G7 Targets Russian Energy Windfall By Capping Oil Prices

published on Friday, September 02, 2022 at 7:41 p.m.

Dealing a further blow to Moscow’s energy windfall: G7 countries decided on Friday to “urgently” cap the price of Russian oil, a complex mechanism to implement.

A “broad coalition” of countries is invited to implement this decision, finalized on Friday during a virtual summit of finance ministers from the seven most industrialized countries.

“Today, the G7 has taken a vital step towards achieving our dual goals of pushing down global energy prices and depriving (Vladimir) Putin of revenue to finance his brutal war in Ukraine,” the Secretary of State immediately greeted. US Treasury, Janet Yellen.

Russia for its part, even before its formalization, denounced a “completely absurd” measure.

– EU unanimity needed –

Such “interference” in the oil market “will only destabilize the oil industry, the oil market. And for this, European and American consumers will be the first to pay,” Russian Deputy Prime Minister Alexander Novak threatened, quoted by the agencies. Russian news.

France, a member of the G7, has also tempered the enthusiasm of its members.

“The technical work is still ongoing, and it is clear to us that a final decision cannot be made before having consulted and obtained a unanimous opinion among the 27 member states of the European Union,” the French Ministry of the Economy said.

The EU has set itself the goal of obtaining this agreement “in accordance with the timetable agreed in the context of the sixth package of EU sanctions” against Russia, explained the European Commissioner for the Economy, Paolo Gentiloni. That’s December 5 for crude oil sales and February 5, 2023 for petroleum products.

The limiting mechanism seems complex.

“The price cap will be set at a level based on a series of technical data and will be decided by the entire coalition before implementation,” write the seven countries: the United States, Germany, Canada, Britain, Italy, Japan and France. .

Specifically, Russia would sell its oil to these countries at a lower price than it sells today, but it would remain above the production price, so it has an economic interest in continuing to sell it to them, and so that it does not cut off its deliveries.

The challenge is to bring together as many countries as possible because the maximum price will only work if all the main buying countries participate, experts stress, noting in particular the role of China and India.

“We want to continue to encourage Russia to produce,” a US Treasury Department official told reporters.

“Our view is that if China and India are in a position to be able to go and negotiate lower prices with Russia, because of the price cap, because of the pressure, our objective will be achieved,” he added.

– Pivotal encounter –

The G20 summit, meeting in Bali on November 15 and 16, should therefore be a crucial date for the launch of this coalition.

The leaders of the G7 countries, under the impetus of Washington, began work at the end of June aimed at developing the mechanisms of this cap, which should be based on a ban on insurers and reinsurers from covering the maritime transport of Russian oil.

“Russian oil purchases will only be able to access these essential services for maritime oil delivery if the oil is sold below a price cap,” US Treasury Secretary Janet Yellen said on MSNBC, and He added that 90% of these services are carried out. by European or British companies.

Such a mechanism should have real effects on the Russian economy, Ms. Yellen believes.

“We have already started to see the impact of the price cap through Russia’s hasty attempts to negotiate massively discounted bilateral oil swaps,” it said in a statement.

However, the move risks having collateral effects on the global economy, warns the Capital Economics think tank.

The mechanism “could further increase global energy prices,” it warned in a note, noting, however, that “the cap could also be effective in reducing tax revenues for the Russian government.”

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