President Vladimir Putin on Tuesday delivered Russia’s long-awaited response to a Western price cap, signing a decree that bans the supply of crude oil and oil products from Feb. 1 for five months to nations that abide by the cap.

The Group of Seven major powers, the European Union and Australia agreed this month to a $60-per-barrel price cap on Russian seaborne crude oil effective from Dec. 5 over Moscow’s “special military operation” in Ukraine.

The cap is close to the current price for Russian oil, but well beneath the windfall price Russia was able to sell for this year, and that helped offset the impact of financial sanctions on Moscow. Russia is the world’s second largest oil exporter after Saudi Arabia, and a major disruption to its sales would have far reaching consequences for global energy supplies.

The decree, published on a government portal and the Kremlin website, was presented as a direct response to “actions that are unfriendly and contradictory to international law by the United States and foreign states and international organizations joining them”.

“Deliveries of Russian oil and oil products to foreign entities and individuals are banned, on the condition that in the contracts for these supplies, the use of a maximum price fixing mechanism is directly or indirectly envisaged,” the decree stated, referring specifically to the United States and other foreign states that have imposed the price cap. “The established ban applies to all stages of supply up to the end buyer.”

The decree, which includes a clause that allows for Putin to overrule the ban in special cases, stated: “This…comes into force on Feb. 1, 2023, and applies until July 1, 2023.” Crude oil exports will be banned from Feb. 1, but the date for the oil products ban will be determined by the Russian government and could be after Feb. 1.

WIDER DEFICIT

The price cap, unseen even in the times of the Cold War between the West and the Soviet Union, is aimed at crippling Russian state coffers and Moscow’s military efforts in Ukraine. Some analysts have said that the cap will have little immediate impact on the oil revenues that Moscow is currently earning.

However, Finance Minister Anton Siluanov said on Tuesday that Russia’s budget deficit could be wider than the planned 2% of GDP in 2023, with the oil price cap squeezing export income, an extra fiscal hurdle for Moscow as it spends heavily on its military campaign in Ukraine. Russia has been promising to respond officially for weeks, and the eventual decree largely established what officials had already said publicly.

The G7 price cap allows non-EU countries to continue importing seaborne Russian crude oil, but it will prohibit shipping, insurance and re-insurance companies from handling cargoes of Russian crude around the globe, unless it is being sold for less than the price cap.

EU countries have separately implemented an embargo that prohibits them from purchasing seaborne Russian oil. Russian Urals oil traded above $56 per barrel on Tuesday, below the price cap level. Brent crude oil moved a little higher on the news and was up 1.4% at $85.1 by 1743 GMT.

A tanker of U.S. sour crude was delivered at Germany’s port of Rostock last week for the first time ever, according to sources, analysts and vessel tracking data, as local refiners test alternatives to Russian oil.

The European Union plans an almost-complete embargo of Russian barrels by year-end, and is trying to wean itself off Russian crude imports, which have fed inland refineries in Germany, Poland and other central European nations via pipeline.

Refiners plan to replace Russian oil with seaborne Norwegian, Saudi Arabian, British and U.S. crude grades. Russia has already shown through its natural gas exports that it is willing to cut off European destinations in a tit-for-tat over the EU’s financial sanctions that followed Moscow’s invasion of Ukraine in February.

According to Refinitiv ship tracking data, the Capricorn Sun tanker loaded Mars Sour crude off the Louisiana coast in the United States and discharged at Rostock on Aug. 3. The tanker was chartered by Shell, according to two sources and Refinitiv ship tracking data. It was estimated to have carried about 570,000 barrels, based on shipping data.

Shell did not have an immediate comment.

“Although this is the first Mars crude oil shipment, there have been West Texas Sour shipments (to Germany) in the past, albeit few and far between,” said Jim Mitchell, head of Americas oil analysts at Refinitiv.

“Mars has a higher distillate content than the WTI or the Eagle Ford grades. As the winter looms, Germany will increase its demand for distillate wherever they can get it from.”

Distillates include refined products such as diesel, jet fuel and gasoil that is used for heating. Heavier, sour grades of oil tend to produce more distillate fuels than gasoline. Germany depends on Russia as a major source of diesel.

The Rostock oil terminal in the Baltic Sea is connected via pipeline to two refineries – the 233,000 barrel-per-day PCK Schwedt refinery and TotalEnergies’ 240,000 barrels per day Leuna plant.

The Schwedt refinery is majority-owned by Russia’s state oil firm Rosneft while Shell and Eni hold minority stakes.

Both PCK and Leuna continue to receive Russia’s main crude grade, medium sour Urals, through the Druzbha pipeline in compliance with EU sanctions on Moscow for its invasion of Ukraine.

Previously, German economy minister Robert Habeck said the country was working on solutions for Schwedt, including dipping into national oil reserves as well as getting shipments from the German port of Rostock and possibly Gdansk in Poland.

Schwedt supplies most of Berlin’s fuel and Germany is struggling to wrest control of the plant, fearing retaliation by Moscow if the site is nationalised and as Western firms hesitate to step in.

Similarly, TotalEnergies’ chief executive Patrick Pouyanne has said it would reduce its Russian crude intake via pipeline.

The United States exported nearly 3 million barrels of oil a day in 2021, but Germany is a fairly minor buyer, only importing about 77,000 bpd, according to U.S. Energy Department figures.