G7 wants to cap Russian oil prices

The G7 countries continue to attack Russia’s energy windfall. The finance ministers of Germany, Canada, France, Italy, Japan, the United Kingdom and the United States found, on Saturday September 3, an agreement in principle on the establishment of a Russian Oil Price Cap Mechanism. This could be in place by the end of the year, but there are many obstacles.

It must be said that the establishment of such a system would be a first. The G7 countries will have to agree on a level of “ceiling” prices, which have not yet been fixed. The mechanism will impose a discount to current market prices, while keeping it above the cost of production to incentivize Russians to continue exporting.

Act on intermediaries

How to ensure that Russia respects the fixed prices? In principle, companies based in the G7 countries and providing financial, insurance or transport services will no longer be able to have contracts linked to Russian oil. Only exception: if the importer or the exporter respects the ceiling prices.

On paper, the mechanism is therefore ideal: it would make it possible to attack the oil sector, whose revenues, combined with those of gas, constitute the equivalent of 45% of Russia’s federal budget. At the same time, it should in theory make it possible to limit the rise in prices on world markets.

Moscow will end its exports

But in practice, several energy experts have underlined in the international press the difficulty of setting up such a mechanism. First, the technical details are complex and remain to be determined. “It’s not something that we can pull out of our drawers as if it were a tried and tested method…it’s a new concept”, had recognized in July, the main diplomatic adviser to the American president, Jake Sullivan.

Specialists also point out that the G7 plan could turn against its initiators. The oil market is already tight. A scenario of lower exports by Moscow globally could push up prices, according to Tamas Varga, of oil broker PVM, quoted by the British agency Reuters.

However, after the declaration of the G7, the Kremlin retorted that it would not sell any more oil to the countries which would impose a limitation of the prices. In the process, the Gazprom company indicated that it would not restart gas flows via the Nord Stream 1 gas pipeline, due to technical problems.

Mille-feuille of sanctions

Some experts doubt the very usefulness of such a device, many measures having already been taken by Westerners: “The United States has already implemented an embargo on Russia, the European Union and the United Kingdom will impose a partial embargo at the end of the year and Canada does not import anyrecalls Thierry Bros, specialist in energy issues and professor at Sciences Po. The device could only be effective if India and China join it. However, they have no interest in it. »

Russia is indeed turning more and more to Beijing and New Delhi – respectively second and third customer behind the European Union – to sell its production. And this, at prices lower than the market. These two countries together account for 32% of Russian imports, according to figures from the International Energy Agency.

According to Bloomberg, US officials are arguing that the price cap could work even in the absence of a formal coalition. The argument put forward is that buyers from these countries will still be able to use the G7 system as leverage in negotiations with Moscow, which would still limit price increases.

European uncertainty

Last condition: to be effective, the system must also be adopted by all the countries of the European Union. After long-term discussions, the Europeans agreed in May to end 90% of Russian imports by December. They had also prohibited European insurers from covering the transport of Russian oil to destinations other than the EU. So much so that the agreement decided by the G7 would in reality lead to a reduction in the scope of European sanctions, since the oil sold at ” ceiling “ could continue to be covered by the Europeans.

“Washington is concerned about these insurance restrictions because they would have a major impact” as it stands without the possibility of derogation introduced by the G7, explained Bill O’Grady, of Confluence Investment Management, to AFP. About 90% of maritime oil transport is, in fact, carried out by EU players and by the British, the latter having aligned themselves with the Union’s sanctions.


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