The finance ministers of the Group of Seven (G7) on Friday agreed to “urgently” impose a price cap on seaborne Russian oil in a bid to reduce Russia’s “ability to fund” the Ukraine war while simultaneously stabilising global energy markets and minimising the “negative economic spillovers, especially on low and middle-income countries.”
In a joint statement following a virtual meeting, the G7 finance ministers—comprising the United States (US), the United Kingdom (UK), Canada, France, Germany, Japan, and Italy—said “we invite all countries to provide input on the price cap’s design,” adding that a “broad coalition” will be established to effectively implement this measure.
The price cap we announced today serves our dual goals of diminishing Putin’s revenue and his ability to wage war against Ukraine while mitigating high energy costs in America and globally. pic.twitter.com/ELapYKSDAt
— Secretary Janet Yellen (@SecYellen) September 2, 2022
The price cap will come into effect on December 5 this year in line with the European Union’s (EU) sixth package of sanctions. “We envisage that practical implementation of the price cap will be based on a recordkeeping and attestation model covering all relevant types of contracts,” it noted.
Calling it a “critical” step, US Secretary of the Treasury Janet Yellen asserted that the price cap is “one of the most powerful tools we have to fight inflation” and “help deliver a major blow for Russian finances.”
Today’s @G7 price cap announcement is a major step toward denying President Putin revenue to fund his unjustified war in Ukraine while lowering global energy prices, incredibly important for countries suffering from rising energy costs. We continue to hold Russia to account.
— Secretary Antony Blinken (@SecBlinken) September 3, 2022
Similarly, White House Press Secretary Karine Jean-Pierre stated that the efforts to implement a price cap “is already bearing fruit,” as Russia is proposing “steep discounts” as high as 30% to some countries, in an alleged reference to Indonesia. “A price cap will give more countries better leverage to strike bargain deals with Russia,” she remarked.
Along the same lines, Japanese Finance Minister Shunuchi Suzuki called it a “significant step” that could reduce global energy prices and inflation, adding, “It’s important to materialise what was agreed quickly.”
The G7 accounts for only about 45% of world gdp, down from 70% three decades ago. Many large countries, including China, India and Indonesia, do not want to be bound by Western foreign policy, sanctions and embargoes. A price cap on oil will be hard to implement.
— Arend Jan Boekestijn (@ajboekestijn) September 3, 2022
The European Commission, meanwhile, vowed to “play its full part in working to achieve unanimity among our 27 Member States in order to implement this measure in the EU.” However, Hungary, which is largely dependent on Russian oil, has refused to sanction or partake in the price cap. Europe still continues to use about two million barrels of Russian oil per day. Nevertheless, oil prices dropped from $120 per barrel in mid-June to $87 on Friday.
Regarding the proposed price cap, Russian Deputy Prime Minister (PM) Alexander Novak declared on Thursday, “If they impose restrictions on prices, we will simply not supply oil and petroleum products to such companies or states that impose restrictions as we will not work non-competitively.” He noted that the “completely absurd” offer would “fully ruin the market.” He also revealed that India and China do not support the idea of a price cap.
Russia is likely to respond harshly to this G7 move
— Samuel Ramani (@SamRamani2) September 2, 2022
Alexander Novak has hinted that Russia could cut supply to countries that support the cap, which would severely impact Germany, as Russia insists that it would cut into the profitability of oil exports
Following the G7’s announcement on Friday, former Russian President and deputy chairman of the Security Council Dmitry Medvedev threatened to shut gas supply to Europe. Later on Friday, Russia indefinitely stopped supplying gas to Germany through its Nord Stream 1 pipeline, citing “oil leaks.” Gas supply was supposed to resume on Saturday but Kremlin spokesman Dmitry Peskov said that because of “no technical reserves” and the fact that only one turbine is in operation, “the reliability of the operation, of the whole system, is at risk.”
In response, European Commission President Ursula von der Leyen said that a price cap could also be imposed on pipeline supplies of Russian gas, asserting, “We see that the electricity market does not work anymore because it is massively disrupted due to [Russian President Vladimir] Putin’s manipulations.”