How Hungary could thwart the G-7 plan to cap Russia’s wartime oil windfall

Sanctions targeting Russian oil exports come into effect in just 10 weeks, on December 5. From a practical point of view, sanctions come into play sooner than that. Tankers can take up to a month to reposition themselves for cargo loads. Refineries need to plan their deliveries well in advance.

The G-7 sanctions plan, which would cap Russian oil export prices, faces a big risk before it even kicks off: it depends on the European Union changing its own sanctions and enacting its own price cap to match that of the G-7. .

To change the sanctions, the EU vote must be unanimous. And it seems less likely to happen anytime soon.

Bloomberg reported on Monday that a price cap is unlikely to be included in the seventh round of EU sanctions currently under discussion. Hungary and Cyprus are among the naysayers, Bloomberg said.

This raises the risk that the tanker industry will face an unworkable quagmire of conflicting G7 and EU sanctions regimes in the months ahead.

If so, there could be a shortage of tankers able to obtain insurance for the transport of Russian cargo. The very result the United States is trying to avoid could happen. Russian exports could fall too far too fast, driving up prices for US consumers.

EU sanctions have gone too far

On June 3, the EU adopted its sixth round of sanctions targeting Russia. The EU agreed to ban maritime imports of crude on December 5 and products on February 5. In addition, EU companies would be prohibited from providing services for Russian crude and product exports to third countries after these two dates, respectively.

With more than 90% of tankers insured by service providers in the UK and EU, there were fears that EU sanctions would go too far and effectively block most Russian exports. U.S. officials addressed the concern during remarks at the Capital Link Maritime Forum in New York on Wednesday.

“We think [EU sanctions] was a well-intentioned policy aimed at reducing Kremlin revenue in the context of the war, but in our view it would significantly reduce the flow of Russian oil to the global market,” said Erik Van Nostrand, senior adviser for the Russia/Ukraine policy. at the Treasury Department’s Bureau of Economic Policy.

The G-7 ‘escape valve’ to EU sanctions

To correct this perceived flaw, the G-7 countries agreed on Sept. 7 to set a cap on the price of Russian oil exports.

As with the EU plan, maritime service providers from G-7 countries would be banned from facilitating Russian oil exports. However, the G-7 would allow its countries’ service providers — most notably British marine insurers — to facilitate the transportation of Russian oil sold at or below a price cap set by the G-7.

“We see the price cap as an adjustment to the EU’s sixth sanctions package,” Van Nostrand said. “The goal is to allow the oil to continue to flow. To keep energy affordable. But do it in a way that doesn’t undermine the Sixth Sanctions’ goal of depriving the Kremlin of windfall profits. What we are doing mechanically is creating an exception to this ban on maritime services. The price cap is a release valve for the sixth round of sanctions.

What if the EU does not approve the price cap?

But this release valve will only work properly if the EU sanctions are revised.

According to Michael Lieberman, deputy director of enforcement at the Office of Foreign Assets Control, “The idea is that the EU would adopt a cap similar to that of the G7. They will reflect each other.

G-7 Finance Ministers Meeting (Photo: AP Photo/Stefan Rousseau)

Van Nostrand said: “This will involve the reopening of the sixth round of sanctions. The exception for oil traded below the cap is coin [of the EU sanctions] this needs to be changed.

This is the exact proposal that is now facing opposition from some EU members.

If the EU fails to reflect the G-7 price cap by December 5, crude tanker shipments that are “legal” under G-7 rules would breach EU sanctions if suppliers of services under EU jurisdiction were involved.

Most Property Insurance and Shipowners Compensation (P&I) clubs are in the UK, a member of the G-7, not the EU. But these P&I clubs are nevertheless exposed to EU sanctions.

According to guidelines published by members of the International Group (IG) of P&I Clubs, “Most of the clubs that make up the IG are subject to EU jurisdiction. All IG clubs, including those domiciled outside EU territory, rely on a reinsurance program that relies heavily on the participation of reinsurers domiciled in the EU.

So UK marine insurers would face coverage restrictions until EU sanctions are aligned with those of the G-7. Due to the EU’s unanimity voting rule, only one country like Hungary – whose leader Viktor Orban is highly critical of Russian sanctions and has contentious relationships with other EU officials EU – could theoretically thwart the G-7 plan by refusing to support an EU price cap.

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