Page 57 - RusRPTJul22

to take this step until the end of the year, and so the price cap is designed to serve as a stop gap.
The price cap could be set at or close to Russia’s marginal cost of production, ensuring the Kremlin makes no profit from its oil exports. At the same time, Russia would have an incentive to keep on exporting the crude, because the alternative would be the costly shut-in of fields and the loss of strategic markets overseas, potentially causing irreparable damage to its oil industry.
To enforce the price cap, G7 countries and their allies could make it illegal for any bank or company in their jurisdiction to support shipments of Russian oil that exceed the price cap. Russian oil exporters would therefore have to sell oil at or below the oil and provide verifiable proof, or lose access to shipping, insurance, ports and financial services in G7 member states. In the case of insurance, for example, the International Group of Protection & Indemnity Clubs in London covers around 95% of the global oil shipping fleet.
On the other hand, buyers that have maintained a more neutral stance towards Russia such as India would have the incentive of cheap oil to abide by the price cap. Indian oil refiners are already securing lucrative deals for discount Russian oil. The threat of secondary sanctions on those that do not comply with the cap would provide a stick to complement that carrot.
Difficulties and dodges For the price cap to work in practice, though, there would have to be a clear enforcement mechanism that avoids confusion and cheating. If enforcement is uneven, then it is likely to create even greater volatility on the global oil market.
Somewhat similar measures were implemented against oil producers in the past, such as the oil-for-food programme by the UN in 1995 that allowed Iraq to sell oil in exchange for food and medicine. Oil buyers paid money into an escrow account run by BNP Paribas, with some of the funds being used to pay for war reparations to Kuwait. But that programme was beset with widespread corruption and abuse.
Meanwhile, despite the intentions, the price cap might encourage some buyers such as India and China to actually ramp up oil supply from Russia, because after all they would be paying less. Therefore, the cap might fail to deprive Moscow of revenue, as Russia would be able to offset some of the lost price with increased volumes. That is, unless the cap was complemented with coordinated global reductions in Russian oil purchases, which buyers such as India have already shown they are unwilling to agree to.
Using insurance markets to implement the cap might also cause the price of non-Russian crude to soar amid fears of future shortages. This would hurt the global economy and could make buyers more willing to risk penalties for violating sanctions. Buyers that are not
57 RUSSIA Country Report October 2020 www.intellinews.com