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Ukraine war: G7 agrees to impose price cap on Russian oil

By Michael Race
Business reporter, BBC News 16 hours ago


Getty Images

Members of the G7 have agreed to impose a price cap on Russian oil in a bid to hit Moscow's ability to finance the war in Ukraine.

Finance ministers said the cap on crude oil and petroleum products would also help reduce global energy prices. The cap will be set at a level based on a range of technical inputs.

"We will continue to stand with Ukraine for as long as it takes," the G7 said.

Russia said it would stop selling oil to countries that imposed price caps.

"Companies that impose a price cap will not be among the recipients of Russian oil," Kremlin spokesman Dmitry Peskov said.

The G7 (Group of Seven) consists of the UK, US, Canada, France, Germany, Italy and Japan. The group is an organisation of the world's seven largest "advanced" economies, which dominate global trade and the international financial system.

* How can the world cope without Russian oil and gas?
https://www.bbc.co.uk/news/58888451

* Why won't the world's big oil producers lower prices?
https://www.bbc.co.uk/news/business-61188579

At their virtual meeting, the finance ministers said the oil price cap plan was "specifically designed" to reduce Russian revenues and its ability to "fund its war of aggression". They also said they wanted to minimise the damaging economic fallout of the conflict, "especially on low and middle-income countries".

The introduction of a price cap on Russian oil means countries that sign up to the policy will only be permitted to purchase Russian oil and petroleum products transported via sea that are sold at or below the price cap.

In the aftermath of Russia's invasion of Ukraine the price of oil soared and has remained at high levels, meaning Russia has increase its revenues from the fossil fuel despite its export volumes falling.

The EU plans to impose an embargo on Russian crude oil from 5 December. It will apply to crude shipped by tanker and most piped supplies.

China and India - major trading partners for Russia - may not follow G7 policy on Russian oil, analysts say. They have not joined the Western sanctions targeting Russia.

UK Chancellor Nadhim Zahawi said the G7 were "united against this barbaric aggression", adding the price cap would "curtail Putin's capacity to fund his war".

US Treasury Secretary Janet Yellen said a cap would also help fight inflation, which is on the rise in many of the world's economies.

The price cap helps achieve "our dual goals of putting downward pressure on global energy prices while denying Putin revenue to fund his brutal war in Ukraine", she said.
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Analysis box by Theo Leggett, business correspondent
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The G7 agreement to impose a cap on the price of Russian oil is certainly symbolic. How effective it is in practice will depend on the level of the cap and how it is enforced.

Energy prices have soared since Russia invaded Ukraine - and the revenues from oil sales have been helping to finance Vladimir Putin's aggression.

So cut off that financial lifeline, and waging war becomes much more difficult.

In fact, oil from Russia has been a lot cheaper than crude from other sources for months, due to a combination of official sanctions and a reluctance by some to trade in it.

But refiners in places like India and China have still been happy to buy it, and Russia's coffers have been filling up as a result.

So the price cap needs to be a lot lower than the level Russian oil is already trading at - and the enforcement mechanism needs to be absolutely watertight.

The devil will be in the detail - and the detail is something we don't yet have.

https://www.bbc.com/news/business-62770283

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Russia’s Demise as an Energy Superpower

"Germany's energy U-turn: Coal instead of gas
"Russia cuts off a major supply of natural gas to Poland and Bulgaria.
[...]The bloc has vowed to cut off its large imports of Russian oil and coal over a period of months, as it searches for replacements and adjusts to higher fuel costs. But Europe is even more dependent on Russian gas, and ending those imports would be more economically damaging; E.U. ministers have said they will reduce the flow from Russia, but not shut it off until 2030.""

Maria Shagina @maria_shagina
Diamond-Brown Research Fellow for Economic Sanctions, Standards and Strategy
About Maria - https://www.iiss.org/people/geo-economics-geopolitics-and-strategy/maria-shagina

The Survival Editors’ Blog 2nd August 2022



Today’s soaring energy prices are bringing Russia record-high revenue and keeping the country’s sanctions-battered economy afloat. But while Moscow is raking in short-term gains, they are unlikely to last. A combination of Western sanctions, the European Union’s accelerated energy transition and limits to Russia’s pivot to Asia make the long-term implications for the country’s oil and gas industry bleak.

Moscow’s traditional energy ties to Europe materialised during the Cold War. Beginning in the 1960s, the energy bridge served as a stabilising mechanism and confidence-building measure between Western Europe and the Soviet Union. The oil and gas infrastructure emerged as a physical connection between the two rival blocs and fostered more normal political ties based on a mutual economic interest. Since the fall of the Soviet Union, Russia’s loss of control over transit infrastructure and the profound transformation of the EU’s energy markets have turned the energy bridge into a source of tension. The Ukraine invasion increased those tensions to the breaking point.

Immediate consequences of the Ukraine invasion

After the invasion, the West imposed sweeping punitive measures. Sanctions have cut off key Russian financial institutions such as SberBank, VEB and Gazprombank from Western capital markets, which will make it difficult for them to make new investments in the country’s energy sector. The United States and the EU exploited Russia’s high dependency on foreign technology by introducing a ban on the export of liquefaction technology, key equipment for the refining and petrochemical sectors. Since February 2022, major Western energy corporations and oilfield service companies have written off their Russian assets or curtailed their Russian operations, fearing reputational damage. The EU agreed on 30 May to a phased embargo on Russian oil that will further strain the industry. Effective as of the end of this year, the embargo will target seaborne crude-oil shipments and petroleum products from Russia, and include a ban on insurance for maritime shipping. It is expected to apply to 90% of Russian imports, which translates into $22 billion a year in lost revenue for Russia.

The country’s oil production declined 10% in April compared with March and is slated to drop by 17% for the year by the end of 2022. Gas production is also expected to drop by 5.6% this year. Falling domestic demand and self sanctioning by international buyers have been the key drivers of the decline. Western buyers are seeking alternatives to Russian oil and gas. Several EU member states are already phasing out their dependencies on Russian fossil fuel. The EU is slated to increase crude imports from West Africa, including Angola, Nigeria and Senegal. The Baltic states ceased importing Russian gas in April. Bulgaria, the Netherlands and Poland will not extend their gas contracts with Gazprom. Italy signed a $400 million deal with Singapore for a floating storage and regasification unit, and Rome is looking to boost gas supplies from Algeria. Germany completed a liquefied natural gas (LNG) and hydrogen deal with Qatar and aims to speed up the growth of its solar energy. The Netherlands has entered into a partnership with Shell to build a renewable-hydrogen plant.

Download full article - https://www.iiss.org/-/media/files/publications/survival/2022/augsept/64-4-06-shagina-cm.pdf

This article appears in the August–September 2022 issue of Survival: Global Politics and Strategy.

https://www.iiss.org/blogs/survival-blog/2022/08/russias-demise-as-an-energy-superpower