque shipping costs to disguise oil purchased above the cap," the G7 coalition said.

Under the current rules in place since December 2022, Western shippers and tanker charterers are required to declare they paid no more than $60/b to lift Russian crude cargoes. Higher price caps are also in place for Russian oil product exports. But increasing volumes of Russian oil have been traded above the price cap this year, helped by a growing fleet of "shadow" tankers and some buyers paying additional sums over the officially reported crude price and claiming the total value included additional costs such as freight and insurance fees.

The G7 coalition said its members would provide further guidance to their service providers and relevant industry, as well as details on the transition period, in the coming weeks through their respective domestic processes.

New US sanctions

The US Department of Treasury's Office of Foreign Assets Control noted the updated price cap coalition guidance when it announced Dec. 20 that it had issued new sanctions on a Russia-owned ship manager and several oil traders.

The move to sanction small, obscure traders transporting Russian oil above the price cap is part of G7 efforts to remove Russia's ability to benefit from the provision of shipping services outside of Western providers, a senior US Treasury official said.

"We're making it more expensive for Russia to move its oil ...and we're focused on pushing on both sides of the balloon together," the US Treasury official said Dec. 20. "It's both enforcement under the cap, which are the [sanctions] designations we've been doing over the past two months and increasing the costs of trade outside the cap."

OFAC sanctioned three traders that have increased their share of the trade of Russian oil since the price cap policy was implemented, according to an OFAC statement. The traders are Hong Kong-based Bellatrix Energy Limited, Hong Kong-based Covart Energy Limited, and UAE-based Voliton DMCC, the statement said.

"Since the imposition of the price cap, little-known oil traders with opaque ownership structures have emerged as frequent participants in the seaborne transport of oil produced by major Russian oil companies, shipping up to half of Russia's oil exports," the statement said.

OFAC also sanctioned the UAE-based SUN Ship management D Ltd, which is owned by Russia-owned fleet operator Joint Stock Company Sovcomflot, the statement said. Sun Ship manages the SCF Primorye, a vessel OFAC previously identified as having violated the price cap while using services of a covered US-based provider, the statement said.

Crude discount

The discount for Russia's key export-grade Urals crude oil has widened to a five-month high versus the Dated Brent benchmark after the EU brought in fresh measures targeting sanctions-busting by some shippers, the latest attempt by Western powers to boost compliance with their "price cap" on Moscow's oil.

Platts, part of S&P Global Commodity Insights, assessed FOB Urals Primorsk at $61.40/b on Dec. 18, a $17.80/b discount to Dated Brent, the widest since July 19.

The discount for Urals, a medium sour crude now sold mostly to refiners in China and India, is seen as a key marker of the success of the G7 oil price cap, which restricts shippers from transporting Russian crude at prices above $60/b while aiming to keep oil markets supplied.

The G7 coalition said it believes the price cap on crude oil has been "successful in advancing both of our goals of supporting stability in energy markets while reducing Russian revenues that it could otherwise use to fund its illegal war."

It estimated that Russian tax revenue from oil and petroleum product exports -- Russia's key source of revenue -- was 32% lower over January-November from the same period last year.

"We are therefore strongly focused on increasing compliance and other costs for Russia," the G7 said. "Coalition members review all available evidence and may pursue additional actions in turn."