EU weighs temporary freeze on Russia oil price cap over Iran

[BRUSSELS] The European Union is considering a temporary freeze to its price cap on Russian oil as the war in the Middle East continues into a fourth month, said people familiar with the matter.

The bloc adopted a dynamic mechanism last year to ensure that the price cap is automatically set every six months at 15 per cent lower than the average market rate for Russian Urals crude. The current price threshold is US$44.10 per barrel and is due for review later this summer.

Under the cap, European companies are banned from providing services such as insurance and transportation involving oil sold above the threshold.

Oil prices have soared as a result of the Iran war and the effective closure of the Strait of Hormuz. The next price cap review in July would likely see the level rise to at least US$65, higher than the previous US$60 threshold set collectively by the Group of Seven, said the sources, who spoke on condition of anonymity to discuss private deliberations. 

The freeze would keep the price cap at the current rate. Other options under consideration include suspending dynamic and automatic increases until the end of the year in light of the exceptional circumstances in the Middle East, or capping any rise to US$60 back in line with the G7 level, the sources said.

The move would be part of the EU’s latest sanctions package, the bloc’s 21st since Russia’s full-scale invasion of Ukraine in 2022. The EU aims to finalise and formally propose a package of new measures in early June. Member-state envoys were briefed on the plans last week. 

Other measures under discussion for the new sanctions package include targeting more banks, oil traders, refineries and crypto operators in third countries used by Moscow to circumvent the bloc’s restrictions.

As well, about 20 additional tankers would be sanctioned in the covert fleet of vessels that Russia depends on to move its oil, and eventually that regime would be extended to ships carrying liquefied natural gas (LNG), limiting the Kremlin’s ability to create a shadow fleet for LNG.

The EU has so far sanctioned hundreds of vessels and intends to also target ships providing services to the tankers, the sources said.

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However, the new sanctions are unlikely to include a full ban on maritime services. Several member states continue to oppose that option due to the volatility in the Middle East, and unless the measure is backed by the wider G7.

Tighten the screws

The main goals of the new package, the sources said, are to further tighten the screws on Russia’s energy revenues and its financial sector, as well as starving its military industry of essential supplies.

Sanctions require the backing of all member states before they are adopted, and plans could change before that. Maritime nations such as Greece have often bristled at price-cap changes, while other capitals are particularly sensitive towards what they say are their energy and trade interests.

Other proposals for the next package include trade restrictions on some critical minerals, metals and ores used in Russia’s aerospace sector and to develop the drones it uses to bomb Ukraine’s cities, as well as technologies such as jamming.

The bloc is also considering export controls on about two dozen companies – including companies in China, India, Turkey and Central Asia – that are allegedly still supplying Russia with restricted goods found in weapons or needed to make them.

The EU is also in the early stages of assessing ways to help the clearing house Euroclear after a Moscow court judgment allowed for the Central Bank of Russia to potentially seize its assets.

That came after the EU approved the use of emergency powers to indefinitely extend a freeze on as much as 210 billion euros (S$312.6 billion) in Russian central bank assets that have been immobilised. Most of those funds are held through Euroclear.

The EU intends to keep the assets immobilised until the war ends, and Russia pays reparations to Ukraine. Several member states, including Belgium, have opposed all efforts to seize the assets outright.

Discussions on introducing a visa ban on former combatants are continuing as well, the sources said.

Spokespeople for the European Commission, the bloc’s executive arm that coordinates the EU’s sanctions efforts, declined to comment. BLOOMBERG