Members of G7 nations have agreed to impose a price cap on Russian oil aimed at slashing Russian revenues, as well as the ability to finance the war in Ukraine.
The ministers stated that the crude oil and petroleum product price caps will eventually lower global energy prices. However, the essential details, including the per-barrel level of the cap, would be determined later “based on a range of technical inputs” to be agreed upon by the coalition of the countries implementing it. (Reuters)
On September 3rd, the G7 said: “We confirm our joint political intention to finalize and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally.”
However, in response to this, the spokesperson of the Kremlin, Dmitry Peskov, said: “Companies that impose a price cap will not be among the recipients of Russian oil.”
What does it mean?
Introducing a price cap on Russian oil means nations that agree to the policy will only be permitted to purchase Russian oil and petroleum products transported via sea that are sold at or below the price cap.
US Treasury Secretary Janet Yellen said that the price cap aims to achieve “our dual goals of putting downward pressure on global energy prices while denying Putin revenue to fund his brutal war in Ukraine.”
The strategy of price capping
In the meeting, ministers highlighted that it was a “specially designed” plan that helped to reduce Russian revenues and its ability to “fund its war of aggression.”
We have seen such international systems with similar mechanisms time and again to prevent nations from exporting oil. For instance, the “oil-for-food” programme by the United Nations (UN) in 1995 allowed Iraq to sell oil in exchange for food, medicine, and other humanitarian needs. It did not, however, use a price cap.
In the case of Iraq, the plan, initiated by then US President Bill Clinton, was to prevent Saddam Hussein’s regime from advancing military capabilities while allowing them to meet the necessary humanitarian needs of citizens.
The success of the Plan
G7-the group of seven consists of the UK, US, Canada, France, Germany, Italy, and Japan. The member nations have already either limited or suspended their Russian oil imports.
Therefore, for the plan to be efficacious, nations other than the G7 will have to take part. Ideally, major trading partners of Russia, such as India and China.
Moscow has already been accused by the west of “weaponizing” gas supplies by reducing flows to Europe.
Even though gas export volumes have fallen, revenue has risen because gas prices have skyrocketed. Therefore, Russia could decide to export less oil. Nevertheless, US officials believe that a significant cut to oil output would cripple the production capacity of the Kremlin.