The Group of Seven most industrialized countries said they plan to implement a price cap for global purchases of Russian oil —a measure the U.S. hopes will ease energy market pressures and slash Moscow’s overall revenues.
“We confirm our joint political intention to finalize and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally,” G7 finance ministers said in a joint statement. “The provision of such services would only be allowed if the oil and petroleum products are purchased at or below a price (“the price cap”) determined by the broad coalition of countries adhering to and implementing the price cap.”
Ministers stated that they would implement a price limit in accordance with European Union sanctions against Russian oil, which will take effect Dec. 5. The statement, which notes that all EU nations will have to sign off on any sanctions changes, didn’t provide a dollar range for the eventual price cap.
“The initial price cap will be set at a level based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction,” the ministers said in the statement. “The price cap will be publicly communicated in a clear and transparent manner.”
G-7 is part of larger efforts to punish Russia’s military invasion in Ukraine. It would allow Russian oil buyers under a cap price to continue to get crucial services, such as insurance and financing for tankers,
The news that the G7 was close to a deal slowed oil prices. Traders wrestled with whether such a regime would be imposed, and what impact it might have.
“Today’s action will help deliver a major blow for Russian finances and will both hinder Russia’s ability to fight its unprovoked war in Ukraine and hasten 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 hurried attempts to negotiate bilateral oil trades at massive discounts.”
To implement a cap, diplomats will have to convince European Union member nations to amend its sixth round of sanctions on Russia over the invasion of Ukraine—and that may still prove to be tough. That package, which prohibits the purchase of Russian oil starting Dec. 5, included a ban on the use by third countries of the bloc’s companies for oil-related insurance and financial services.
But it remains unclear how effective a price-cap regime would be, particularly since some of Russia’s biggest buyers haven’t agreed to join. People familiar with Indian industry’s views say that India is reluctant about joining a price-cap system, as it fears losing out to other buyers.
Wally Adeyemo, the U.S. deputy Treasury Secretary, visited India last month. He stated that the alliance for setting a price limit on Russian oil had expanded and that a variety of countries joined. However, he declined to identify them.
“Quite extensive measures are going to have to be taken to ensure that companies don’t’ find ways around price limitations,” said Richard Watts, the managing director at Geneva commodities trading advisory HR Maritime. “This was the challenge in Iraq’s food-for-oil scheme in the 1990s. The question is how does the G7 police this?”
It also won’t be easy to get the EU’s full backing. Hungary, which has maintained closer relations with Russia, held up agreement on the original sanctions package for weeks as the bloc tried to reach a deal on targeting Russia’s energy sector. Budapest indicated that it will oppose any oil price caps, signaling another potential political battle.
Russia said Friday that it won’t sell oil to nations that impose a price cap on its oil. “We simply won’t interact with them on such non-market principles,” Kremlin spokesman Dmitry Peskov told reporters on a conference call, adding that Russian oil will find alternative markets.
After Russia’s invasion of energy markets, the U.S. and its allies struggled to decide how to best sanction it. This sent oil prices skyrocketing. The G7—which also includes Germany, the UK, France, Italy, Japan and Canada—pledged earlier this year to curb reliance on Russian energy, including “by phasing out or banning the import of Russian oil.”
G-7 leaders declared at the June summit in Elmau that they would be reviewing the price caps plan. But German Chancellor Olaf Scholz insists that the price cap can only work properly if it’s introduced globally and supported by more than just the G-7 countries. It is crucial that big Russian oil buyers like India and Turkey support the price cap.
“The price cap fundamentally lacks impact unless the G-7 can persuade the other main buyers (i.e. China, India, Turkey, etc) to sign up,” Christopher Haines, a global crude analyst at consultant Energy Aspects, said in an emailed response to questions. “They are all reluctant despite the offer of exemptions from Western financial and shipping insurance sanctions. Meanwhile Russia will be determined to undermine the policy for both political and economic reasons.”
US officials have argued that the price cap could work even if many buyers don’t officially join the coalition, since they could still use the system for leverage in contract negotiations with Moscow to negotiate lower prices.
The price cap will also play a key role. U.S. officials have suggested they intend to fix it slightly above Russia’s marginal cost of production, according to a person familiar with the matter, although the final level would depend in part on the global oil price when it comes into effect.
White House Press Secretary Karine Jean-Pierre on Thursday said the measure, if adopted, would cut President Vladimir Putin’s oil revenue overall by “forcing down the price of Russian oil to help blunt the impact of Putin’s war at the pump.”
—With assistance from Josh Wingrove, Archie Hunter, Kwaku Gyasi and Christopher Condon.
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