Sa, 4.02.2023

The most important struggle of Estonia’s diplomacy: price ceiling for Russia’s oil

Mikk Salu
, ajakirjanik
The most important struggle of Estonia’s diplomacy: price ceiling for Russia’s oil
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An unofficial anchorage area for tankers and cargo ships waiting to enter Russian ports in the part of the Gulf of Finland that is part of the Estonian economic zone.
An unofficial anchorage area for tankers and cargo ships waiting to enter Russian ports in the part of the Gulf of Finland that is part of the Estonian economic zone. Photo: Madis Veltman
  • Estonia and Poland have vetoed the European Commission’s present price ceiling proposal.
  • The Americans are trying to convince Kaja Kallas.
  • The next few days will show whether Estonia’s struggle was successful.

The next few days will decide whether Estonia and Poland will succeed in establishing a price ceiling for Russian oil. This, in turn, will affect the global oil price.

This is a unique situation in history, when two countries which do not have oil of their own, set the price of oil on the world market, says an Estonian government official. “It has already affected the world market price,” adds an Estonian politician.

The Politico magazine wrote last Wednesday that the G7 and the European Commission recommend setting the price ceiling for Russian oil at 65–70 dollars per barrel. On the same day, ambassadors of European countries to the EU also gathered to discuss the matter. As a counter move, Poland made its price offer there – 30 dollars per barrel – and Estonia supported it, according to Politico.

This story is only partially true. Yes, Poland announced its price, although this was probably a tactical move. However, Estonia has not stated what we think the barrel price should be, therefore it cannot be said that Estonia supported what Poland has proposed. However, Estonia's position is equally rigid – in any case, the price ceiling must be lower than the $65 requested by the Commission and the G7. Estonia also wants some kind of monitoring mechanism to be created, so that the price ceiling will be reviewed periodically – is it still effective, should it be lowered further? So that it is would not be just a one-time act.

Postimees managed to talk to several politicians, ministers, diplomats and officials. Since the issue is a sensitive one and involves negotiations between countries, they preferred not to be quoted by name. But everyone said that the issue of the oil price ceiling is currently Estonia’s most important diplomatic struggle. A small country cannot be rigid all the time and argue about everything, because then the others would start ignoring it. However, if the country has proven itself and shown that it is reasonable, it will be taken seriously if it takes a stand at some point. Estonia has done it now. “We are currently using the credit that we have been building up for a long time,” says one of Estonia's top officials.

Prepared for veto

On the Estonian side, Prime Minister Kaja Kallas (RE) and Foreign Minister Urmas Reinsalu (Isamaa) are the most involved with the issue. This is the side of the politicians. Among the diplomats and officials, Jonatan Vseviov, Secretary General of the Ministry of Foreign Affairs, and Aivo Orav, the Estonian ambassador to the European Union, are leading the way. Orav's last working days have revolved around oil from dawn to dusk. Another meeting of ambassadors started last night, where Orav also plays a big role.

Last Thursday, other ministers of the cabinet were briefed of the current situation. Reinsalu spoke at the press conference after the government meeting, and one of his answers showed that Estonia is ready to use the right of veto if necessary. It is possible that this is an over-interpretation and Reinsalu only hinted at it, but the veto threat made the headlines in any case.

The reality is, of course, that Estonia (and Poland) have already essentially used the veto right. Even if it is not officially called as such, the very fact that these two countries have said unequivocally that they do not agree to the $65 price cap proposal essentially acts as a veto. The question of the price ceiling is not a matter where the majority of votes counts; the consent of all member states is needed. Estonia is not going to give its consent to 65 dollars. We want a lower limit.

Estonia and Poland work in tandem on the issue of the oil price ceiling. Sometimes Latvia and Lithuania are also included in the group but those familiar with the matter from the Estonian side confirm that although the southern neighbors are supportive, they are essentially less vocal this time. The price ceiling is the subject of Poland and Estonia. "There is close cooperation and trust between Estonia and Poland," a diplomat confirms.

Estonia's position did not arise suddenly. It was not the case that Estonia woke up and objected only when the G7 and the European Commission came up with their proposal on Wednesday (there were hints in this direction in diplomatic channels a few days earlier). The Estonian officials and diplomats have been dealing with the issue for months, have made the details clear to themselves, have calculated themselves what the cost price of Russian oil production is, and have thought through all the arguments pro and contra. All these facts have reached the necessary politicians.

Accordingly it happened that when US Treasury Secretary Janet Yellen called Kallas last Friday to convince her to agree to the $65 price ceiling, Kallas could not be talked out of it. Every argument and every statement was followed by a well-thought-out counter-argument.

At the moment, Estonia itself no longer needs to convince anyone. Estonia is in a state where others constantly call us attempting to change our mind. On the other side of the front line on the price ceiling issue are Greece (the most vocal), Malta and Cyprus. They, on the contrary, have stated that $65 is too low. Understandably, these countries in one way or another earn from the tanker business and the transportation of Russian oil. It is all about money. For Estonia, the question is about much more. “Further in the west, sometimes they still do not understand how existential the war in Ukraine and the things related to it are for us (Estonia, Eastern Europe),” an Estonian diplomat explains the fundamentally different positions.

However, essentially it is the European Commission who conducts the negotiations. Their job is to reach a consensus out of the countries’ different opinions that everyone would agree to. Since it is a joint approach of the G7 and the European Union, the USA (primarily) and the UK are also involved. That is the reason of the activity of the Americans and the phone calls to Tallinn and Warsaw.

Several months of diplomatic efforts are coming to an end. It was already known at the end of May that the European Union will impose sanctions on Russian oil and that from December 5, Russian oil cannot be brought to Europe by ships. In the meantime, the issue of the price ceiling was added, and that is what has dragged on. In the end, the price ceiling was left to the G7 (US, Germany, France, Japan, Canada, UK, Italy) to negotiate. Through the G7, it reached the European Commission and from there to the European countries.

Consensus is needed

In order for the oil price ceiling to work, it is necessary to get the whole West to agree. (Hungary and Bulgaria, which are dependent on the pipelines, were already exempted earlier; therefore they are not very active in price ceiling negotiations.) The question which certainly arises is: if the Europeans and the Americans are not willing to pay more than 50 dollars (hypothetical price) per barrel for Russian oil, why should India or Indonesia accept it? Why should third countries go along with the “Western” sanctions, and why shouldn't Russia sell oil to third countries for the old or higher price?

Technically, two things should work against this. First of all, the majority of the oil tanker business is directly and indirectly controlled by the West. One diplomat explains that oil tankers are insured by Western insurance companies, and without insurance from the Western companies, these tankers either do not sail at all or do it at a much higher price. The second and more indirect effect should come from the fact that if the West puts a price ceiling, then what would be India's motivation to pay a higher price for Russian oil than the Western countries? At least Estonia hopes that there is no such motivation and thus the price of Russian oil can be brought down globally.

Apparently, Poland's proposed $30 per barrel price for Russian oil is not realistic, and the Poles have publicly expressed their flexibility on the matter. Estonia has not announced a specific price, but in any case it should be lower than $65. Maybe a realistic proposal would be between $55 and $65? What the agreement will be in the end, if any, will be revealed in the coming days.

Translated by Kristjan Tedre.

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