EU wants to hit Russia with a new price cap on diesel

Zurich, Brussels The first blow to the Kremlin’s war chest came in December. At the end of 2022, the EU stopped imports of crude oil from Russia and at the same time implemented a global price cap together with the USA and the other G7 countries. Since then, Russian oil has traded at significantly lower prices than crude oil from other sources.

“There was a lot of skepticism as to whether such a price cap could work,” said Maria Shagina, an energy expert at the International Institute for Strategic Studies (IISS). “But it works.”

Now the next blow is prepared. The EU countries are in the final phase of negotiations on the introduction of price caps on diesel and heavy fuel oil. A meeting of representatives of the member states on Tuesday did not bring any breakthrough. It is clear, however, that the price cap should come into force on February 5th.

From this date onwards, the EU itself no longer wants to import diesel or heavy fuel oil from Russia. At the same time, exports of Russian oil products to other regions of the world may only be shipped by European shipowners or insured by European financial firms if they are traded below the price cap. As in December with the crude oil price cap, the G7 countries support the new measures.

There are still discussions about the height of the lid. The EU Commission has proposed $100 per barrel for diesel and $45 per barrel for heavy fuel oil, which is said to be around 10 percent below market prices. The cap on diesel is particularly relevant. Poland and the Baltic states want lower values, other states prefer to proceed cautiously and set the sum rather high.

Consequences for Moscow and German motorists

The lower the cap, the more Russia’s diesel customers should be able to drive down the price, making the sanction all the more painful for Moscow. However, a cap that is too low could result in Russia severely reducing exports or stopping them altogether. That would shake up the market and cause prices in the West to rise even more than expected.

Gas station

The diesel embargo could therefore cause greater damage in the West than the crude oil embargo.

(Photo: dpa)

In the case of crude oil, the G7 countries managed to reduce Russia’s export revenues while leaving the volume exported unchanged. So there was no shortage on the world market. With diesel, that might be harder.

“Prices at the pump have already risen in the past week and will continue to rise,” says Michael Connolly from the industry service ICIS. “Until recently, Europe imported large quantities of Russian diesel, which is difficult to replace in the short term.”

The diesel embargo could therefore cause greater damage in the West than the crude oil embargo. In the coming months, however, supply will increase again as large refineries are completed in other parts of the world, says Connolly.

The prices at the petrol stations would also fall again. The reason for this has nothing to do with Russia’s invasion of Ukraine: the investment decisions for these refineries were made 10 to 15 years ago, Connolly explained. Back then, diesel still had an environmentally friendly image.

For Russia, the impact of the diesel price cap is likely to be more severe than that of the crude oil price cap. Moscow is trying to circumvent the price cap on crude oil and will try to do the same with the price cap on diesel, says Shagina. “Russia spent a lot of money building a shadow fleet of very old tankers to ship its crude oil,” she says.

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Even that is sometimes adventurous: “Russian companies pay 40 million euros for very old tankers,” she says. “That’s a lot of money for a pile of scrap metal floating in the ocean.”

Bypassing becomes more difficult

Selling diesel in this way is becoming even more difficult. Expanding the shadow fleet is likely to pose problems for Moscow. In addition, unlike the import ban on crude oil, China and India are no longer major buyers. They have their own refinery capacities and are therefore more interested in crude oil than finished diesel.

Oil refinery Russia

The price cap is intended to punish Russia for the aggressive war against Ukraine.


Giovanni Staunovo, a commodities analyst at the Swiss bank UBS, therefore expects Russia to be forced to cut oil production from more than 10 million barrels a day before the war to 9 million barrels a day.

The combination of shrinking supply and growing demand due to the economic opening in China after the corona pandemic will cause the price of crude oil to rise from around $85 a barrel at present to more than $100 in the second half of 2023.

>> Read here: Russian economy is doing better than expected – IMF raises forecasts

The price cap is intended to punish Russia for the aggressive war against Ukraine. It is an indirect sanction that works differently than a classic embargo. Western countries prohibit their insurance companies and shipping companies from trading in Russian diesel if the diesel was sold at a price above the price cap. Since many shipowners are based in the EU and many insurance companies in Great Britain, the West is clearly slowing down Russia’s oil business in this way.

More: The collapse of Russia’s economy is imminent

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