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Russian Oil: Walking a Tightrope

Global Trade review

Western sanctions have historically sought to take a sledgehammer to the countries on the receiving end. In the case of US restrictions on Iran and North Korea, for example, companies are totally prohibited from facilitating the trade of goods and services, with only occasional carve-outs, for example for humanitarian purposes.


The solution they struck upon was to impose a price cap on oil transactions, introduced from December 5 onwards. The regime allows banks, insurers and shipping companies to continue facilitating trade in Russian oil, but only if the price remains below a certain level. As of press time, the cap has been set at US$60 per barrel, with a second threshold for petroleum products yet to be established.

“This is walking a tightrope,” says Washington, DC-based Matthew Thomas, a partner in the international trade practice at law firm Blank Rome. “Western governments can’t go after Russian energy with a sledgehammer, like with Iran, because they have a huge interest in maintaining the relative stability of energy prices – especially with high inflation globally.”

“These really are among the most innovative sanctions we’ve seen,” adds Anthony Rapa, a partner at the same firm and head of its national security practice. “We’ve never experienced anything quite like this mechanism.”


Will the cap prove effective?

Enticing banks, traders and insurers to make use of the price cap mechanism is only one measure of its effectiveness. Governments will be keenly watching for attempts to circumvent the controls, although Blank Rome’s Thomas and Rapa suggest doing so is unlikely to be easy.

“The concept behind this is that even if you have a Russian seller and a buyer in China or India, you would struggle logistically to move that from one place to the other without bumping into western finance, shipping or insurance,” says Thomas.

“There is also the ubiquity of dollars in energy trade.”

Rapa adds that non-oil price countries “probably don’t see trade in Russian oil as enough of a strategic issue that they need to build an entire ecosystem, completely firewalled, to facilitate it.”

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"Russian Oil: Walking a Tightrope," by John Basquill was published in Global Trade Review on January 16, 2023.