G7 countries have agreed to introduce a price cap on purchases of Russian oil in a bid to limit the Kremlin’s ability to finance its war against Ukraine.
The initiative will be based on an incentive system whereby importers seeking insurance cover and shipping services from companies based in G7 and EU countries to transport Russian oil would have to observe the price cap, according to the finance ministers of the US, UK, France, Germany, Italy, Canada and Japan said in a statement after a meeting on Friday.
The level of the cap will be decided in future talks with all participants, including non-G7 countries that may join the plan.
“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 Russia’s war on global energy prices,” the G7 ministers in a joint statement.
They added: “The initial price cap will be set at a level based on a range of technical inputs and will be decided by the entire coalition prior to implementation in each jurisdiction.”
The deal is a political victory for the US, which first privately proposed a price cap in April as a means of punishing Russia over the war in Ukraine. But it has had to overcome the skepticism of some EU countries about its viability.
Energy prices rose after Russia’s decision to launch a full-scale invasion of Ukraine in February. This was followed by Western economic sanctions against Moscow and measures by countries to stop buying Russian oil. The price increases have given the Kremlin a windfall in export earnings.
Oil prices have cooled over the past three months, in part because Russian exports have held up better than expected, along with fears that rising natural gas prices could trigger a recession in Europe .
Brent crude, the international benchmark, has fallen from around $120 a barrel in early June to around $94 a barrel, close to the level it was on the eve of the invasion of Ukraine. Prices rose 2 percent on Friday.
The impact of the price cap will largely depend on how many major Russian oil importers outside the G7, such as China and India, decide to participate. A European official expressed hope that other countries will join the initiative in the coming days.
The mechanism would include “targeted mitigation mechanisms. . . to ensure that the most vulnerable and affected countries maintain access to energy markets, including Russia,” the G7 statement said.
James O’Brien, sanctions coordinator at the US State Department, said: “A price ceiling . . . makes sure that every country can get the lowest possible price, and that’s good for the world.” .
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But oil industry executives and some G7 government officials have expressed skepticism about how the cap would work and whether enough countries would adopt it.
“It only works if it is organized globally,” German Chancellor Olaf Scholz, whose country holds the rotating G7 presidency, said last month. “You can’t do it unilaterally, but only in close cooperation with many others. Otherwise, it will come to nothing.”
Shipping insurers have privately expressed concern about using insurance as a cap enforcement mechanism, given that insurers do not typically track the commercial price of a cargo.
Executives and officials have acknowledged that fear of breaching the terms of the cap could mean insurers would overcompensate and withdraw coverage from a wider range of vessels.
A senior market figure at Lloyd’s of London said on Friday that insurers would ask cargo owners, who normally buy a bulk insurance policy, to commit to meeting the limit. “If you’re a business that doesn’t trade meeting the cap, you won’t be able to buy insurance,” the person said.
Russia threatened on Thursday to stop selling oil to any country that adopted a price cap mechanism.
Kremlin spokesman Dmitry Peskov said Friday that the move would be an “absurd decision” and would “lead to a major destabilization of oil markets,” according to Interfax.
On Friday evening, Russian state gas supplier Gazprom said it had suspended operation of the Nord Stream 1 pipeline indefinitely, exacerbating pressure on the bloc’s gas supplies ahead of winter.
Saudi Arabia, which leads the OPEC+ alliance of oil producers with Russia, has warned the group may have to cut output if prices remain “volatile” and worries the market is underestimating the impact of the tightening of Western sanctions on the supply of oil to Russia later this year. .
The kingdom fears that a sharp drop in Russian production would be difficult for other OPEC+ countries to replace, as there is only limited spare capacity. OPEC+ will meet on Monday to discuss production policy for the coming months, after total production has returned to pre-pandemic levels.
The price cap would apply at the same time as EU embargoes on Russian oil imports, according to two officials briefed on the deal. The measure would enter into force on December 5 for crude oil and on February 5 for refined products.
Additional reporting by Max Seddon in Riga and David Sheppard and Ian Smith in London