G7 leaders appeared to sidestep imposing a price cap on Russian oil within weeks to strip Russia of its largest source of income to finance its war effort in Ukraine.
The leaders of the world’s leading western economies have promised a cap before, most recently at a meeting of G7 finance ministers on 2 September, with the plan pencilled to come into force on 5 December.
But the latest G7 statement made only the most passing general comment about “continuing to cooperate to ensure energy security and affordability across the G7 and beyond”. The Ukrainian president, Volodymyr Zelenskiy, had urged the meeting to impose a tough price cap calling for “zero profit for the terrorist state”.
The G7’s terse reference reflects doubts inside the EU, principally Germany, about the wisdom of the scheme, and how it could work alongside a still to be agreed EU scheme to impose a gas price cap. There has been concern that Russia would ban all energy exports to any country implementing the price cap, forcing oil prices higher, and putting a heavier Russian squeeze on Europe to reduce its support for Ukraine’s war aims.
Tuesday’s G7 meeting had originally been convened to discuss the price cap, and annexation of Donbas, but its focus was shifted by this week’s Russian missile assault on Ukraine’s infrastructure.
Three states, the US, UK and Canada, have already stopped importing Russian oil, and the EU agreed in May to ban all imports of Russian seaborne crude from 5 December and all Russian refined products from 5 February. Pipeline flows were to be exempted for a period to give time to help Germany and Poland, but already Russia had lost three-fifths of its seaborne crude sales to Europe.
The G7 price cap would in practice sit alongside the EU import ban, but allow EU states to transport oil to third countries only if the oil is sold at or below a yet to be announced fixed price. Germany fears that Russia, on the basis of its recent actions, will carry out its threat not to supply any energy to countries imposing a cap. It also thinks other importers of Russian oil, such as India, China and Turkey, are unlikely to agree to participate in the scheme, making it less effective.
Speaking on Tuesday, Olaf Scholz, the German chancellor, said he favoured “a negotiated process” involving countries such as South Korea as well as the EU and the G7 to get prices down to a reasonable level.
According to Russia’s central bank, exports of its crude oil accounted for €113bn (£99bn) in revenues in 2021, on top of the €70bn (£62bn) earned from refined products such as gasoline and diesel. Income from the oil industry was around €102bn (£90bn) in the first six months of the war.
Despite the scepticism among economists, the US Treasury secretary, Janet Yellen, has said an international price cap “will help deliver a major blow for Russian finances and will both hinder Russia’s ability to fight its unprovoked war in Ukraine and hasten the deterioration of the Russian economy”.
The US Treasury is still pitching the scheme to the global south by estimating that capping the price of Russian oil at the international level would result in $160bn billion (€165bn, £145bn ) in annual savings for the 50 largest emerging economies.
The G7 price cap would be enforced by preventing insurance being provided to Russian cargoes if the oil is being sold above a still-undefined G7 limit. Officials have hinted at $40-$60 (£36-£54) a barrel.
The G7 estimates that about 95% of the global oil tanker fleet is covered by shipping insurers in G7 countries, namely Canada, France, Germany, Italy, Japan, the UK and the US.
The scheme’s two chief problems are first ensuring the price is set at a level that entices Russia to continue trading with the G7 albeit at a lower price, and second preventing Russia diverting its oil sales to non-G7 countries, notably India, Turkey and China.
Advocates of the scheme, chiefly the US, say it would still be worthwhile if countries like India continued to buy Russian oil since it would have to be sold at a discounted price.
The G7 scheme has been hindered by a linked and heated argument within the EU over whether to impose a gas price cap. Spain and Portugal have already introduced a price cap on gas used for electricity with the state subsidising the generators for lost income.
Germany is opposed since it fears a price cap will stimulate demand, leading to shortages, as well as incentivise gas producers like Norway, Qatar and the US to look for different, more profitable markets outside the EU. But the EU Commission president, Ursula von der Leyen, is backing a temporary price cap followed by wider electricity market reforms. There is no agreement on whether the cap should be imposed on long-term contracts, on gas used to produce electricity and on all, not just Russian, gas trades.
Countries would also need to decide how to compensate gas plants for the gap between the capped price and the higher market price at which they buy fuel, be it through public funding or a levy on other energy generators.
With EU heads of government due to discuss the issue next week, the G7 scheme cannot be finalised even though the idea has been in circulation since June.
Most energy experts such as the International Energy Authority say the EU can get through the winter without major blackouts because storage is at about 90% capacity, but they are less confident about the winter of 2023.
