The G7 countries and Australia announced a $60 per barrel price cap on Russian oil on Friday. The decision came after the European Union members overcame Poland’s opposition and reached a political agreement earlier in the day.
Following the holdout by Poland, the EU reached an agreement on the price, clearing the way for formal approval over the weekend. The G7 and Australia stated that the price cap would go into effect on December 5 or shortly thereafter.
What is the Price Cap?
Since the commencement of the Ukraine-Russia war, Western nations have avoided playing an active part in the conflict but instead indirectly hindered Russia and its capability to wage war.
Western nations imposed oil and gas-based sanctions on Russia failed due to the global rise in oil and gas prices in 2022.
On September 2, 2022, finance ministers from the G7 group of nations agreed to cap the price of Russian oil and petroleum products to reduce Russia’s ability to finance its war with Ukraine without exacerbating the 2021-2022 inflation surge.
Furthermore, it will make hiring oil tankers much more difficult for Russia, limiting the amount of oil that Russia can sell and ship to customers and thus reducing revenue.
The price cap has been set to $60 per barrel of crude oil.
How does it work?
As we studied the mechanism of price cap imposed by the G7 nations, it turned out to be a restriction on maritime companies rather than an actual price cap.
The Group of Seven countries are home to most major shipping companies and insurers. The plan forbids those companies from handling Russian crude unless the shipment is sold at or below the price cap set by the G7 nations. If it is not, they will be held accountable for sanctions violations.
Impact on Russia
It might be a significant symbolic sign to Russia and Vladimir Putin but frankly it would amount to much.
According to Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels, a $60 cap will have little impact on Russia’s finances. This will “almost go unnoticed”, he says because it is close to where Russian oil is already selling.
Russian Urals blend sells at a significant discount to international benchmark Brent and fell below $60 for the first time in months this week as a result of concerns about reduced demand from China due to COVID-19 outbreaks.
For many, the price cap is not satisfying as it is quite higher than what countries like Poland demanded during the G7 nations negotiations talks.
Effect on Oil Importer Nations
The price cap is essentially aimed at countries like India, China and Turkey as G7 nations have mostly stopped purchasing Russian oil.
Nations such as India have not signed up with the Price cap but the US still hopes that it will join onboard.
A senior Indian government official said on Friday that India will continue to import crude oil from all sources, including Russia.
According to the data, Russia’s share of India’s oil imports increased to an all-time high of 23% from 19% the previous month. The price cap is likely to benefit countries such as India, China, and other major buyers who have been purchasing discounted Russian barrels.
The price cap would provide them with leverage to reduce the price they pay to Russia.
The Way Ahead
The current price cap would not be of much trouble to either the Russian or Indian and Chinese economies. However, the scenario could change if the group of seven nations decide to reduce the price cap. A sudden increase in global crude oil prices would also ensure that the current price cap would hurt the Russian oil suppliers.
The G7 or the entire West can try to bolster their economic sanctions but it would do little to deter Russia until they could convince other major market players such as China and India to stop importing oil from Moscow or offer a viable alternative.