A comprehensive US-led plan to limit what Russia can charge for its oil exports will limit the price of Russian crude to $60 a barrel, the Group of 7 countries agreed on Friday. The threshold, set after protracted negotiations between European Union diplomats, is likely to put a small dent in the Kremlin’s energy revenues and, the White House hopes, help prevent a global oil shock.
The deal was announced by the EU’s executive body and received swift approval from the rest of the G7 and Australia late Friday.
“With today’s decision, we fulfill the commitment made by the G7 leaders at their summit in Elmau to prevent Russia from profiting from its war of aggression against Ukraine, to support stability in global energy markets and to mitigate the negative economic spillover effects of the Russian offensive war to a minimum. , especially on low- and middle-income countries, which have disproportionately felt the impact of Putin’s war,” the joint statement said.
The final agreement came about after months of deliberations on how to keep economic pressure on Russia without creating an oil price shock that will trigger a global recession. Negotiators in Europe worked all week to agree on a price for the cap, leaving little time before an embargo on Russian oil takes effect on Monday.
“This price cap has three objectives: first, it reinforces the effect of our sanctions. Secondly, it will further reduce Russia’s revenues and thirdly, it will stabilize global energy markets at the same time,” European Commission President Ursula von der Leyen said shortly after the deal became final.
The United States praised the agreement, saying it would limit Russia’s ability to finance the war.
“Together, the G7, the European Union and Australia have now jointly set a cap on the price of Russian oil by sea that will help us achieve our goal of limiting Putin’s primary source of income for his illegal war in Ukraine while safeguarding stability.” of the global energy supply,” said Treasury Secretary Janet L. Yellen.
The price threshold reflects what U.S. officials have long said is their primary goal in pushing through the plan: to keep millions of barrels of Russian oil flowing to the world market as a new wave of European sanctions on Russian oil exports takes effect, triggering a sudden avoids contraction in supply that could drive up gasoline and heating fuel prices in the United States and around the world.
The $60-per-barrel limit attempts to capture the steep discount that buyers of Russian oil can now pay against other oil sources on the world market. While it won’t drastically reduce Russian export earnings, which is critical to Ukraine’s war effort, it could still hurt Russian finances. The limit will be lightly enforced, but European allies agreed that a new round of sanctions against Russia would soon follow.
Dealing with the price was not easy. European Union ambassadors in Brussels met many times over the past two weeks to discuss the limit, with some countries calling for a price much lower than $60 and others pushing for a higher limit. oil to countries like India and China for between $60 and $65 a barrel.
Oil traders seemed to see the plan as a sign that a European Union embargo on Russian oil imports, which takes effect December 5, is unlikely to knock much, if any, Russian oil off the world market. Global oil prices fell on the cap news and are about 10 percent lower than a month ago. Biden administration officials call that evidence that the cap was already working to deny Russia the high oil prices it enjoyed earlier this year.
EU diplomats agreed that the price should be reviewed every two months, or more often if necessary, by a committee of policymakers from the Group of 7 countries and allies. The first review was due to take place on Jan. 15, and the goal is to keep the cap at least 5 percent lower than the price Russian oil trades on the market, officials said. This approach ensures that fluctuations in the market price, measured by the price of the International Energy Agency, are followed by fluctuations in the price cap.
The G7 statement said price changes would be implemented with a grace period to minimize disruption to oil markets. Acknowledging that the policy is a work in progress, the coalition said it would “consider further action to ensure the effectiveness of the price cap”.
That plan puts the burden of executing and controlling the price cap on the companies that help sell the oil: global shipping and insurance companies, mostly based in Europe.
The European Union embargo on Russian oil includes a ban on European services from shipping, financing or insuring Russian oil shipments to destinations outside the bloc, a measure that would disable the infrastructure that moves Russian oil to buyers around the world.
For example, some 55 percent of the tankers carrying Russian oil out of the country are in Greek hands, according to maritime data and analysis by the Institute of International Finance.
Instead, to enforce the price cap, these European shipping companies are only allowed to carry Russian crude oil outside the block if the shipment meets the price cap. It is up to them to ensure that the Russian oil they carry or insure has been sold at or below its capped price; otherwise, the providers would be held legally liable for breaching sanctions.
“The good news is that the West has now equipped itself with an important tool to put pressure on Putin,” said Simone Tagliapietra, senior fellow at the Brussels think tank Bruegel.
Russia has repeatedly said it will ignore the policy and refuse to sell oil below a price cap; setting the level near the market price could help Moscow avoid appearing to be collapsing.
Earlier this year, economic forecasters expressed concern that Russia’s withdrawal of oil could push U.S. gasoline prices above $7 a gallon by the end of the year.
“Our motives are to squeeze Russia’s revenues to hinder its ability to wage the war,” Ms Yellen said in an interview last month. “And second, to make sure there is enough oil available worldwide so that oil prices don’t rise, because that would both exacerbate inflation and probably trigger a recession.”
US officials have celebrated the imposition of the cap. “Many people doubted the determination of the G7 and Europe in particular,” Ben Harris, the deputy secretary for economic policy at the Treasury Department, said in an interview. But, he said, the cap would help stabilize markets: “Sometimes you don’t get credit for the avoided crisis.”
The protracted talks in Brussels were proof of the discord that the cap has sown in Europe. Throughout most of the process, EU officials and diplomats from some Member States have been working to address two types of concerns.
A group of three maritime EU countries – Greece, Cyprus and Malta – demanded that the price cap be set very high, at or above $70 a barrel, to ensure that their business interests would not be harmed. Another group of three staunchly pro-Ukrainian countries – Estonia, Lithuania and Poland – demanded an ultra-low cap of or around $30 a barrel to drastically cut the Kremlin’s oil revenues, regardless of the disruption it would cause on the global oil markets. .
The benchmark for the price of Russian oil, known as the Ural blend, traded at $60 to $70 a barrel in the year before the pandemic, close to global benchmark prices. Shortly after Russia’s invasion of Ukraine in February, a cut of more than 20 percent in world prices was opened, but at its post-invasion peak, Russia was still able to sell Ural crude for about $100 a barrel.
Since then, global oil prices have plummeted as Russia signed deals to sell its oil at even greater discounts to China, India and others. Those falling prices have put a strain on Moscow’s finances, at least to some extent.