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G7 countries plan to impose ‘price caps’ on Russia’s oil exports
The West has alleged that revenue inflows are helping Russian President Vladimir Putin finance the war in Ukraine. The G7 is attempting to address this dilemma by imposing price caps - an unprecedented intervention in the global energy market
In a move that may have an impact on the terms of the growing Russia-India energy partnership - India has enhanced import of Russian energy since the war in Ukraine began as energy prices spiral - the G7 countries are considering imposing “price caps” on Russia’s oil to dilute revenue inflows to Moscow.
The West has alleged that these inflows are helping Russian President Vladimir Putin finance the war in Ukraine. At the same time, galloping energy prices and rising inflation across the world have increased domestic political pressure even in western countries, Europe continues to be overwhelmingly dependent on Russian gas, and other economies, including China and India, have leveraged Russian energy sources in the quest for both energy security and to manage inflation.
The G7 is attempting to address this dilemma by imposing price caps - an unprecedented intervention in the global energy market.
US national security adviser Jake Sullivan told reporters said that there was “absolute consensus” across G7 that the purpose of energy sanctions on Russia was to deny a Russia revenue, while ensuring a stable energy market. “There is also consensus emerging - although there continue to be discussions around it, so I don’t want to get ahead of the leaders on this - that the price cap is a serious method to achieve that outcome.”
The question then, according to Sullivan, is how to do this. “How do you implement it working with consuming countries and with the private sector? What are the details? What are the methods of execution? That requires technical work that has to be done by ministers - energy ministers and finance ministers - in order to develop an actual executable cap that then goes into effect.”
G7 leaders are expected to instruct concerned ministers to take forward the idea and finalise its modalities.
The US acknowledged that this had not been a tried and tested method that could be pulled off the shelf and thus required careful planning and coordination, with Sullivan calling it a “new kind of concept” to deal with a particularly “novel challenge”.
When asked if President Joe Biden was lobbying in favour of the idea of price cap at the G7, Sullivan said, “I wouldn’t describe what the President has been doing here as lobbying so much as posing the problem, which is: If you merely try to reduce flows and not reduce price, you have certain impacts on the energy market that are averse, whereas if you reduce price, if you focus on price more than flows, you might be able to actually maximise your overall objectives of both depriving revenues to Putin and keeping energy market stable.”
Calling it a “pretty dramatic step forward”, the US NSA did not offer a specific timeline or explain the modalities of price caps would function, but said that an outcome could be expected rapidly.
A senior administration official said they were very close to a place where G7 leaders will urgently direct relevant ministers to develop mechanisms to set a global price cap for Russian oil in shipments to countries outside of the US, Europe, United Kingdom and EU the broader G7. The official reiterated that there was a dual objective here - “take direct aim at Putin’s revenues, particularly through energy, but also to minimise the spillovers and the impact on the G7 economies and the rest of the world”.
When asked if the US had engaged in conversations with countries such as India and China on the issue, the official said what the leaders will say will reflect the recognition that ministers tasked with this work “need to engage intensively with potential partner countries around the world; engage intensively with stakeholders, including those in the private sector”. “That’s going to be a very intensive set of dialogues, an intensive set of conversations in the days and weeks ahead.”
Offering a hint of how G7 countries hope to implement price caps, the official said, “We collectively have a set of tools that can go to the services that are provided to allow Russian oil to be transported elsewhere in the world. And by zeroing in on those services and the way in which they’re provided - and particularly, potentially, through the mechanism of a price gap — there’s an ability to achieve both of those objectives simultaneously.”
The Guardian reported that G7 countries were considering twin caps on Russian oil and pipeline gas. The gas cap would operate with European countries refusing to pay above the specific price for gas - based on the calculation that Russia would have no choice but to sell it. Price caps, according to the report, would also be imposed by warning International Group of Protection and Indemnity Clubs - the insurance company which has a quasi monopoly over insuring Russian oil tankers - of sanctions if it allowed oil to be sold above the specific price.
