Another blow to Moscow’s energy gains: the G7 countries decided on Friday to “urgently” cap the price of Russian oil, a complex mechanism that needs to be put in place.
A “broad coalition” of countries is invited to implement the decision, which was finalized on Friday during a virtual summit of finance ministers from the seven most industrialized countries.
“Today, the G7 took a crucial step toward our twin goals of putting pressure on global energy prices while simultaneously depriving (Vladimir) Putin of revenue to fund his brutal war in Ukraine,” US Treasury Secretary Janet Yellen immediately welcomed .
Russia, for its part, denounced a “completely absurd” measure even before it was formalized.
EU unanimity required
Such “meddling” in the oil market “will only destabilize the oil industry, the oil market. And for that, European and American consumers will be the first to pay,” Russian Deputy Prime Minister Alexander Novak threatened, quoted by Russian news agencies.
France, a member of the G7, has also dampened the enthusiasm of its partners.
“The technical work is still ongoing and it is clear to us that no final decision can be taken before the 27 Member States of the European Union have been consulted and a unanimous opinion has been obtained,” said the French Economy Ministry.
The EU is striving for this agreement “according to the schedule agreed as part of the sixth EU sanctions package” against Russia, explained EU Economic Commissioner Paolo Gentiloni, i.e. on December 5 for crude oil sales and on February 5, 2023 for petroleum products.
The capping mechanism looks complex.
“The price cap will be set at a level based on a set of technical data that will be decided by the entire coalition prior to its implementation,” write the seven countries — the US, Germany, Canada, the UK, Italy, Japan and France.
Specifically, Russia would sell its oil to these countries at a price lower than the price it sells it at today, but which would remain higher than the production price, so it has an economic interest in continuing to sell it to them sell, and so that it does not cut back on its deliveries.
The challenge is to win over as many countries as possible, because the price cap only works if all major buyer countries participate, emphasize the experts, who point in particular to the role of China and India.
To that end, the G7 “calls on all countries to give their opinion on the design of the price cap and to implement this important measure” to form “a broad coalition” to maximize the measure’s impact.
The G20 summit on November 15th and 16th in Bali should therefore be a crucial meeting in the implementation of this coalition.
At the end of June, leaders of the G7 countries began work, spurred on by Washington, to develop the mechanisms for this cap, which should be based on a ban on insurers and reinsurers from covering sea transport of Russian oil.
Such a mechanism should have a real impact on the Russian economy, Ms Yellen believes. “We have already started to see the impact of the price cap from Russia’s hasty attempts to negotiate bilateral oil swaps with massive rebates,” the finance minister said.
British Chancellor of the Exchequer Nadhim Zahawi welcomes that this ceiling is likely to deal a new blow to the Russian economy, which is already “slipping into a deep recession”.
However, the measure carries the risk of collateral effects for the global economy, warns the think tank Capital Economics.
The mechanism “could further inflate global energy prices,” he warns in a statement, but stresses that “the cap could also reduce tax revenues for the Russian government.”
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