G7 targets Russian energy windfall by capping oil prices

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

Dealing a new blow to Moscow's energy windfall: the G7 countries decided on Friday to "urgently" cap the price of Russian oil, a complex mechanism to put in place.

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 putting downward pressure on global energy prices while depriving (Vladimir) Putin of revenue to fund his brutal war. in Ukraine," immediately greeted US Treasury Secretary 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", threatened Russian Deputy Prime Minister Alexander Novak, cited by Russian news agencies.

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

"The technical work is still in progress, and for us, it is clear that no final decision can be taken before having consulted and obtained a unanimous opinion among the 27 Member States of the European Union", indicated the French Ministry of the Economy.

The EU aims to obtain 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 is December 5 for crude oil sales and February 5, 2023 for petroleum products.

The capping mechanism looks 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 its implementation", write the seven countries - United States, Germany, Canada, Great Britain , Italy, Japan and France.

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

The challenge is to rally as many countries as possible because the price cap will only work if all the major buyer countries participate, underline the experts, who point in particular to 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 find themselves 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 is achieved” , he added.

- Crucial meeting -

The G20 summit, meeting in Bali on 15 and 16 November, should thus constitute a crucial meeting for the implementation of this coalition.

The leaders of the G7 countries, under the impetus of Washington, launched work at the end of June aimed at developing the mechanisms for 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 the delivery of maritime oil if the oil is sold below a price cap,” said US Treasury Secretary Janet Yellen on MSNBC. , adding that 90% of these services are carried out by European or British companies.

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

"We have already started to see the impact of the price cap through Russia's hasty attempts to broker bilateral oil swaps at massive discounts," she said in a statement.

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

The mechanism "could further drive up global energy prices," he warned in a note, noting, however, that "the cap could also be effective in reducing tax revenues for the Russian government."