TThe Group of Seven most industrialized nations said it plans to impose a price cap on global purchases of Russian oil, a measure the United States hopes will ease pressure on the energy market and reduce Moscow’s overall revenue.
“We reaffirm our joint political intent to finalize and implement a comprehensive ban on services that enable the maritime transport of crude oil and petroleum products of Russian origin worldwide,” the G7 finance ministers said in a joint statement. “The provision of such services will only be permitted if oil and petroleum products are purchased at or below a price (a “price ceiling”) set by the broad coalition of countries that adhere to and implement the price ceiling.”
Ministers said they plan to introduce a price cap to coincide with the timing of European Union sanctions on Russian oil, which are due to come into effect on December 5. The statement, which noted that all EU countries would have to sign off on any changes to the sanctions, did not provide a dollar range for the potential price cap.
“The initial price cap will be set at a level based on a set of technical data and will be decided by the full coalition before implementation in each jurisdiction,” the ministers said in the statement. “The price cap will be publicly communicated in a clear and transparent manner.”
The G7 plan, part of a broader effort to punish Russia for its military invasion of Ukraine, would allow buyers of Russian oil below a capped price to continue receiving important services such as financing and insurance for tankers.
Oil prices pared gains after news that the G7 was close to a deal, as traders grappled with the likelihood of such a regime being imposed and any impact it might have.
“Today’s action will help deal a serious blow to Russian finances and impede Russia’s ability to wage its unprovoked war in Ukraine and accelerate the deterioration of the Russian economy,” US Treasury Secretary Janet Yellen said in a statement. “We have already begun to see the impact of the price cap through Russia’s hasty attempts to negotiate bilateral oil trade at huge discounts.”
To impose a cap, diplomats would have to convince European Union member states to change their sixth round of sanctions against Russia over the invasion of Ukraine – and that could still prove difficult. That package, which banned the purchase of Russian oil from Dec. 5, included a ban on third countries’ use of companies from the bloc for oil-related insurance and financial services.
But it remains unclear how effective the price cap regime would be, especially since some of Russia’s biggest buyers have not agreed to join. India has been reluctant to formally join a price cap scheme because its industry worries it could lose out to other buyers from the chance to buy Russian crude at discounted prices, according to people familiar with the views of Indian firms.
US Deputy Treasury Secretary Wally Adeyemo visited India last month, where he said the coalition to cap Russian oil prices had expanded and a number of countries had joined, declining to name them.
“Quite extensive measures will have to be taken to ensure that companies don’t find ways around price caps,” said Richard Watts, managing director at Geneva-based commodities trading consultancy HR Maritime. “That was the challenge in Iraq’s food-for-oil scheme in the 1990s. The question is, how does the G7 control this?
It will also not be easy to get the full support of the EU. Hungary, which maintains closer ties with Russia, held up agreement on an initial package of sanctions for weeks as the bloc tried to reach an agreement to target Russia’s energy sector. Budapest has signaled it will oppose any cap on the price of oil, signaling another potentially awkward political battle.
Russia said on Friday it will not sell oil to nations that impose a price ceiling on its oil. “We simply will not interact with them on such non-market principles,” Kremlin spokesman Dmitry Peskov told reporters on a conference call, adding that Russian oil would find alternative markets.
The US and its allies have been grappling with how best to sanction Russia after its invasion rattled energy markets and sent commodity prices soaring. The G7, which also includes Germany, the United Kingdom, France, Italy, Japan and Canada, pledged earlier this year to curb dependence on Russian energy, including “by phasing out or banning imports of Russian oil.”
G7 leaders announced at a June summit in Elmau, Germany that they would study the price cap plan. But German Chancellor Olaf Scholz insists the price cap can only work properly if it is implemented globally and supported by more than the G7 countries. The support of major buyers of Russian oil, such as India and Turkey, is seen as particularly crucial.
“The price ceiling fundamentally has no impact unless the G7 can convince the other major buyers (ie China, India, Turkey, etc.) to sign on,” said Christopher Haynes, global crude oil analyst at the consultancy Energy Aspects, in response to questions by email. “All of them are reluctant despite the offer of relief from Western financial and insurance sanctions on shipping. Meanwhile, Russia will be determined to undermine the policy for both political and economic reasons.
US officials say the price cap could work even if many buyers do not formally join the coalition, as they can still use the system as leverage in contract negotiations with Moscow to negotiate lower prices.
Another key factor will be at what level the price ceiling is set. U.S. officials have suggested they intend to set it slightly above Russia’s marginal production costs, according to a person familiar with the matter, although the final level will depend in part on the global price of oil when it takes effect.
White House press secretary Karine Jean-Pierre said Thursday that the measure, if passed, would reduce President Vladimir Putin’s overall oil revenue by “forcing him to lower the price of Russian oil to help reduce the impact of the war on Putin on the pump”.
— With help from Josh Wingrove, Archie Hunter, Kwaku Gyasi and Christopher Condon.
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