Which Countries Can Officially Dodge Compliance With G7 Price Cap on Russian Oil?

On 5 December, new sanctions rustled up by the Group of Seven (G7) countries and the European Union to punish Russia for its special military operation in Ukraine came into effect.

They include a price cap on Russian oil of $60 per barrel, enforced by the G7 industrialized economies (US, Canada, the UK, France, Germany, Italy and Japan), as well as the EU, and Australia. The cap is set to come under review every two months to remain at 5 percent below the International Energy Agency (IEA) benchmark.

An EU embargo on seaborne Russian oil, incorporated into the seventh package of sanctions against Moscow on 21 July, also kicked in.

In line with the G7 plan, shipping and insurance companies are prohibited from providing services to Russia unless the latter agrees to sell its crude for $60 per barrel or less.

However, a number of countries were officially spared the need of complying with the restrictions.

The new punitive restrictions on Russian oil do not apply to pipeline supplies of crude. When the 27 member states of the EU negotiated the sixth package of sanctions against Moscow in June, negotiations over a gradual phasing-out of both crude barrels and refined oil products from the world's second-largest oil exporter by the end of the year were exceedingly tense as Hungary advocated that oil supplies flowing through pipelines be granted total exemption. Lacking access to the sea, the trio of Hungary, the Czech Republic and Slovakia which are heavily reliant on Russian oil, raised concerns at the time. Thus, the EU-wide ban set seaborne crude imports from Russia in its crosshairs.

Accordingly, Hungary, the Czech Republic and Slovakia will continue to receive oil through the Druzhba pipeline, operated by Russia's state-controlled giant Transneft.

Put into full operation in October 1964, Druzhba - one of the world’s biggest crude oil pipeline networks - extends about 5,500km from its starting point in Almetyevsk in the Russian Federation, where it receives crude from pipelines in Siberia, the Urals and the Caspian Sea. Druzhba's present capacity is between 1.2Mln and 1.4Mln barrels per day.

The Czech Republic will receive oil from Russia via the southern branch of the Druzhba pipeline for another three years, Prime Minister Petr Fiala said in early December, adding:

"However, from 2025, the supply of this strategic raw material will be provided via the Transalpine Pipeline (TAL), whose capacity will be significantly expanded."

A special temporary derogation until the end of 2024 was granted to Bulgaria "because of its specific geographical exposure", allowing it to continue to import Russian crude oil and petroleum products via maritime transport.

Furthermore, the European Union allowed Hungary, the Czech Republic, Slovakia and Bulgaria to buy Russia’s seaborne crude without restrictions applying if supplies through the Druzhba network were suddenly interrupted.

Petroleum products, unlike oil, are still allowed to be delivered to Europe (the ban will come into force on 5 February 2023). Therefore, Croatia will continue to import vacuum gas oil from the Russian Federation, and the Czech Republic will continue to distill gasoline and diesel from Russian raw materials.

Japan has implemented a price cap on Russian crude oil at all fields, but opted to exclude the Sakhalin-2 oil project from the list. The requisite precondition is that the energy resource's place of origin is confirmed, the Japanese Foreign Ministry said.

"In terms of ensuring Japan's energy security, Sakhalin-2 oil is not subject to these regulatory measures. Thus, such operations as import, intermediary trade, transportation, customs clearance, insurance will be available for Sakhalin-2 oil," the ministry said.

Importers will have to obtain a document confirming that the imported oil is actually produced at the Sakhalin-2 project, as import of Russian oil from any other field, including from the Sakhalin-1 project, at a price above the cap will be forbidden.

As before the restrictions, Europeans can also continue to import non-Russian oil headed their way even though it travels through Russia or departs from Russia’s ports. Accordingly, Azerbaijani, Turkmen and Kazakh crude shipped from Russia's Ust-Luga and Novorossiysk terminals is unaffected by the sanctions. The same seems likely to apply to Latvian so-called “blends” from Ventspils.

Crude oil exported from Kazakhstan primarily moves via the Caspian Pipeline Consortium (CPC) system, with the oil reaching the Russian Black Sea port of Novorossiysk. Crude exports from Kazakhstan also use Russia’s Transneft pipeline system to reach Novorossiysk and the Russian Baltic Sea port of Ust-Luga.

From Azerbaijan, exports of crude are largely transported through the Turkish port of Ceyhan through the Baku-Tbilisi-Ceyhan (BTC) pipeline, but part of the oil is exported via Russia, using the Baku-Novorossiysk pipeline. Azerbaijan has been pumping oil through the 1,330km pipeline since 1997.

India may continue to buy Russia's fuel at market value, including above the G7-imposed price cap mechanism, under the condition that it steers clear of western insurance, finance and maritime services. According to India's Oil Minister Hardeep Singh Puri, his country is not affected by new sanctions against Russia. When asked to comment on the effect that capping the price of Russian oil would have on India, the official gave the curt reply, "None".

India, the world's third-largest oil consumer, bought 22 percent of its total imports from Russia in October. India will continue to buy Russian oil as it ensures energy access to the population on the “most advantageous terms”, Indian Foreign Minister Subrahmanyam Jaishankar said during a joint press conference with his Russian counterpart Sergei Lavrov in Moscow in late November.

As for Russia's reaction to the introduction of a price cap by the West, it emphasized that the price of crude will change in its wake.

On Sunday, Russia's deputy prime minister and native of Ukraine, Alexander Novak, said that Russia was devising mechanisms to render the western price cap on its oil inapplicable. Russia has slammed what it considers to be an attempt to manipulate “the basic principles of free markets,” clarifying that it will "only sell oil and oil products to those countries which will work with us according to market conditions".