New U.S. guidance on the planned Russian oil price cap could cause a significant escalation in the energy crisis should Moscow decide to restrict oil exports. In guidance published Sept. 9, the U.S. Treasury Department threatened to sanction entities that do not comply with the G-7 price cap and the EU insurance ban when using Western insurers. But it also sought to give safe harbor for insurers and other financial institutions, which are effectively tasked with implementing the price cap, by laying out the steps and documentation needed to comply with the cap. The Treasury Department hopes the guidance will facilitate the transport of Russian oil under the price cap and avoid a crisis where insurers and other financial institutions forgo covering trade involving Russian crude oil. It also hopes the guidance gives the G-7's price cap teeth by showing that the United States is willing to use sanctions against companies that use Western insurance services but do not comply with the cap.

• On Sept. 2, the G-7 agreed to implement a price cap on Russian crude oil and Russian oil products, effective in December 2022 and February 2023, respectively, to coincide with the incoming EU ban on financial institutions providing insurance coverage on the maritime transport of Russian oil to third countries. 
• Under the price cap, financial institutions will be allowed to provide insurance to maritime transports of Russian oil to third countries, but only if the oil is sold under the proposed price cap. 
• On Sept. 7, Russian President Vladimir Putin warned that Russia would stop exporting oil and natural gas to countries abiding by the price cap, putting its Asian clients, principally India and China, on notice not to comply with the cap. Beijing has said that it does not support the cap and India is considering the matter; the countries' leading oil importing companies have not addressed the issue publicly.

For the United States and Europe, the price cap is just as much about ensuring that the EU ban on shipping insurance does not result in Russian oil being stopped altogether amid a growing energy crisis in the West. The European financial sector — and London's financial sector in particular — is crucial to the global shipping industry because it provides insurance and reinsurance to maritime traffic. Even though the insurance ban only covers the European Union, many have feared it would be too disruptive to Moscow's ability to ship oil to third countries. This is because the London insurance organization the International Group of P&I Clubs follows European law and its members arrange about 95% of the tanker liability coverage globally, and because many of Russia's Asian clients reinsure or insure through financial institutions affiliated with the organization. If fully implemented as written, the ban therefore risks significantly disrupting Russian oil shipments beyond the West given the limited size of the non-Western financial industry and limited availability of non-Western tankers. Through the price cap and Treasury's guidance, the United States and the European Union now hope some of those insurance and reinsurance services remain on offer, limiting the impact of the restrictions on actual flows of Russian oil. This is because the price cap theoretically effectively provides an exemption for oil purchases below the price cap. The West is acting on fears of oil prices returning to $120 per barrel or more as seen earlier this year, since any decline in Russian oil exports will result in higher oil prices. These concerns are particularly significant in Europe, where Russia is curbing its natural gas exports to Europe through the Nord Stream 1 pipeline. 

• The Treasury guidance focuses heavily on record keeping and pricing documentation processes ''designed to create a 'safe harbor' for service providers from liability for breach of sanctions.'' With such safe harbor processes, financial institutions will probably be more willing to provide financial services to Russian oil shipments. 
• For Europe, higher oil prices would deepen the ongoing energy price shock, which is causing some industries to substitute oil for much more expensive, more limited natural gas supplies. In the United States, higher oil prices would become a political liability for the Democratic Party due to the politically sensitive nature of high gasoline prices, though a new spike would not be unlikely to occur before Nov. 8 midterm elections. 

Though China and New Delhi are unlikely to support the price cap, it may prompt smaller non-Western countries to accept it or give them the leverage to demand large discounts from Russia — something the West would still view as a strategic win. Thus far, China has said it opposes the price cap and India has said it is weighing the cap. But with Moscow threatening to cut off oil exports to countries abiding by the cap and Beijing and New Delhi both concerned about energy security, neither is likely to adhere to the cap formally. Moreover, China and India are large enough countries that their governments might be willing to partially subsidize shipping insurance, or pressure their companies buying Russian oil to use non-Western insurers. Collectively, China and India imported about 1.85 million barrels per day of Russian crude oil in July 2022 — or about 40% of Russia's overall exports — but this may be the upper end of what they can afford, and what they can refine. This will make Russian sales to smaller non-Western countries — including Vietnam, Indonesia, Pakistan and Turkey — more crucial for Moscow once the G-7 price cap and European oil embargo go into effect. Governments in those countries do not, however, always have the same ability to step in and subsidize insurance coverage. This could lead some of their companies to abide by the price cap or try to use the price cap's existence to negotiate significant price discounts from Russia. 

• Indonesia has announced that Russia is willing to sell oil to the country at a 30% discount. While it remains unclear if the price cap would be set that low, from the West's point of view, a 30% discount — even if not as low as the cap — would be a substantial hit to Russian oil revenue that still keeps the oil on the market. Thus, it would be a strategic win, since the cap's main goal is to reduce the Kremlin's oil revenue while keeping oil flowing. 
• Indian government officials have repeatedly pointed out that Ingosstrakh, a Moscow-based insurer, is one of the 15 insurers that does not belong to the London-based International Group of Protection and Indemnity Clubs but that is approved for India to use through February 2024. This suggests that New Delhi will push its state-owned refiners to buy Russian oil at a discount, and might use Ingosstrakh for liability coverage without necessarily complying with the price cap.

If the G-7 price cap does limit Russia's oil revenue — either via the cap or negotiated discounts — Moscow will become more willing to restrict oil exports to drive up revenue and trigger economic crises in the West. Just hours after the G-7 announced it would proceed with the price cap, Russian natural gas exporter Gazprom announced that natural gas flows through the Nord Stream 1 pipeline — which delivers gas directly to G-7 member Germany — would be suspended indefinitely. This demonstrates Moscow's willingness to cut off energy flows and gives credence to Russian President Vladimir Putin's threat to cut off oil exports to countries abiding by the oil price cap. Russia will likely cut off oil exports to countries willing only to buy Russian oil at the price cap, but will probably be willing to sell to countries at large discounts above the price cap to maintain necessary revenue flows. It remains to be seen how large that market will be, as it is unclear whether companies in smaller countries will find alternative insurance coverage and enough tankers to transport oil without Western coverage. If the market is small, however, Russia may be unable to sell a substantial part of its roughly 4 million to 5 million barrels of crude oil exports (and more refined products) above the price cap. If that is the case, Russia probably will not export that oil, which could send prices back to above $100 or $120 per barrel, and perhaps much higher.

• Not exporting the oil would probably damage Russia's long-term oil production. Still, Russia has shown it could shut in substantial production without short-term repercussions after it cut production by 2 million b/d in May 2020 after agreeing to production cuts with OPEC+ in response to the COVID-19 pandemic.