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The leaders of the Group of Seven industrialized nations announced on Friday that they will impose a price cap on Russian oil, aiming to undercut the Kremlin’s finances while keeping energy flowing to the West.
The price cap plan, one of the top priorities of U.S. Treasury Secretary Janet L. Yellen, aims to reduce the huge energy windfall that Russia is using to finance its war in Ukraine without creating shocks prices that could paralyze the global economy.
The G-7 had previously agreed to only explore the price cap proposal, but its statement on Friday was its most significant statement yet that nations would seek to enact an aggressive new policy, which would be unprecedented internationally coordinated action on of energy prices.
Top Russian leaders have repeatedly warned that they will retaliate against the price cap. Europe remains heavily dependent on Russian energy, and an escalation of hostilities could exacerbate the economic crisis already facing Western allies.
“Today’s action will help deliver a major blow to Russian finances and hinder Russia’s ability to fight its unprovoked war in Ukraine and accelerate the deterioration of the Russian economy,” Yellen said in a announced on Friday. “We have already begun to see the impact of the price cap through Russia’s hasty attempts to negotiate massively discounted bilateral oil trades.”
Janet Yellen’s global campaign to defund Russia’s war machine
The G-7 nations — the United States, five of its Western allies and Japan — said in a statement that they plan to enact the price cap by cutting insurance for all shipments of Russian oil sold above of a certain price. This would effectively make it impossible to send loads with a price above the limit. The maximum price has not yet been announced, but is expected to take effect in December, when the shipping ban is also expected to take effect.
Yellen has been pushing the policy for months with her international counterparts, but has faced skepticism and tough questions about exactly how the price cap would work. Analysts have expressed concern that the limit 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 on world markets at a premium. Other analysts and foreign leaders have expressed concern that Russia could retaliate by further sharply limiting its natural gas shipments to Europe, which is already facing a winter in which Germany and other nations will experience critical shortages of energy supplies.
Despite the recent drop in energy prices, Russia has continued to collect hundreds of billions of dollars from its oil and natural gas sales. These energy sales have dramatically undercut the Western sanctions campaign imposed by 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 did not make clear how the cap would affect international gas and oil prices, noting that critical details such as the level of the price cap and the date on which will come into force.
“The devil is in the details, and few details 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, going from exploring a price cap to implementing one.”
Senior Treasury officials told reporters on a call Friday that the allies will set the maximum price above the cost of production for Russia, 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 such as India and China do not join the price cap, Treasury officials said, the existence of the cap will give other nations greater leverage in negotiations with Russia over its energy contracts. , which should help achieve the goal of reducing the Kremlin’s income. . Treasury officials said leaders of other nations have told them they are already benefiting from the price cap plan because Russia knows it has a shrinking number of potential buyers.
Yellen also stressed that the price cap would be less damaging to global energy markets than the ban on all Russian oil that Europe is preparing to implement later this year. In June, after weeks of tense negotiations, the European Union agreed to ban oil imports from Russia and banned insuring and financing the shipping of Russian oil to third countries. The United States banned imports of Russian oil in March.
Janet Yellen’s global campaign to defund Vladimir Putin’s war machine
To implement the cap, the G-7 will have to get EU member states to modify the bloc’s sixth round of sanctions. News of the oil cap comes as the EU considers emergency measures to deal with rising energy prices and prepares for what many fear will be a long and cold winter. EU energy ministers will meet in Brussels on September 9 to discuss calls to overhaul the bloc’s energy market.
Worried about the potential for higher prices, US officials have pushed hard for the cap, but have faced resistance in Brussels, where some EU diplomats have argued the cap needs support much wider, especially from China and India, to be effective.
Dmitri Peskov, a spokesman for Russian President Vladimir Putin, warned on Friday that countries participating in the price cap will not receive Russian oil. Peskov said of Western allies: “We simply will not cooperate with them on oil on such non-commercial principles.”
Asked about the Kremlin’s threats, a senior Treasury official said Russia is desperate for energy revenue and cast doubt on its credibility, noting that Russian officials also said they were not going to invade Ukraine.
Ariel Cohen, a senior member of the Atlantic Council, said he remains concerned that Putin will respond to the price cap by cutting off natural gas shipments to Europe, which could exacerbate the continent’s economic crisis.
“We have to be careful not to cause an economic collapse in Europe,” Cohen said. “I want to understand clearly where the alternative gas supply will come from. What is the extent of the economic pain that Europe can bear?
But Simon Johnson, a professor at the Massachusetts Institute of Technology who specializes in energy policy, stressed that the price cap plan, which would still allow Russia to trade oil at a discount, would be less disruptive to global markets than the previous plan of ‘Europe to cut. of all Russian oil imports.
“It shows that they want the oil to flow, which will keep oil prices lower than they would otherwise be,” Johnson said.