G7 countries are poised to back a price cap on Russian oil purchases in a bid to limit the Kremlin’s revenue from exports and its ability to finance its war on Ukraine.
The finance ministers of the United States, United Kingdom, France, Germany, Italy, Canada and Japan will formally provide political support for such a decision during a virtual meeting on Friday afternoon, according to five officials briefed on the talks. However, the price cap level is still under discussion, they said.
The capping mechanism would be implemented at the same time as EU embargoes on Russian oil imports, two of the officials said. The measure would come into force on December 5 for crude and February 5 for refined products.
The plan is 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 respect the ceiling price. .
Although backed by the European Commission, the system still needs the backing of EU member states as it will require changes to the bloc’s sixth sanctions package which was sealed after tense negotiations.
Officials also said support from third countries that buy large amounts of Russian oil, such as India, will be important for the cap to be more effective. A European official expressed the hope that other countries would join the initiative in the coming days, adding that the level of the price cap would be set jointly by all participating states.
“A ceiling price. . . ensures that every country can get the lowest possible price, and that’s good for the world,” said James O’Brien, sanctions coordinator at the US State Department.
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.
Over the past three months, oil prices have cooled, 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 June G7 had agreed to explore ways to limit Moscow’s income without driving up world prices.
Since then, US officials have worked to find consensus within the G7 on the broad outlines of the cap and how it would be implemented. Oil industry executives and some G7 government officials have expressed skepticism about how the cap will work and whether enough countries will adopt it.
Last month, German Chancellor Olaf Scholz, whose country holds the rotating G7 presidency, said of the proposal: “It only works if it is organized globally. You cannot do this unilaterally but only in close cooperation with many others. Otherwise, it will be useless. »
Meanwhile, marine insurers have privately expressed concern over the use of insurance as a cap enforcement mechanism, given that underwriters generally do not follow the commercial price of a cargo. Leaders and officials have acknowledged that fear of breaching cap conditions could mean insurers are overcompensating and withdrawing cover from a wider range of vessels.
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.
Additional reporting by Max Seddon in Riga and David Sheppard in London