G7 dodged imposing a price cap on Russian oil

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Image Source: Indian Express

The G7 leaders appeared to avoid capping the price of Russian oil in the coming weeks, depriving Russia of its primary source of revenue to support its conflict in Ukraine.

A cap has already been announced by the heads of the major western countries, most recently at a meeting of the G7 finance ministers on September 2. The measure is expected to take effect on December 5.

However, the most recent G7 statement merely included a cursory general remark on the need to keep working together to guarantee energy affordability and security for the G7 and beyond. Volodymyr Zelensky, the president of Ukraine, has asked the meeting to enforce a strict price restriction requiring a loss for the terrorist state of zero.

The G7’s brief mention underscores concerns within the EU, particularly in Germany, regarding the scheme’s viability and compatibility with a yet-to-be-agreed EU plan to impose a gas price cap. Moreover, there have been worries that Russia will forbid all energy exports to any nation that adopts the price cap, driving up oil costs and increasing the pressure on Europe to lessen its support for Ukraine’s war objectives.

The price ceiling and annexation of Donbas were the original topics of Tuesday’s G7 meeting, but last week’s Russian missile attack on Ukraine’s infrastructure changed the agenda.

The EU decided in May to prohibit all imports of Russian seaborne crude beginning on December 5 and all imports of refined Russian products beginning on February 5. As a result, three countries—the US, UK, and Canada—have already ceased buying Russian oil. In order to help Germany and Poland, pipeline flows were to be spared for a while, but at that time, Russia had already lost three-fifths of its seaborne crude sales to Europe.

The G7 price cap would coexist with the EU import embargo, but it would only let EU member states ship oil to non-EU nations, provided the oil is sold at or below a fixed price that has not yet been disclosed. Based on previous moves, Germany is concerned that Russia would follow through on its threat to stop providing energy to nations imposing a cap. It also believes that other Russian oil importers, like Turkey, China, and India, are unlikely to consent to the plan’s terms, making it less effective.

Russian crude oil exports brought in €113 billion (£99 billion) in revenue in 2021, on top of the €70 billion (£62 billion) from processed goods like gasoline and diesel, according to the central bank of Russia. In the first six months of the invasion, the oil industry brought in over €102 billion (£90 billion).

Experts doubts G7 proposed plans

Despite the skepticism among economists, US Treasury Secretary Janet Yellen has claimed that an international price ceiling would help deal a serious blow to Russian finances, make it more difficult for Russia to wage its unprovoked war in Ukraine, and speed the decline of the Russian economy.

The US Treasury continues to promote the plan to the developing world, claiming that the 50 largest emerging economies would save $160 billion (€165 billion, £145 billion) a year if the price of Russian oil were capped at the global level.

If the oil is sold beyond a still-undetermined G7 limit, the G7 price limitation would not be implemented by barring insurance from being granted to Russian cargoes. The official range is $40–$60 (£36–£54) per barrel.

The G7 nations—Canada, France, Germany, Italy, Japan, the UK, and the US—estimate that shipping insurers cover around 95% of the world’s fleet of oil tankers.

Read Also: G7 agrees to impose price cap on Russian oil 

Germany opposes a price cap because it worries that it will increase demand, which might cause shortages, and encourage gas producers like Norway, Qatar, and the US to seek other, more lucrative markets outside the EU. On the other hand, Ursula von der Leyen, president of the EU Commission, favors a temporary price ceiling that more sweeping changes would follow in the electricity market. However, there is no consensus on whether the cap should be applied to long-term contracts, gas used to generate electricity, and all gas trades, not just those involving Russian gas.

Even though the G7 plan has been discussed since June, it cannot be finalized because EU heads of government are scheduled to discuss the matter next week.

Most energy specialists, including the International Energy Authority, believe that the EU will avoid big blackouts this winter because storage is at approximately 90% of its maximum capacity, but they are less sure about the winter of 2023.