New US enforcement measures ushering in a second phase of the G7-led price cap on Russian seaborne crude exports have government officials and market watchers more optimistic that the novel policy can retain its efficacy and meaningfully impact Russia’s economy and warfighting capabilities.
Though US officials continue to point to the novel price cap regime as a success, noting that Russian oil tax revenue has slid 45% from January-August this year compared with the same year-ago period, concerns have mounted over the policy’s continued effectiveness in the face of a growing shadow fleet and other measures by Russia to circumvent the $60/b cap on its oil.
“Russia, as expected, has taken countermeasures to trade around the cap, including amassing a fleet of aging ships to carry its oil and offering questionable insurance on those tankers,” said Ben Harris, an architect of the price cap while at the Treasury Department and now vice president and director of economic studies at the Brookings Institution.
“The enforcement measures announced last week by the Treasury Department and the G7 coalition are a strong first step towards an effective second phase and have reinforced my optimism that the price cap will continue to achieve its stated objectives,” he said during an Oct. 16 Brookings-hosted webinar.
Those enforcement measures included first-ever US sanctions targeting violations of the price cap against companies in the UAE and Turkey whose vessels used US-based service providers while transporting Russian crude priced above the price cap.
The coalition behind the price cap, namely the G7 and Australia, also came out in strong and unified support of the policy and committed to cracking down on violators as well.
Treasury outlook
Treasury Acting Assistant Secretary for Economic Policy Eric Van Nostrand said the price cap was designed to force Russia to make “hard choices” — sell oil at a considerable discount in line with the price cap or invest heavily in a shadow tanker fleet to transport oil outside of the G7’s reach.
“Such investments contribute to Russia’s growing fiscal deficit, and buying tankers makes it considerably harder for the Kremlin to buy tanks, and that’s a desirable goal of the strategy,” Van Nostrand said.
The 45% drop in Russian oil revenues does not “account for the large expense Russia has incurred trying to construct this alternative ecosystem of ships and services,” he added. “So the real economic toll for the Kremlin isn’t just about the lost revenues, it’s about that and the increased costs associated with using non-G7 services.”
He deemed the first phase of the price cap a success as the disruptive oil supply impacts forecast by many analysts were avoided while Russian revenues were sharply cut.
The enforcement focus of the second phase, he said, will use sanctions tools to crack down on overt evasion of the price cap as well as look for more ways to increase costs faced by the shadow fleet to both disincentivize its further expansion and further drain money from Russia’s war coffers.
Russia’s shadow fleet capacity is approaching 40% of its crude export needs, but the country has been able to transport more than half of its oil on these ships by focusing on short routes to get more out with fewer ships, according to Craig Kennedy, an associate at Harvard University’s Davis Center for Eurasian and Russian Studies.
This fleet building has been slow and pricey, leaving the West with a great deal of leverage from its control of most maritime services, he said. Still, he asserted that key to the success of the second phase of the price cap will be whether Treasury can reverse or at least slow “the expansion of the shadow fleet channel and divert more oil back into the compliance channel and make certain that channel is well policed.”
Focus on insurance
If price cap coalition members follow through on their own advice laid out in an Oct. 12 advisory to the maritime oil industry, “you could potentially see quite significant limits placed on the ability of Russia to continue using the shadow fleet for its exports,” Kennedy said.
In particular, he pointed to guidance requiring appropriately capitalized Protection and Indemnity insurance for all vessels.
Tankers are obligated to carry oil spill liability insurance that is not available through commercial insurance markets. This forced the shipping industry to develop a system that now covers 95% of the global fleet with sufficient insurance. That system can provide up to $1 billion per incident if a spill were to occur as part of an international obligation.
“The shadow fleet does not provide anything like the degree of transparency or certainty that the insurance that they claim to have actually even exists, much less is adequately capitalized,” Kennedy said. “And what we know about the business model of the shadow fleet is they cut corners aggressively, and they use opacity and lack of transparency as a way of making money.”
He advocated for a requirement that any tanker traveling through territorial waters of an EU member state must verify its insurance to show that it is current and properly capitalized.
He noted that maritime law gives coastal states rights to protect their marine environment from possible threats from oil spills, and Turkey began doing this in December for vessels transiting through the Bosporus or when calling at Turkish ports.
“You can do that in 10 seconds online for 95% of the world’s oil tanker fleet,” Kennedy said. “The shadow fleet, however, has been getting a free pass, and it’s time for people to step up and say, if you’re not going to insure your tanker properly, it may not pass.”
Source : Hellenic Shipping News
