The proposal aims to stabilize unsettled energy markets in the wake of Russia’s invasion of Ukraine. But it faces considerable obstacles.
WASHINGTON — Top officials from the world’s leading advanced economies agreed on Friday to move ahead with a plan to cap the price of Russian oil, accelerating an ambitious effort to limit how much money Russia can earn from each barrel of crude it sells on the global market.
Finance ministers from the Group of 7 nations said they were firming up details of a price cap, with the aim of both depressing the price of global oil and reducing critical revenue that President Vladimir V. Putin is relying on to finance Russia’s war effort in Ukraine. The untested plan has been pushed by the Biden administration as way of keeping sanctions pressure on Russia while minimizing the impact on a global economy that has been saddled with soaring energy and food prices this year.
Hours after the G7 ministers announced their plan on Friday, Gazprom, the Russian-owned energy giant, said it would postpone restarting the flow of natural gas through a closely watched pipeline that connects Russia to Germany, known as Nord Stream 1. The unexpected delay was attributed to mechanical problems with the pipeline, but it raised concerns that it was in retaliation for the price cap, an idea that Moscow has condemned.
Eric Mamer, a spokesman for the European Commission, said that the “fallacious pretenses” for the latest delay were “proof of Russia’s cynicism.”
The price cap still has many hurdles to clear before it can take effect, but its goal is to keep Russian oil flowing to global markets that depend on those supplies, while substantially reducing the profit Moscow reaps from its sales. Europe still consumes nearly two million barrels of Russian oil a day, though its imports have fallen since the war began, and the European Union is preparing to wean itself off those supplies by the end of the year.
Officials are racing to put the price-cap plan in place by early December to try to limit the economic fallout from the new E.U. sanctions. They would ban nearly all Russian oil imports to the European Union and block the insurance and financing of Russian oil shipments.
The Biden administration has become concerned that those moves could send energy prices skyrocketing and potentially tip the global economy into a recession if millions of barrels of Russian oil were suddenly yanked off the global market, drastically reducing the world’s supply of crude. U.S. administration officials have estimated that oil could soar to $200 a barrel or higher unless efforts to impose the price cap are successful.
The initiative is a novel attempt to blunt the global economic impact of the invasion. Oil prices rose as fears of confrontation grew a year ago, and spiked when Russian troops entered Ukraine in February. They have receded in recent months, in part because much of Europe has tipped into recession, reducing global oil demand.
Whether the price cap can work will hinge on a variety of factors, including securing agreement by all 27 E.U. member states and determining how the actual price would be set. Maritime insurers, which are critical to making the plan work, would also have to figure out how to comply in a way that allows them to continue insuring Russian oil cargo without running afoul of sanctions.
The industry, which would be responsible for making sure that oil buyers and sellers were honoring the price cap, has warned that insurers lack the capacity to police the transactions. Financial services in Europe undergird international energy shipments around the world, and fully blocking their ability to deal with Russian oil could disrupt exports globally, even to countries that have not adopted Russian oil embargoes.
The G7 finance ministers said in their statement that they intended to use a “record-keeping and attestation model” to track of whether oil transactions were below the price ceiling, and that they would try to minimize the administrative burden on insurers.
Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, said the agreement unveiled on Friday raised more questions than answers and suggested a challenging path ahead.
“This sounds like something that is very technical and technocratic that is going to be hard to monitor and fully enforce,” Ms. Ziemba said.
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The discussions around the plan reflect the way in which energy has become both a weapon and a source of leverage in the battle over Russia’s war in Ukraine.
The United States, Britain and other Western nations have influence over Russia’s oil exports and the way they are shipped around the world since crude is primarily transported on ships that rely heavily on insurance and other financial support from the West. The cap threatens Russia’s access to those ships unless it sells at cut-rate prices.
Yet Moscow has already shown a willingness to cut off natural gas flows to Europe through pipelines that it controls, and Friday’s move by Gazprom struck many energy analysts as a sign of what could be in store if the oil cap goes into effect.
“Putin will endeavor to demonstrate that he has not played his last card and that there are many open windows in his energy war with the West,” Helima Croft, head of commodities at RBC Capital Markets, wrote in a note to clients on Friday.
Alexander Novak, Russia’s deputy prime minister, said this week that the country would not sell oil products to countries participating in the price cap, according to Russian state media.
Still, Biden administration officials predict that Russia will ultimately act in its economic self-interest and that it is unlikely to stop selling oil in the face of a price cap, since doing so would damage its wells and starve its economy of revenue.
Treasury Department officials said on Friday that the gathering momentum behind the idea was already working to suppress prices, pointing out that Russia has already been selling oil to countries such as Indonesia at a 30 percent discount and is trying to lock in long-term contracts before the price cap is in place.
Oil prices rose slightly on Friday, with West Texas Intermediate crude, the U.S. benchmark, trading at around $87 per barrel. Still, prices are down for the week, and well off the highs of around $120 a barrel in mid-June.
In recent months, Treasury Secretary Janet L. Yellen and her team have been traveling the globe to solidify support for the price cap idea. A central component of those discussions has been how the price would be set, and how it would be enforced.
The finance ministers have not yet agreed on the price at which Russian oil can be sold, but said in a joint statement that it would be “set at a level based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction.” Treasury officials have said that price will be higher than Russia’s cost of production, to ensure that it still has incentives to pump oil, but much lower than global market rates.
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The success of the plan could determine whether oil prices surge above $100 a barrel this winter after the European embargo and insurance bans go into force and the weather turns cold.
Ms. Yellen said in a statement on Friday that a price cap would be a critical tool for fighting inflation and protecting Americans from future energy price surges. She acknowledged that although energy prices in the United States had eased recently, they remained a looming problem.
“By committing to finalize and implement a price cap, the Group of 7 will significantly reduce Russia’s main source of funding for its illegal war, while maintaining supplies to global energy markets by keeping Russian oil flowing at lower prices,” she said.
The proposal still faces considerable obstacles. The European Union will have to amend a package of sanctions that is set to take effect on Dec. 5 to incorporate the price cap; that will require the unanimous agreement of all 27 member states.
Biden administration officials are growing increasingly confident that they will be able to galvanize an international effort to impose the price cap, in part because of the progress at the Group of 7. But they say bringing all E.U. member countries on board for the plan will be more difficult.
The Group of 7 had already agreed to explore the concept of a price cap at a leaders summit in the German Alps in June. But European countries like Hungary — which previously pushed for the oil that it buys from Russia via pipeline to be exempted from Europe’s import ban — have not yet agreed on such a plan.
In addition, although the United States and Europe have moved to cut themselves off from Russian oil, nations such as China and India have been buying it at heavily discounted prices. That has allowed Mr. Putin to support his economy despite global sanctions that have been imposed on its central bank, financial sector and military industry.
The United States has been working to broaden the coalition beyond the Group of 7, courting the support of nations such as South Korea and India. Last month, Ms. Yellen’s deputy, Wally Adeyemo, met with counterparts in India to discuss global energy security and promote the price cap concept.
Biden administration officials hope that if a broad coalition agrees to the price cap, it will give nations that do not want to officially join more bargaining power to negotiate lower prices with Russia.
“In line with our extensive and ongoing engagement with a diverse group of countries and key stakeholders, we invite all countries to provide input on the price cap’s design and to implement this important measure,” the finance ministers wrote in Friday’s joint statement.
Stanley Reed contributed to this article.
Source: Economy - nytimes.com