G-7 announces price cap deal on Russian oil in favor of Yellen

Yellen said the price cap would prove to be a powerful tool to fight inflation and deal “a heavy blow to Russia’s finances”.

“By committing to finalize and implement a Russian oil price cap, the G-7 today took a crucial step in achieving our dual goals of putting downward pressure on prices. global energy markets while refusing [President Vladimir] Putin’s income to fund his brutal war in Ukraine,” she said in a statement.

However, several elements of the plan remain unclear, including how many countries will eventually sign on, what price the cap will be set at, and how Putin will react.

The aim is to bring the effective date of the price cap into line with new European sanctions due to come into force on December 5 on shipping services for Russian oil exports. Under the deal, importers who buy Russian oil below the cap will be exempt from new restrictions on financing and shipping services, which are largely provided by G-7 countries. This will allow the oil to keep flowing while limiting Russia’s revenues, which have increased following the invasion of Ukraine.

Treasury officials are working with their international counterparts to complete the legal frameworks for the cap in each jurisdiction, which are expected to be unveiled in mid-October.

Russian Central Bank Governor Elvira Nabiullina has said Russia will refuse to sell to countries that impose a cap, raising doubts about whether the plan

In its statement, the G-7 pledged to work urgently to finalize the measure in each of its jurisdictions and acknowledged that implementation in the European Union will require unanimous agreement among all 27 member states.

“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, especially for countries low- and middle-income, allowing only service providers. to continue to do business related to Russian marine petroleum and petroleum products sold at or below the ceiling price,” the statement read.

The G-7 is made up of the United States, United Kingdom, Germany, France, Italy, Canada and Japan. The EU itself also belongs to the group.

Senior Treasury officials confirmed on Friday that the deal would include three price caps — one for crude oil and two for refined products — that would be set at a particular dollar amount, not as a discount or percentage of a reference price. Those prices, which are still determined by G-7 members, could be revised as needed, one of the senior officials said in a call with reporters.

Some in the oil industry have warned the plan is too complicated and will be difficult to implement, while economic and energy policy experts say it could have unintended consequences and drive up the price of oil.

Yellen said the alternative would be worse – if European sanctions come into effect without a price cap exemption, it could lead to a catastrophic supply shock that sends energy prices skyrocketing and triggers a global recession, she said.

US oil prices, which had soared to nearly $90 a barrel in the morning after the release of positive economic data, returned some of the gains after the Treasury announcement.

Buyers will need to consider whether Russia will continue to sell them oil if the price cap is too low, said Paul Sankey, director of energy analyst firm Sankey Research.

“Russia has aggressively pushed back against G7 proposals to cap oil prices, saying it would exclude any participants in the price cap,” Sankey said. That threat could be greater if OPEC decides to cut its own production at a meeting of oil-producing nations scheduled for Monday, Sankey added.

It’s unclear whether the price cap will put more oil on the market, said Andy Lipow, president of consulting firm Lipow Oil Associates.

“It certainly increases the number of buyers of Russian oil, which is bearish, but Russia might decide not to sell to them, which is bullish,” Lipow said. “It raises the question of how you get on board with China and India, as they have already benefited from buying Russian oil at a deep discount.”

US officials have made it clear that they do not necessarily need India and China to formally sign to achieve their goal. Already there are signs that some importers are negotiating lower prices with Russia ahead of the price cap announcement, and that the Kremlin is looking to strike long-term contracts at lower prices, another senior said. treasury official.

It will also cost Russia significantly more to obtain alternative services to finance and ship its oil if it chooses to sell to countries outside the price cap coalition, further eating into its oil profits, the official said. .

“The truth here for the Kremlin is that they are going to have very tough choices, and those choices are going to keep getting tougher,” the senior official said.

The G-7 finance ministers, in their statement on Friday, said implementation would be based on “a registration and attestation model” covering all contracts, and said they would “aim to limit the possibilities of circumventing the cap while minimizing red tape”. burden on market players.

The initial cap will be set at a level based on a range of technical inputs, the group said, and will be decided by the entire coalition before the implementation date.

Ben Lefebvre contributed to this story.