G7 ministers forge ahead with Russian oil price cap, details thin

Group of Seven finance ministers agreed on Friday to impose a price cap on Russian oil aimed at slashing revenues for Moscow’s war in Ukraine while keeping oil flowing to avoid price spikes, but Russia vowed to halt oil sales to countries imposing it.

The ministers from the G7 wealthy democracies confirmed their commitment to forming a buyer’s cartel after a virtual meeting. They said, however, that key details, including the per-barrel level of the price cap would be determined later “based on a range of technical inputs” to be agreed by the coalition of countries implementing it.

“Today we confirm our joint political intention to finalise and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally,” the G7 ministers said.

The provision of Western-dominated maritime transportation services, including insurance and finance, would be allowed only if the Russian oil cargoes are purchased at or below the price level “determined by the broad coalition of countries adhering to and implementing the price cap.”

The G7 consists of Britain, Canada, France, Germany, Italy, Japan and the United States.

A senior US Treasury official told reporters that the coalition would set a specific dollar price limit for Russian crude and two others for petroleum products — not discounts to global market prices. The cap would be revisited as needed.

The G7 ministers said they would work to finalise the details through their own domestic processes in time to launch by December 5, when new European Union sanctions initiate a ban on Russian oil imports into the bloc.

“This price cap on Russian oil exports is designed to reduce Putin’s revenues, closing an important source of funding for the war of aggression,” said German Finance Minister Christian Lindner, the current G7 finance chair. “At the same time, we want to curb rising global energy prices. This will minimize inflation globally.”

OIL CUTOFF THREAT

The Kremlin responded to the G7 statement by saying that it would stop selling oil to countries implementing the price cap, saying it would destabilise global oil markets.

“We simply will not cooperate with them on non-market principles,” Kremlin spokesman Dmitry Peskov told reporters.

Nonetheless, US Treasury Secretary Janet Yellen said that Russia would still have an economic incentive to sell oil at or near the price cap, because otherwise it would have to shut down production that would be difficult to restart. China and India also would seek to buy oil at the capped price, she added.

French Finance Minister Bruno Le Maire injected a dose of reality, telling his G7 counterparts that more work was needed to work out technical details, persuade a critical mass of importers to join the plan and preserve European unity on the subject, his office said in a statement.

“We got positive signals from other countries, but no firm commitments yet,” a senior G7 source said of efforts to recruit other countries into the coalition. “We wanted to send a signal of unity towards Russia and also countries like China.”

The G7 announcement had little effect on benchmark crude prices, which rose in anticipation of an OPEC+ discussion of output cuts on Monday amid weaker demand.

The ministers said they would work to finalise the details, through their own domestic processes, aiming to align it with the start of European Union sanctions that will ban Russian oil imports into the bloc starting in December.

Enforcing the cap would rely heavily on denying London-brokered shipping insurance, which covers about 95 per cent of the world’s tanker fleet, and finance to cargoes priced above the cap. But some analysts say that alternatives could be found to circumvent it and market forces could render it ineffective.

The G7 ministers said they would seek to limit circumvention through “a record-keeping and attestation model covering all relevant types of contracts” that aims for consistent enforcement across jurisdictions.

Despite Russia’s falling oil export volumes, its export revenue in June increased by $700 million from May due to prices pushed higher by its war in Ukraine, the International Energy Agency said last month.

PRICING CONCERNS

The US Treasury has raised concerns that the EU embargo could set off a scramble for alternative supplies, spiking global crude prices to as much as $140 a barrel, and it has been promoting the price cap as a way to keep Russian crude flowing.

Russian oil prices have risen in anticipation of the EU embargo, with Urals crude trading at an $18-to-$25 per barrel discount to benchmark Brent crude, down from a $30-to-$40 discount earlier this year.