The Group of Seven Nations is working on a cap on the price of Russian oil in an effort to limit Moscow’s ability to finance the invasion of Ukraine, a plan that analysts say could work in the long run, but oil prices in could increase in the coming months.
Officials in G7 countries, including US Treasury Secretary Janet Yellen, say the unprecedented measure, which begins on December 5, will lower the price Russia receives for oil without cutting its petroleum exports to world consumers.
Russian President Vladimir Putin could push back, causing stress in oil markets even if the plan coincides.
Below are questions about the price cap and the challenges it faces.
WHO IS IN THE PRICE CAP COALITION?
The rich countries of the G7 — the United States, Japan, Germany, Britain, France, Italy and Canada — and the EU are working on details of the plan. The G7 wants to appeal to other countries, including India and China, which have been taking heavily discounted oil from Russia since the invasion of Ukraine on February 24.
Moscow has managed to maintain its revenues through increased sales of crude oil to India and China.
G7 expected to advance oil price cap plans in Russia, with insurance playing a key role
But even if India and China don’t join, a cap could help push prices down for Asia and other consumers. Ben Harris, the Treasury Department’s deputy secretary for economic policy, said on Sept. 9 that if China negotiates a separate 30%-40% discount on Russian oil over the price cap, “we’ll consider that a win.”
The consensus on the price cap will be reached with the help of a “rotating lead coordinator,” the US Treasury Department said Friday, suggesting countries in the coalition will have temporary leadership roles as the plan progresses.
WHAT IS THE LEVEL OF THE PRICE CAP?
It will likely be weeks before the price of Russian crude and two oil products will be decided, Harris said.
Washington-based ClearView Energy Partners has said officials have been talking about a $40-$60 a barrel range for crude. The top of that range matches historical prices for Russian crude, while the bottom is closer to Russia’s marginal cost of production, analysts say.
Coalition members with longstanding economic and military relations with Russia could push for a higher limit, while too low a limit could take market share away from Saudi Arabia and other oil producers. “The level will be determined by both quantitative and qualitative reasons,” said Bob McNally, president of Rapidan Energy Group.
Russian crude is priced at a discount to the international Brent benchmark and the G7 wants to keep that spread wide, to keep Russian oil revenues low.
However, achieving a wide spread could lead to higher prices for western consumers, as Russia is the world’s second largest exporter of crude oil after Saudi Arabia.
WHAT DOES THE G7 EXPECT FROM MARITIME SERVICES?
The plan agreed by the G7 calls on participating countries to refuse Western-dominated services, including insurance, finance, brokering and navigation, for oil cargoes priced above the ceiling.
To secure those services, petroleum buyers would provide “certificates” to suppliers who said they had bought Russian petroleum at or below the limit.
Maritime service providers cannot be held liable for false price information provided by buyers and sellers of Russian oil, the US Treasury Department said.
G7 officials believe the plan will work because the London-based International Group of Protection & Indemnity Clubs provides marine liability coverage for about 95% of the global oil shipping fleet.
Traders point to parallel fleets that can handle Russian oil with Russian and other non-Western insurance that could be used to evade enforcement efforts.
It remains uncertain how many ports around the world will accept ships insured by Russia.
Craig Kennedy, an associate of Harvard University’s Davis Center for Eurasian and Russian Studies, said the G7 has a long-term impact because Moscow is limited by a small tanker fleet rather than the sheer volume of exports it needs to to come out. If Russia does not want to sell at the ceiling, it may have to stop production, which could cause costs for its oil fields in the long run.
HOW CAN RUSSIA FIGHT BACK?
Putin has said Russia will hold back exports to countries that enforce the cap, and fears of the threat could see oil markets surge before December.
Higher prices could also be risky for US President Joe Biden ahead of the November midterm elections, when his fellow Democrats hope to retain control of Congress.
Some analysts fear Moscow could respond by taking actions beyond Russia’s borders before the ceiling goes into effect.
“My biggest concern is that I think Putin will make it very, very painful on the way to December 5,” Helima Croft, head of global commodities strategy at RBC Capital Markets, told a Brookings Institution event on September 9. “They also have assets in other producing countries, be it Libya, be it Iraq, and they can cause problems in other producing states.”
HOW IS THE CAP MAINTAINED?
The US Treasury Department warned service companies to be vigilant for red flags indicating possible evasion or fraud by Russian oil buyers. These may include evidence of deceptive shipping practices, refusal to provide requested pricing information, or excessive service charges.
US Deputy Treasury Secretary Wally Adeyemo said on Friday that those who falsify documentation or otherwise hide the true origin or price of Russian oil will face repercussions under the national laws of jurisdictions that apply the price cap.
(Reporting by Timothy Gardner; additional reporting by David Lawder and the London Energy Team; editing by Daniel Wallis)
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