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Russian oil sanctions are about to kick in. And they can disrupt the markets to a great extent

European oil sanctions are to start on 5 December. The idea is to reduce oil revenues for Russia given the war in Ukraine.

Andrey Rudakov | Bloomberg | Getty Images

Forthcoming sanctions on Russian oil are set to be “really disruptive” to energy markets if European nations fail to put a cap on prices, analysts have warned.

The 27 countries in the EU agreed in June to ban the purchase of crude oil from 5 December. In practical terms, the EU ̵[ads1]1; together with the US, Japan, Canada and the UK – wants to drastically cut Russia’s oil revenues in an attempt to empty the Kremlin’s war chest after the invasion of Ukraine.

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Concerns that a complete ban would send crude prices soaring, however, led the G-7 to consider capping the amount they will pay for Russian oil.

An outright ban on Russian imports could be “really disruptive” to markets, according to Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group.

The potential for rising oil prices is “why there is pressure from the United States” to agree on a cap, Gloystein told CNBC on Wednesday.

A price cap would cause G-7 nations to buy Russian oil at a lower price, in an attempt to reduce Russia’s oil revenues without raising crude prices around the globe.

However, EU countries have been at odds for several days over the right level to limit prices.

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Right oil cap

A proposal discussed earlier this week proposed a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to agree, arguing that it was too high to drain Russia’s income. These nations have been among the most vocal in pushing for action against the Kremlin for its aggressions in Ukraine.

Speaking to CNBC’s Julianna Tatelbaum on Wednesday, the Dutch energy minister said a cap on Russian oil prices was “a very important next step.”

“If you want effective sanctions that really hurt the Russian regime, then we need this oil cap mechanism. So hopefully we can agree on that as soon as possible,” said Rob Jetten.

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On Wednesday, Russian oil traded for around 66 dollars a barrel. Kremlin officials have repeatedly said a price cap is anti-competitive, and they will not sell their oil to countries that have implemented the cap.

They hope that other major buyers – such as India and China – will not agree to the limit and therefore continue to buy Russian oil.

China and India

The G-7 countries agreed to impose a limit on Russian oil back in September and have been working on the details ever since. At the time, the EU’s energy chief, Kadri Simson, told CNBC that she hoped China and India would also support the price cap.

Both nations stepped up their purchases of Russian oil after Moscow’s invasion of Ukraine, taking advantage of discounted prices. Their participation is seen as crucial for the restrictions on Russian oil to work.

“China and India are crucial in buying the bulk of Russian oil,” Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, told CNBC.

“However, they will not commit for political reasons, as the cap is a US-sponsored policy and [for] commercial reasons, since they already get a lot of cheap oil from Russia, so why jeopardize it? To think that they would voluntarily join was always naive as Ukraine is not that important to them.”

India’s Oil Minister Shri Hardeep S Puri told CNBC in September that he has a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy from anywhere,” he added.

As such, there are growing doubts about the true impact of the restrictions on Russia.

“Energy sanctions against Russia have come too late and are too scared,” Guntram Wolff, director of the German Council on Foreign Relations, said by email.

“This is just a continuation of an unfortunate series of anxious decisions. The longer and later the sanctions come, the easier it will be for Russia to circumvent them.”

Watch CNBC's full interview with India's Oil Minister Hardeep Singh Puri

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