The Group of Seven most industrialized countries said they plan to implement a price cap for global purchases of Russian oil — a measure the US hopes will slash Moscow’s overall revenues but has so far been treated with skepticism in the oil market.
The group’s finance ministers said in a joint statement they plan to implement a price cap in line with the timing of European Union sanctions on Russian oil set to kick in on Dec. 5. US Treasury Secretary Janet Yellen, who led efforts to build a coalition, said separately that details could be finalized in the coming weeks.
“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,” G-7 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.”
It remains unclear how many countries have signed up to put limits on Russia, and there is no sign that the two largest buyers — China and India — will do so. For its part, the Kremlin has said it won’t sell to anyone who joins the price-cap coalition. Oil traders shrugged off the G-7 announcement, with prices climbing on Friday.
The plan is aimed at encouraging Russia to continue producing and exporting oil, senior US Treasury officials told reporters, adding that the price cap will be set above Russia’s production costs. The coalition plans to set a specific price point for Russian crude, and two different ones for refined products, the officials said.
“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.”
The G-7 plan, which is part of broader efforts to punish Russia for its military invasion of Ukraine, would allow buyers of Russian oil under a capped price to continue getting crucial services like financing and insurance for tankers.
“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,” 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 EU member nations to amend the 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.
The proposal would strengthen the EU’s sanctions package, the bloc’s economy commissioner, Paolo Gentiloni, said in a statement, adding that the European Commission will help work toward a unanimous deal among the 27 nations to implement the measure.
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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. India is reluctant to formally join a price-cap scheme, since its industry worries it could lose out to other buyers on the chance to buy discounted Russian crude, according to people familiar with the views of Indian firms.
French Finance Minister Bruno Le Maire told his G-7 colleagues behind closed doors on Friday that more work still needs to be done to convince a critical mass of purchasers of Russian oil to join the coalition and to preserve European unity on the topic, the ministry said.
Senior US Treasury officials said that countries buying outside a price-cap regime will need to find alternative ways to insure and finance those purchases, which will be more expensive and more risky, which will lead them to see lower prices from Moscow.
US Deputy Treasury Secretary Wally Adeyemo visited India last month, where he said the coalition for putting a price cap on Russian oil has broadened and a number of countries have joined, while declining to name 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 G-7 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 has signaled that it would oppose any oil price cap, signaling another potentially awkward political fight.
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.
The US and its allies have grappled with how best to sanction Russia after its invasion rattled energy markets and sent crude prices soaring. The G-7 — 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.”
Russia Seen Floating Long-Term Oil Discounts Amid Price-Cap Push
G-7 leaders announced at a June summit in Elmau, Germany, that they would examine the price cap 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. The backing of big buyers of Russian oil, such as India and Turkey, is seen as particularly crucial.
“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.