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The energy battle between Russia and the West escalated dramatically on Friday, with Western countries making a concerted effort to cap the prices of Moscow’s oil and gas exports, while Russia announced it would not restart the crucial Nord Stream pipeline.
Finance ministers from the G7 group of industrialized democracies have called for designing a system that would only allow Russian oil to be sold at below-market prices. The President of the European Commission also called for a cap on Russian gas prices. The aim is to limit the Kremlin’s income from the sale of fossil fuels, which helps finance its invasion of Ukraine
Within hours, Moscow retaliated. Gazprom has announced the indefinite closure of its vital Nord Stream gas pipeline to Germany, a move likely to be seen as another economic assault on the European Union by the Kremlin.
Friday’s quick exchanges between Russia and the West on energy show just how high the stakes are. Western governments are grappling with an energy crisis that is fueling inflation, while seeking to exert maximum pressure on Moscow by targeting Russian fossil fuel exports.
Russia, meanwhile, has benefited from record prices and hopes to further harm Western economies by reducing supply.
“The price cap is specifically designed to reduce Russian revenues and Russia’s ability to finance its war of aggression while limiting the impact of the Russian war on global energy prices,” the ministers said. G7 in a statement after their virtual meeting.
On the same day, European Commission President Ursula von der Leyen said she was “firmly convinced” of the need to cap the price of Russian gas exported by pipeline to the EU – something the bloc wants to do. both to squeeze Russia financially and to rein in soaring energy prices at home.
“A gas price cap can be proposed at European level,” she said.
It is an effort to bring order to global energy markets that were savagely destabilized by Putin’s invasion of Ukraine more than six months ago.
Nothing indicates that Russia is ready to play the game.
The Kremlin warned it would stop selling oil to companies participating in the G7 program, and Gazprom said it would not restart the Nord Stream pipeline to Germany on Saturday as planned.
Russia’s gas export monopoly cited maintenance issues on the undersea gas pipeline. “Until the equipment malfunctions are corrected, gas transport to the Nord Stream pipeline is completely stopped,” he said.
Eric Mamer, spokesperson for the European Commission, called Gazprom’s argument is “misleading” and said it was “further confirmation of its unreliability as a supplier”.
Despite efforts to hamper Moscow’s energy exports – the mainstay of the country’s budget – a combination of heavy reliance on Russian energy in many EU countries and strong demand from countries like India and China, has not stopped the flow of cash into the Kremlin. coffers.
Although Russian oil exports fell in June, the country still earned $20.4 billion for the month, a 40% increase from the same month last year, according to the International Security Agency. energy.
The EU has been reluctant to ban Russian natural gas – which accounted for 40% of the bloc’s imports last year – but has vowed to minimize its reliance. However, the Kremlin halted or limited exports to a dozen EU countries, and imports at the end of August were 68% lower than the same period last year, according to the group. of Bruegel reflection.
Nord Stream has only been operating at 20% capacity in recent weeks, and Berlin is increasingly pessimistic about any return to normal.
“What I expect is that we cannot count on Russia or Gazprom in any way,” German Economy Minister Robert Habeck said on Thursday.
However, Gazprom is not suffering; gas prices are about 10 times higher than a year ago, and it posted a record net profit of $41.3 billion in the first half of this year.
This prompts the EU, US and other countries to work to hinder these revenues.
The sixth EU sanctions package included a complete ban on the import of Russian crude oil transported by sea by December 5 and refined products by February 5 – with exemptions for countries like the Hungary which are heavily dependent on oil imports via pipelines. The G7 effort would fit into the EU timetable.
Last year, the EU imported 71 billion euros of Russian oil and petroleum products. The United States, which buys far less Russian oil, imposed its own ban in March.
The G7 plan calls for a broad coalition of countries to price Russian oil below the market – the key is to find a level at which Russia will continue to pump but low enough not to make huge profits.
The plan would hinge on Russia refusing access to the vital insurance market in London, which covers 95% of the global oil transport industry, if it fails to meet the price cap. Much of Russia’s crude is shipped by tankers from countries like Greece, and that trade could be hampered by insurance restrictions.
Tankers are “at the center of it all”, said Robin Brooks, chief economist of the IIF, a global association for the financial services industry. “And so if you want to enforce an embargo or if you want to enforce a price cap, you have to do it with the tankers. Otherwise, it is not believable.
Ownership of tankers is far from simple, but according to Brooks analysis, 55% of tanker capacity that left Russia between March and August had Greek beneficial owners, up from 35% during the same period. in 2020 and 2021. Because the sanctions are not yet in force, there is nothing illegal about such activity, although Ukrainian President Volodymyr Zelenskyy has criticized Greece’s role in transporting Russian oil .
The G7’s goal is to make these expeditions much less lucrative for Russia.
“Today the G7 took a crucial step towards achieving our twin goals of putting downward pressure on global energy prices while depriving Putin of revenue to fund his brutal war in Ukraine,” said US Treasury Secretary Janet Yellen.
The EU is also seeking to wean itself off Russian gas. The price spike is impacting electricity prices, fueling inflation and causing growing political instability on the continent.
EU energy ministers will hold an emergency summit to address the issue on September 9, and there are growing calls to cap Russia’s natural gas revenues.
“I think it’s something that we definitely have to take into consideration…the question is to what extent do we consider this as something that we can afford,” Spain’s Minister for Ecological Transition told POLITICO. Teresa Ribera.
The European Commission clarified its thinking on the urgency of energy prices in a draft document obtained by POLITICO.
Moscow is furious at the idea of price caps, and Dmitry Peskov, the Kremlin spokesman, has warned that Russia will stop exports to countries that join the effort to set such price limits.
“We just won’t cooperate with them on oil on such non-market principles,” he said.
But even if Russia stops exporting oil to the countries setting a cap, it “will still have an impact on their income” because it could force Moscow to give a discount on sales to other countries, predicted Simone Tagliapietra , member of Bruegel.
He also said it might be worth minimizing Russia’s gas revenue, “because it’s clear that Russia could cut off all supplies, anyway.”
Wilhelmine Preussen, Hanne Cokelaere and Victor Jack contributed reporting.
This article has been updated with a comment from the European Commission on the shutdown of Nord Stream.
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