The G-7 had previously only agreed to explore the price cap proposal, but its statement on Friday was its most significant statement yet that nations would seek to adopt an aggressive new policy, which would be action unprecedented and internationally coordinated on energy. prices.
Russia’s top leaders have repeatedly warned that they will retaliate against the price cap. Europe remains heavily dependent on Russian energy, and an escalation in hostilities could exacerbate the economic crisis already facing Western allies.
“Today’s action will contribute to a severe blow to Russian finances and will both hamper Russia’s ability to wage its unprovoked war in Ukraine and accelerate the deterioration of the Russian economy,” Yellen said. in a statement Friday. “We have already started to see the impact of the price cap through Russia’s hasty attempts to broker bilateral oil swaps at massive discounts.”
The G-7 nations – the United States, five of its Western allies and Japan – said in a statement that they planned to enact price caps by cutting insurance for all shipments of Russian oil sold to the above a certain price. This would effectively make it impossible to ship cargo whose price exceeds the cap. The price cap has yet to be announced but is expected to come into effect by December, when the shipping ban is also expected to come into effect.
Yellen has pushed the policy for months with her international counterparts, but has faced skepticism and tough questions about exactly how the price cap works. Analysts fear the cap could be circumvented if countries outside the G-7 – such as China and India – continue to buy Russian oil at a higher price and then sell it back on world markets at a higher price. superior. Other analysts and foreign leaders have expressed concern that Russia could retaliate by further limiting its natural gas shipments to Europe, which is already facing a winter in which Germany and other countries will experience critical energy supply shortages.
Despite the recent decline in energy prices, Russia has continued to reap hundreds of billions of dollars from its oil and natural gas sales. These energy sales significantly undermined the Western sanctions campaign imposed following Russia’s invasion of Ukraine, stabilizing the Kremlin’s finances and giving it the means to continue the war.
Energy analysts said Friday’s announcement does little to clarify how the cap will affect international gas and oil prices, noting that critical details – such as the level of the cap price and when it will come into effect – have not been announced.
“The devil is in the details, and few details have emerged today,” said Bob McNally, a former energy official in the George W. Bush administration now at Rapidan Energy Group. “This was a process announcement, moving from exploring a price cap to implementing it.”
Senior Treasury officials told reporters on a Friday call that the allies would set the price cap above Russia’s cost of production so that oil continues to flow to world markets. Officials said they would work to bring other European countries and major economies into the plan. Even if countries like India and China do not adhere to the price cap, Treasury officials have said, the existence of the cap will give other nations greater leverage in negotiations with Russia over their energy contracts. , which should help achieve the goal of lowering Kremlin revenues. . Treasury officials said leaders of other countries told them they were already benefiting from the price cap plan because Russia knew it had a dwindling number of potential buyers.
Yellen also pointed out that the price cap would be less disruptive to global energy markets than the ban on all Russian oil that Europe is set to implement by the end of the year. In June, after weeks of tense negotiations, the European Union agreed to ban oil imports from Russia and banned the insurance and financing of maritime transport of Russian oil to third countries. United States bans imports of Russian oil in March.
To implement the cap, the G-7 will need to get EU member states to amend the bloc’s sixth round of sanctions. News of the oil cap comes as the EU considers emergency measures to tackle soaring energy prices and prepares for what many fear will be a long, cold winter. EU energy ministers will meet in Brussels on September 9 to discuss calls for an overhaul of the bloc’s energy market.
Concerned about the possibility of a price spike, US officials lobbied for the cap but met resistance in Brussels, where some European diplomats argued the cap needed much broader support, especially from China and India, to be effective.
Dmitry Peskov, spokesman for Russian President Vladimir Putin, warned on Friday that countries that participate in the price cap will not receive Russian oil. Peskov said of Western allies: “We simply won’t cooperate with them on oil on such non-market principles.”
Asked about Kremlin threats, senior treasury official said Russia desperately needs energy revenue and questioned its credibility, pointing out Russian officials also said they were not going to invade Ukraine .
Ariel Cohen, a senior fellow at the Atlantic Council, said he remained concerned that Putin would react to the price cap by cutting Europe off from natural gas shipments, which could deepen the continent’s economic crisis.
“We have to be careful not to cause an economic crisis in Europe,” Cohen said. “I want to clearly understand where the alternative gas supply will come from. How much economic pain can Europe endure? »
But Simon Johnson, a professor at the Massachusetts Institute of Technology who specializes in energy policy, pointed out that the price cap plan – which would still allow Russia to trade oil at a discount – would be less disruptive to world markets than the price cap plan. previous European plan to reduce all imports of Russian oil.
“It demonstrates that they want oil to flow, which will keep oil prices lower than they otherwise would be,” Johnson said.