G7 countries set to back price cap on Russian oil

The G7 countries are poised to back a price cap on purchases of Russian oil in an attempt to limit the Kremlin’s earnings from exports and ability to fund its war against Ukraine.

Finance ministers from the US, UK, France, Germany, Italy, Canada and Japan will formally give their political support for such a move at a virtual meeting on Friday afternoon, according to five officials briefed on the talks. However the level of the price cap is still under discussion, they said.

The capping mechanism would be implemented at the same time as the EU’s embargoes on Russian oil imports, two of the officials said. The measure would take effect on December 5 for crude and February 5 for refined products.

The plan hinges 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 need to observe the price ceiling.

Although supported by the European commission, the system still needs backing from EU member states as it will require modifying the bloc’s sixth sanctions package that was sealed after fraught negotiations.

Officials also said that the support of third countries who buy large quantities of Russian oil, such as India, will be important for the cap to be most effective. One European official expressed hope other countries would join the initiative in the coming days, adding that the level of the price cap would be set jointly by all participating states.

“A price cap . . . makes sure that every country can get the lowest price possible, and that’s good for the world,” said James O’Brien, sanctions co-ordinator at the US state department.

Energy prices jumped following Russia’s decision to launch a full-scale invasion of Ukraine in February. That was followed by western economic sanctions against Moscow and moves by countries to stop buying Russian oil. The price rises have given the Kremlin a windfall in export earnings.

Over the past three months oil prices have cooled, partly as Russian exports have held up better than expected alongside fears that soaring natural gas prices could trigger a recession in Europe. Brent crude, the international benchmark, has fallen from about $120 barrel in early June to about $94 a barrel, close to the level it stood at on the eve of the Russian invasion of Ukraine. Prices rose about 2 per cent on Friday.

The G7 in June had agreed to explore ways of limiting Moscow’s revenues without driving up global prices.

Since then, US officials have worked to find a consensus within the G7 on the outlines of the cap, and how it would be implemented. Oil industry executives and some G7 government officials have voiced scepticism over how the cap would work and whether enough countries would adopt it.

Last month, German chancellor Olaf Scholz, whose country holds the rotating G7 presidency, said of the proposal: “It only works if it is organised globally. You cannot do it unilaterally but only in close co-operation with many others. Otherwise it will just come to nothing.”

Meanwhile shipping insurers have privately expressed concern at the use of insurance as the enforcement mechanism for the cap, given underwriters do not typically track the trading price of a cargo. Executives and officials have acknowledged that the fear of breaching the terms of the cap could mean insurers overcompensate and pull coverage from a wider range of vessels.

Russia on Thursday threatened to stop selling oil to any country that adopted a price cap mechanism.

Kremlin spokesperson Dmitry Peskov said on Friday the move would be an “absurd decision” and would “lead to a significant destabilisation of oil markets”, according to Interfax.

When asked about that threat, O’Brien said: “Russia needs to keep its energy machinery running and needs the money. What it chooses to do is its decision.”

Saudi Arabia, which leads the Opec+ alliance of oil producers with Russia, has warned that the group may need to cut production if prices remain “volatile” and is concerned the market is underestimating the impact of tightening western sanctions on Russian oil supplies later this year.

The kingdom fears a sharp fall in Russian production would be hard to backfill by other Opec+ countries as there is only limited spare capacity. Opec+ is due to meet on Monday to discuss production policy for the coming months, having now restored total production to pre-pandemic levels.

Additional reporting by Max Seddon in Riga and David Sheppard in London