Western efforts to choke Russia’s oil profits are failing as production cuts agreed with Saudi Arabia push the market price towards US$100 a barrel and Russia’s biggest customers—China and India—start paying close to full market price.

Russia is successfully evading the Western effort to impose a price cap of US$60 a barrel on a large share of its oil sales.

The price cap, devised by US Treasury Secretary Janet Yellen and in place since December 2022, demands that Western insurance companies only provide coverage of Russian oil shipments if they can be certified as being sold at no more than the upper limit.

The aim was to curb Russia’s profits while allowing its oil to keep flowing to world markets. An absolute ban on Russian oil sales, as the US imposed on Iran and Venezuela, would have sent the global price rocketing and was, in any case, seen to be impractical with such a large supplier as Russia.

Since Western insurance companies covered around 90% of the world’s shipping, it was expected to be successful. The agreement on the price cap binds all European Union and G7 members, except Japan. Australia is also party to the arrangement. Japan secured an exemption, which was recently extended to the middle of next year, because of its extensive involvement in Russia’s Sakhalin-2 oil and liquefied natural gas project, in which Japanese trading companies have invested and which supplies 10% of Japan’s LNG imports.

Estimates by French trade data consultancy Kpler show that, in August, only 24 million barrels of Russian oil were delivered by ships carrying insurance, while no insurance could be identified for tankers carrying 67 million barrels. The share with identifiable insurance has dropped from 47% to 26% since May.

According to energy pricing company Argus Media, Russian oil was selling for US$87 a barrel on 22 September, only a few dollars short of the North Sea benchmark price of US$94, and far above the level set by the cap. Russia had been forced to accept discounts of as much as US$35 a barrel until April this year.

Yellen acknowledged last weekend that the prices being fetched by Russian oil showed the price cap wasn’t working as hoped. ‘It does point to some reduction in the effectiveness of the price cap,’ she said.

‘Russia has spent a great deal of money and time and effort to provide services for the export of its oil. They have added to their shadow fleet, provided more insurance and that kind of trade is not prohibited by the price cap,’ she said.

The ‘shadow fleet’ Yellen referred to is understood to comprise almost 500 tankers, often with obscure ownership and insurance details that can change monthly. Shipments are sometimes made in small tankers and then transferred to larger vessels in the Mediterranean for the journey to Asia.

Lloyds List analyst Michelle Wiese Bockman says prices for nearly all grades of Russian crude oil and refined products are now between 28% and 50% above the G7 price cap. She said a significant portion of Russia’s oil shipments were still using Western insurance, implying they were complying with the cap.

She suggested that false attestation documentation by the Russian sellers could explain how Russia was exceeding the limit. ‘There’s no suggestion sanctions are being breached by those ships, but I can’t see how so many volumes could be compliant. These documents aren’t publicly available, but would be available to regulators upon request. Perhaps enforcement needs to be stepped up to find out how these deals are being structured so they can remain below the cap.’

A Financial Times investigation found that on the Russia-to-India trade, oil was being loaded at Russia’s Baltic ports at a price below the cap, but was arriving in India at prices US$18 a barrel higher, which is about double the freight cost.

Russia’s most potent counter to the Western price cap is the deal it struck with Saudi Arabia 12 months ago to cut oil production, with combined OPEC and Russian output falling by two million barrels a day. The cut was supposed to expire last month, but Saudi Arabia and Russia recently agreed to extend it to the end of the year.

The International Energy Agency, which represents oil-consuming nations, commented, ‘The Saudi–Russian alliance is proving a formidable challenge for oil markets.’ It predicts demand will rise by 1.5 million barrels a day over the remainder of the year, with most of the increase coming from China, and says supplies will run short.

It’s a seller’s market for oil and this favours Russia getting the prices it wants. Shipping is too fragmented an industry—with its flags of convenience, tax-haven ownerships and a multitude of shippers who can operate from a post office box—to be corralled reliably by the G7 price cap, particularly when the biggest buyers of Russian oil—China, India and Turkey—are not parties to it.

Yellen is a formidable economist. She chaired the US Federal Reserve and the Council of Economic Advisers under President Bill Clinton, and has held significant academic appointments. However, the price cap may have been too clever, overestimating the power of financial regulators to dictate the terms of trade to the oil market.

There have been concerns that Russia may use the tight state of markets to generate a further global energy crisis over the coming northern winter, with suggestions that Russian President Vladimir Putin is keen to make life for US President Joe Biden as uncomfortable as possible in the lead-up to next year’s US election. Russia recently banned the export of diesel and petrol, claiming it faced a domestic shortage, which added to global anxiety about energy supplies.

While an energy crisis may suit Russia, it is not in the interest of Saudi Arabia. The alliance between the two is just one of convenience. The Saudis want to keep the oil price high, but not so elevated that it leads to either a global recession or a fresh surge of US shale oil production. It was only three years ago that a disagreement between Saudi  Arabia and Russia over production cuts in the face of the pandemic descended into an all-out price war which at one point sent the global oil price negative.