On September 9, the US Department of Treasury’s Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg and Assistant Secretary for Economic Policy Ben Harris held a briefing on the finalisation and implementation of the G7 price cap on Russian oil.
Rosenberg had said: “...The price cap policy is an important tool to put downward pressure on global energy prices by allowing Russian oil to continue flowing to the global markets... That’s good for countering inflation.”
The price cap will also deny Russian President Vladimir Putin revenue to fund his brutal war in Ukraine, according to them. They had said that the price cap policy itself builds on the EU’s sixth sanctions package that come into force on December 5.
Specifically, the EU has announced prohibition of services like insurance, banking and brokering for the seaborne shipment of Russian oil and products globally.
So the new announcement from the G7 confirms that the group will bring into force similar prohibitions.
When is the price cap likely to be implemented?
The capping does pose many challenges. And if it has to be implemented it has to be done by December when the EU’s sixth sanctions package comes into force.
At the same briefing, Rosenberg said: “There are several key data points we are considering in how the price should ultimately be set, and that includes the marginal cost of production for Russian oil — that is to say, the price cap price should be over the marginal cost of production for Russian oil — as well as it should be in line or consistent with historical prices accepted by Russia in the global market.”
G7 and the price cap coalition have been working together to determine the price cap and to bring forward the legal regimes in their own jurisdictions that will be more specific on exactly how this will work operationally, Rosenberg added. Also crucial will be how major consumers like India and China respond to it.
How will it impact global oil prices?
It will have an impact only when there is a supply crunch in the global market.
How will it affect India?
The proposed price cap will allow flow of Russian oil into global markets provided it’s sold at a price at or below the cap. This is seen as the most effective way to keep the oil market well supplied and lower energy prices.
However, the EU and the UK provide 90 per cent of global shipping insurance and G7 countries provide majority of payment and financing services for the global oil trade. This will have an impact on the trade.
For India, being a large consumer, a lot will depend on its bargaining skills. The Russian grades of crude oil, including Urals, if available at a discount of $20-30 a barrel, will be advantageous to India. But India will need to take a call on the strategy ahead.
How has Russia reacted to the price-cap proposal?
Russia has been upfront in its strategy. Recently, Russian Deputy Prime Minister Alexander Novak was quoted as saying Russia will not make supplies to countries that will set the price cap, whatever it is: $60 [per barrel] or any other one.