An elaborate US-led plan to limit what Russia can charge for its oil exports is expected to cap the price of Russian crude at $60 a barrel, the Group of 7 nations agreed on Friday. The threshold, which was set after lengthy negotiations among European Union diplomats, should make a small dent in the Kremlin’s energy revenues and, the White House hopes, help avert a global oil shock.
The deal was announced by the EU’s executive body and won swift approval from the rest of the G7 and Australia on Friday night.
“With today’s decision, we honor the G7 leaders’ commitment at their summit in Elmau to prevent Russia from profiting from its war of aggression against Ukraine, to support the stability of global markets energy and to minimize the negative economic fallout from Russia’s war of aggression, especially on low- and middle-income countries, which have felt the effects of Putin’s war disproportionately,” says the joint statement.
The final agreement came after months of deliberations on how to keep economic pressure on Russia without creating an oil shock that would cause a global recession. Negotiators in Europe have worked all week to agree a price for the cap, completing it with little time before a Russian oil embargo 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 revenue and, thirdly, at the same time, it will stabilize global energy markets,” European Commission President Ursula von der Leyen said shortly after the deal was signed. become final.
The United States welcomed the deal and said it would reduce 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 transported by sea, which will help us achieve our goal of restricting Putin’s main source of income for his war. illegal in Ukraine while simultaneously preserving the 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 main goal in pushing the plan: to keep millions of barrels of Russian oil on the world market as a new wave of European sanctions on Russian oil exports enters in force, avoiding a sudden contraction. in supply that could send gasoline and heating oil prices skyrocketing in the United States and around the world.
The $60-a-barrel limit is intended to lock in the steep discount buyers of Russian oil are now able to pay relative to other sources of oil on the world market. Without drastically reducing Russia’s export earnings, which are crucial to its war effort in Ukraine, it could further hurt Russia’s finances. The cap will come with light enforcement, but European allies have agreed it will be quickly followed by a new round of sanctions against Russia.
Settling on the price wasn’t easy. European Union ambassadors in Brussels have met several times over the past two weeks to discuss the cap, with some countries arguing for a price well below $60 and others asking for a higher cap. They agreed on a price that reflects what Russia has recently sold. oil to countries like India and China for – between 60 and 65 dollars a barrel.
Oil traders appeared to take the plan as a sign that a European Union embargo on imports of Russian oil, which takes effect on December 5, is not expected to bring much, if any, downside Russian oil. global market. Global oil prices fell on news of the cap and are down about 10% from last month. Biden administration officials call it proof that the cap was already working to deprive Russia of the premium oil prices it enjoyed earlier this year.
EU diplomats agreed that the price should be reviewed every two months, or more frequently if necessary, by a committee of policymakers from the Group of 7 countries and allies. The first review would take place on Jan. 15 and the goal is to keep the cap at least 5% below the market-traded Russian oil price, officials said. This approach will ensure that fluctuations in the market price, using the International Energy Agency price as a benchmark, will be followed by fluctuations in the price cap.
The G7 statement said the price changes would be enacted 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 measures to ensure the effectiveness of the price cap”.
This plan places the burden of implementing and controlling the price cap on the companies that help sell the oil: the global shipping and insurance companies, which are mainly based in Europe.
The European Union’s embargo on Russian oil includes a ban on European services from shipping, financing or insuring shipments of Russian oil to destinations outside the bloc, a measure that would disable the infrastructure that carries the Russian oil to buyers around the world.
Some 55% of the tankers that transport Russian oil out of the country belong to Greece, for example, according to shipping data and analysis from the Institute of International Finance.
To enforce the price cap, these European carriers will only be allowed to transport Russian crude out of the bloc if the shipment meets the price cap. It will be up to them to ensure that the Russian oil they transport or insure has been sold at or below the ceiling price; otherwise, suppliers would be held legally responsible for breaching the sanctions.
“The good news is that the West has now equipped itself with an important tool to pressure Putin,” said Simone Tagliapietra, senior researcher at Brussels-based think tank Bruegel.
Russia has repeatedly said it will ignore the policy and refuse to sell oil below a price cap; setting the level close to the market price could help Moscow avoid giving the impression that it is collapsing.
Earlier this year, economic forecasters expressed concern that Russia pulling oil from the market could push U.S. gasoline prices above $7 a gallon by the end of the year.
“Our motives are to withhold Russia’s revenue to hamper its ability to wage war,” Ms Yellen said in an interview last month. “And second, to ensure that there is enough global oil supply that global oil prices do not rise, as this would both exacerbate inflation and likely trigger a recession.”
US officials celebrated the imposition of the cap. “A lot of people doubted the resolve of the G7 and Europe in particular,” Ben Harris, assistant 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 crisis averted.”
The protracted talks in Brussels have been proof of the discord the cork has sown in Europe. For most of the process, EU officials and diplomats from some member countries worked to alleviate two sets of concerns.
A group of three EU maritime nations – Greece, Cyprus and Malta – demanded that the price cap be set very high, at $70 a barrel or more, to ensure their trading interests were not disrupted. Another group of three hardline pro-Ukrainian countries – Estonia, Lithuania and Poland – demanded an ultra-low cap, at or around $30 a barrel, to drastically cut the Kremlin’s oil revenues, regardless of be the disruption it would cause on world oil markets. .
The benchmark for the price of Russian oil, known as the Urals Blend, traded at $60 to $70 a barrel in the year before the pandemic, close to global benchmark prices. A discount of more than 20% on world prices opened shortly after Russia invaded Ukraine in February, but Russia was still able to sell Urals crude for around $100 apiece. barrel at post-invasion peak.
Since then, global oil prices have fallen as Russia signed deals to sell its oil at an even lower price to China, India and others. These falling prices have weighed on Moscow’s finances, at least to some extent.