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Leaders of the G7 group of major economies today endorsed a proposal to impose a price cap on Russian oil exports to third countries, but details on how to implement and enforce the ambitious idea will take longer to work out.
In a statement issued to mark the end of a two-day summit in Germany, the group said it is considering "a range of approaches, including options for a possible comprehensive prohibition of all services, which enable transportation of Russian seaborne crude oil and petroleum products globally, unless the oil is purchased at or below a price to be agreed in consultation with international partners."
The G7 leaders tasked their ministers of energy and finance to continue discussions on this "urgently" with third countries, the private sector and energy suppliers. The US Treasury Department separately said it "will work expeditiously" on the proposal. "We look forward to the work that ministers do urgently in the days, weeks ahead," a senior US official said.
The idea behind the price cap is to enable third-country market participants to buy and transport Russian crude without any hindrance from US, EU and UK sanctions, so long as they agree to only pay a fixed price well below the market rate. The goal is to ensure Russian oil supply remains available but at a reduced price, to cut Moscow's export earnings.
Such a move would be a first, and to be a success would realistically require the participation of large buyers of Russian oil like China and India, both of which have increased purchases since G7 members and the EU rolled out plans to partially or fully limit their own oil imports from Russia. Although Russian oil production fell sharply in April, it has since rebounded and deputy prime minister Alexander Novak has projected this will continue in July to a level near the output achieved before Moscow's invasion of Ukraine. Russian crude exports have held firm above 5mn b/d in recent months.
US and Indian government officials already have kicked off discussions on how a price cap would work and its implications, White House national security adviser Jake Sullivan told reporters today.
The G7 summit separately issued a tersely worded appeal to China not to back Russia's invasion of Ukraine. The US has observed that Beijing has neither provided military support to Russia nor taken steps to enable Moscow to bypass economic sanctions imposed by the west, "and we want to see that continue," Sullivan said.
The price cap proposal originated in the US and UK following the EU's adoption of the most recent package of sanctions that implemented a phaseout of most crude and product imports from Russia. That package includes a full ban on provision of insurance and other services that facilitate trade and transportation of oil — with implications for third countries, given the prominence of European firms in this market segment. Implementing the G7 plan would require carving out exemptions from the US, UK and EU sanctions to enable third-country market participants to buy and transport Russian crude, so long as they agree to only pay a fixed price set well below the market rate.
The proposal presents practical challenges that may prove difficult to overcome — and Russia's cooperation in externally imposed limits on its main revenue source is hardly guaranteed.
The mandated price level, in theory, ought to provide enough incentives for Russian sellers and third-country buyers to cooperate. Advanced economies in the west have not imposed oil price caps since the 1970s energy crisis.
The price cap proposal is only one element of the increasingly bold approach by G7 members to tackle consumer inflation reaching 40 year highs. Energy price increases are seen as the primary contributor to inflation.
The G7 noted the "burden" of higher energy prices and said it is working with the IEA on ideas to "reduce price surges." It also called on Opec to continue its recent action to increase production. The EU appears to have pitched a proposal to cap prices on Russian natural gas imports into the bloc.
The Opec+ group meets this week. US president Joe Biden will visit Saudi Arabia on 15-16 July.
While US-Iran diplomacy that could have enabled Iran's full participation in global oil markets has been in limbo since March, US officials have stepped up dialogue with Venezuela. The US says it is prepared to offer further relief of sanctions against Venezuela following what it sees as the possibility of progress in negotiations between president Nicolas Maduro and the opposition.
