The G7 countries agreed to finalize a “comprehensive ban on services” that would allow the sea transport of crude oil and Russian petroleum products.
G7 leaders have been considering a Russian oil price cap since spring this year, as a way to reduce Moscow’s revenue from fossil fuels without causing a price boom on global oil markets.
On Friday, the finance ministers from Canada, France, Germany, Italy, Japan, the United Kingdom and the United States gave the green light to such a scheme, declaring that it would “build on and amplify existing sanctions.”
Officials stress that there is still much work to be done before the price cap is enacted, with key questions outstanding, including the level of the cap.
The success of the proposals will depend on the willingness of major Russian oil importers, including India and China, to keep pace with the scheme; So far, neither country has expressed an interest in participating; Russia has warned that it will respond to any country that participates by stopping oil shipments.
What did the G7 agree on?
The G7 countries agreed to finalize a “comprehensive ban on services” that allow the sea transport of crude oil and Russian petroleum products.
These services, which include shipping insurance, will only be permitted if the products are purchased at or below the price set by a “broad coalition of countries”. US Treasury Secretary Janet Yellen has strongly defended the concept.
The idea of capping prices is to allow Russian oil to reach markets that have not imposed import bans – particularly low- and middle-income countries – thus limiting upward pressure on global oil prices, while limiting Moscow’s ability to finance its war against Ukraine.
Importers who want insurance coverage for the G7 or the European Union and freight services that allow transportation of Russian oil need to consider the price cap.
A senior US Treasury official, quoted by the Financial Times, said that the plan would include setting one ceiling for crude oil and another two caps for refined products.
The cap mechanism will not replace the current embargo imposed by the G7 countries on Russian oil, but it will be implemented at the same time, taking effect on December 5 for crude oil and February 5 for refined products.
The official said OFAC will issue guidance on how to implement the price cap in the United States, although the exact rate will only be revealed as soon as the actual date.
Washington’s goal is for a large number of non-G7 nations to sign off on the price cap, but officials stressed that even if no other governments agreed to it, buyers of Russian oil around the world were already demanding, and will continue to demand, for Discounts on their purchase contracts.
“In my conversations with other countries, they told me that Russia is trying very hard to get long-term contracts now at lower prices,” he added.
What is the reality of Russia’s oil exports?
Russian oil exports have fallen by about 1 million barrels per day in the wake of the war in Ukraine, with many buyers in Europe agreeing to reduce purchases from Russia while others remain on the same contracts.
But while the International Energy Agency has warned that Russian production, which typically exceeds 10 million barrels a day, could fall by 3 million barrels a day within months, Russia has proven resilient thanks to India and China.
Before the war, India imported almost no Russian oil, while as of last July, it was importing nearly 1 million barrels per day of heavily discounted Moscow crude, or about 1% of global supply.
Russia’s ability to maintain exports has helped lower global oil prices from about $120 a barrel in early June to about $95 a barrel, or around the pre-war level.
Because Russia produces more than 10% of the world’s oil supply, officials in the United States and Europe are concerned about imposing sanctions on its barrels from the market, and the loss of a quarter of Russian supplies could drive up oil prices.
What is the price cap risk?
Russia could decide to export less oil, as the West accuses Moscow of “weaponizing” gas supplies by reducing flows to Europe; While gas export volumes declined, Moscow’s revenue rose due to higher gas prices.
It is possible that Russia will resort to the same rules of the game in the oil market and reduce supply while raising world prices.
But US officials believe that a significant reduction in oil production would cripple Russia’s production capacity.
Russian exports may also decline if it does not find enough tankers willing to operate without Western insurance; The G7 countries are responsible for 90% of all global shipping insurances, and Russia exports nearly 8 million barrels per day of crude and refined products, which requires a large number of ships.