The G7 countries have agreed to introduce a price cap on Russian oil purchases in a bid to limit the Kremlin’s ability to finance its war against Ukraine.
The initiative will be based on a system of incentives whereby importers who seek insurance coverage and shipping services from companies based in G7 and EU countries to transport Russian oil would have to comply with the ceiling price, the finance ministers of the United States, United Kingdom, France, Germany, Italy, Canada and Japan said in a statement after a meeting on Friday.
The actual level of the cap will be decided in future discussions with all participants, including non-G7 countries that may join the plan.
“The price cap is specifically designed to reduce Russian revenues and Russia’s ability to finance its war of aggression while limiting the impact of the Russian war on global energy prices,” the ministers said. of the G7 in a joint communiqué.
They added: “The initial price cap will be set at a level based on a range of technical inputs and will be decided by the entire coalition prior to implementation in each jurisdiction.”
The agreement is a political victory for the United States, which first private fleet the proposal for a price cap in April as a means of punishing Russia for the war in Ukraine. But it had to overcome skepticism from some EU countries about its feasibility.
Energy prices jumped following Russia’s decision to launch a invasion of ukraine in February. This was followed by Western economic sanctions against Moscow and moves by countries to stop buying Russian oil. The price increases provided the Kremlin with a windfall in export earnings.
Oil prices have fallen over the past three months, in part because Russian exports have held up better than expected, alongside fears that soaring natural gas prices could trigger a recession in Europe.
Brent, the international benchmark, fell from around $120 a barrel in early June to around $94 a barrel, close to where it was on the eve of Russia’s invasion of Ukraine. Prices rose about 2% on Friday.
The impact of the price cap will strongly depend on the number of major Russian oil importers outside of G7, like China and India, decide to participate. A European official expressed the hope that other countries would join the initiative in the coming days.
The mechanism would include “targeted mitigation mechanisms”. . . to ensure that the most vulnerable and affected countries retain access to energy markets, including from Russia,” the G7 statement said.
James O’Brien, sanctions coordinator at the US State Department, said: “A ceiling price. . . makes sure every country can get the lowest possible price, and that’s good for the world.
Oil industry executives and some G7 government officials have expressed skepticism about how the cap will work and whether enough countries will adopt it.
“It only works if it’s organized globally,” German Chancellor Olaf Scholz, whose country holds the rotating G7 presidency, said last month. “You cannot do this unilaterally but only in close cooperation with many others. Otherwise, it will be useless. »
Marine insurers have privately expressed concern over the use of insurance as a cap enforcement mechanism, given that insurers generally do not track the commercial price of a cargo.
Leaders and officials have acknowledged that fear of breaching the cap’s conditions could mean insurers overcompensate and withdraw cover from a wider range of vessels.
A senior Lloyd’s Market official in London said on Friday that insurers would ask freight owners, who typically buy insurance in bulk, to commit to the cap. “If you’re a business that doesn’t meet the cap, you won’t be able to buy insurance,” the person said.
Russia threatened on Thursday to stop selling oil to any country that adopts a price cap mechanism.
Kremlin spokesman Dmitry Peskov said Friday that the move would be an “absurd decision” and “would lead to significant destabilization of oil markets”, according to Interfax.
Asked about this threat, O’Brien said: “Russia needs to keep its energy machines running and needs the money. What he chooses to do is his decision.
Saudi Arabia, which leads oil producers’ Opec+ alliance with Russia, has warned the group may have to cut production if prices remain ‘volatile’ and fears the market is underestimating the impact of the tightening Western sanctions on Russian oil supplies later this year.
The kingdom fears that a sharp drop in Russian production will be difficult for other OPEC+ countries to fill, as spare capacity is limited. OPEC+ is due to meet on Monday to discuss output policy for the coming months, having now restored total output to pre-pandemic levels.
The price cap would be implemented at the same time as EU embargoes on Russian oil imports, according to two officials briefed on the deal. The measure would come into force on December 5 for crude and February 5 for refined products.
Additional reporting by Max Seddon in Riga and David Sheppard and Ian Smith in London