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As deadline looms, some traders remain wary of Russia oil price cap

The workings of the price cap on Russian oil by the G7, European Union and Australia remain uncertain less than two weeks from its start date, with some jurisdictions yet to provide details on enforcement and top traders suggesting they will not resume trading Russian crude.

A ban on the provision of financing, insurance and other services to exports of Russian crude below the price cap will come into effect on December 5. The final price may reportedly be set as early as today.

The G7 devised the price ceiling mechanism with the dual aims of preventing Vladimir Putin from taking advantage of elevated oil prices to fund his war against Ukraine while providing a cheap source of energy for developing countries.

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Among the notoriously opaque world of oil trading giants, major players Vitol and Shell say they have no plans to resume trading Russian-origin crude oil, while others have left open the door to resuming or continuing the trade.

Shell, a trader of crude oil as well as buyer for its own refineries and service stations, confirmed to GTR it will not resume trading or buying Russian-origin crude. The UK-headquartered company said in March that it would end “its involvement in all Russian hydrocarbons” and apologised for purchasing cargoes of Russian crude immediately after Russia’s invasion of Ukraine in February.

Vitol, one of the world’s largest independent oil traders, tells GTR that it has lifted no Russian-origin crude since April but that it “will continue to lift a small amount of [non-crude] Russian product after 5th December [in] full compliance with all applicable regulatory and sanctions regimes”.

“We have put in place comprehensive procedures and controls to oversee any such flows,” a spokesperson says, adding that the trader is “waiting for additional information, including detail regarding the EU regimes and additional price-cap information”.

The US Treasury did not respond when asked if it was concerned that large traders may not resume dealing in Russian crude when the cap begins.

A spokesperson for Glencore says the commodities giant has “nothing further to add” to its March statement that it “will not enter into any new trading business in respect of Russian origin commodities unless directed by the relevant government authorities”. When asked if that means Glencore will not resume trading under the cap, the spokesperson declined to comment.

Asked if they will adhere to the oil price cap, independent oil trading majors Gunvor and Trafigura say only that they follow all applicable economic sanctions.

A spokesperson for Trafigura tells GTR: “We stopped purchasing crude oil from Rosneft before the 15 May deadline [imposed by the EU] and have substantially reduced the volume of petroleum products we are offtaking, in order to supply essential fuels to customers.”

A spokesperson for Gunvor, asked whether the company had ceased trading Russian-origin oil after the invasion of Ukraine, says: “As international economic sanctions have come into effect, Gunvor has ended trading with relevant Russian counterparties, while performing on contracts that are not subject to sanctions. None of Gunvor’s refineries process Russia-origin crude oil.”

TotalEnergies, which announced an end to new trading in Russian oil shortly after the invasion, did not respond to requests for comment. BP and Mercuria, who never explicitly committed to ending trade in Russian-origin crude, did not respond when asked if they will adhere to the price cap.

 

Details lacking

Less than two weeks from its introduction, uncertainty remains over how widely the price cap will be enforced and what the onus on traders, banks and insurers will be in each jurisdiction.

So far, only the UK and US have published detailed guidance for firms. The UK’s Office of Financial Sanctions Implementation published detailed guidance earlier this month, which includes mandatory reporting requirements for traders and due diligence requirements for trade finance providers.

US authorities published similar preliminary guidance in September and released final guidance on November 22, including further detail on what banks and traders need to do in order to qualify for “safe harbour” from enforcement action under the mechanism. A State Department official said last week that the Biden administration expects some “hiccups” in the early stages of implementation.

But the European Commission has not yet detailed its enforcement approach, or indicated if it will differ from that of the US or UK. A Commission spokesperson declined to comment while G7 discussions are ongoing.

Sanctions enforcement in the EU is currently the responsibility of its 27 member states and it is not clear if each will take its own compliance approach. A forthcoming directive is expected to centralise some enforcement responsibilities in Brussels.

The EU ban on provision of services to exports of Russian crude begins on December 5, and a similar ban on Russian-origin refined products kicks in a month later. The Commission is set to allow shipments of crude loaded before December 5 to be exempt from the cap as long as they are unloaded by January 19, following a similar measure by the UK, Bloomberg reported earlier this week.

Switzerland announced on Wednesday that it will adopt the EU’s eight sanctions package, which includes the price cap, in full.

Swiss campaign group Public Eye estimates that some 50-60% of Russian oil is traded through Switzerland, although since the invasion many traders have reportedly shifted their Russian trading operations to locations such as Dubai, where local authorities are largely sitting out the Western sanctions regime on Russia.

Paramount Energy and Commodities, a Swiss trader named by Public Eye earlier this year as a significant trader of Russian oil, did not respond to written questions.

Japan, one of the earliest proponents of a price cap and part-owner of a stake in the Sakhalin-2 oil and gas project in Russia’s far east, has not yet published guidance for companies under its jurisdiction on compliance with the cap.

The US Office of Foreign Assets Control on Tuesday published a general licence authorising transactions relating to Sakhalin-2 as long as they are direct imports to Japan.

Australia, the only non-G7 country so far to join the price mechanism, has also not published guidance for firms in scope of its sanctions regime. A spokesperson for the Australian Department of Foreign Affairs tells GTR that “Australia is engaging constructively with the G7 as we work towards effective implementation of the price cap on Russian oil”.

Australian authorities have never taken enforcement action against a company for violating its sanctions laws and the relevant regulator, the Australian Sanctions Office, can force companies to hand over documents but has no civil enforcement powers and relies on federal police to investigate possible breaches.

Announcing an agreement on the price cap in September, G7 members said they “envisage that the coalition establishes a cooperation framework across jurisdictions to ensure compliance and enable monitoring and supervision,” but such a document is yet to be published.

US officials, concerned about weak links in the West’s sanctions regime, have been jetting to foreign capitals urging allies to beef up their enforcement efforts, the Wall Street Journal reported on November 21.

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