Estonia is under pressure to abandon its threat to veto a US-advocated cap on the price of Russian oil exports that it believes is set too high to have an impact on the Russian war machine.
The level of the cap on the price of seaborne oil has been the subject of fraught negotiations within both the European Union and the G7 group of industrialised nations.
Estonia, with a population of only 1.3 million, has, in conjunction with Poland, been holding out against introducing a cap if it is set so high that it believes it will have no impact on Russian oil revenues and hence Putin’s war machine. Oil and gas revenues form about 30% to 50% of the Russian consolidated federal budget.
EU officials were briefing on Thursday that they expected agreement on a cap set at $60 a barrel. Security experts from the CSIS thinktank have suggested a cap at that level is toothless since it is above the price of existing Russian oil prices of around $52 a barrel.
Despite its size, Estonia is in theory in a strong negotiating position since unanimity is needed for the price cap. The EU is also on 5 December supposed to introduce an already agreed and more restrictive EU ban on most Russian oil shipments.
The price cap would bite by preventing G7 and EU countries from insuring vessels carrying Russian oil to third countries unless those countries accept the capped price for oil dictated by the west. This in theory affects the flow and price of Russian oil to China and India.
The US fears the EU ban on Russian oil imports combined with a price cap set too low could lead to a worldwide spike in the price of oil, tipping the west further into recession and sparking popular protests. Vladimir Putin has threatened to block sales of oil to any country or company that recognises or trades at the cap.
At one level, the row is a technical dispute about the true market price of Russian crude, but for Baltic states this is an existential issue since they fear Ukraine will eventually be forced into a surrender unless the west quickly raises the cost of the war for Russia.
One Baltic official said: “If we set the figure too high it is going to have no impact on Russian oil revenues, and that is the purpose of this. We have to squeeze Russian revenues. There is no point doing this otherwise. False narratives that we are changing the balance of power with Russia through sanctions ends up making fools of ourselves as democracies. The pace that we are moving is a pace that is not fast enough if we are to bear down on Russia and raise the price of their aggression. We are on a ninth sanctions package after all.”
Kaja Kallas, the Estonian prime minister who has developed a reputation as the lead hawk in resistance to Russian aggression, refused to budge in a lengthy conversation with the US treasury secretary, Janet Yellen, last Friday. But there is a limit to Estonia’s ability to face down the US.
Estonia has not directly joined Poland in saying the cap should be set at $35 a barrel, but it is clear it thinks it needs to be substantially lower than $65. It reckons Russian oil industry costs means it sells oil at a profit from $40-45 a barrel, but Russia’s true extraction costs are hard to estimate.
Estonia is at minimum demanding there is a written clause in the agreement that will apply to both the G7 and the EU insisting there is a review mechanism that can take the oil price down further if the market can justify it.