Explainer: The G7 price cap on Russian oil is starting to take shape

A model of 3D-printed oil barrels is seen in front of the falling stock market chart in this illustration taken December 1, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

WASHINGTON, Sept 12 (Reuters) – Group of Seven nations are working to cap the price of Russian oil in a bid to limit Moscow’s ability to fund its invasion of Ukraine, analysts say, a plan that could work long term but could boost oil prices in the coming months.

Officials from G7 countries, including US Treasury Secretary Janet Yellen, say the unprecedented measure, due to begin on December 5, will reduce the price Russia receives for oil without reducing its oil exports to global consumers. .

Russian President Vladimir Putin could push back, causing tensions in oil markets even as the plan materializes.

Below are questions about the price cap and the challenges it faces.

WHO IS PART OF THE PRICE CAP COALITION?

The wealthy G7 nations – the United States, Japan, Germany, Britain, France, Italy and Canada – and the EU are working out the details of the plan. The G7 wants to enlist other countries, including India and China, which have been snapping up Russian oil at a very reduced price since its invasion of Ukraine on February 24.

Moscow has managed to maintain its revenue thanks to increased rough sales to India and China.

But even if India and China don’t join, a cap could help lower prices for Asia and other consumers. US Treasury Assistant Secretary for Economic Policy Ben Harris said on September 9 that if China negotiated a separate 30-40% discount on Russian oil due to the price cap, “we consider that to be a victory “.

Consensus on the price cap level will be reached with the help of a “rotating principal coordinator”, the US Treasury Department said in guidelines released on Friday suggesting coalition countries will have a temporary leadership role in the as the plan progresses.

WHAT IS THE PRICE CAP LEVEL?

It will likely be weeks before the price of Russian crude oil and two petroleum products is decided, Harris said.

Washington-based ClearView Energy Partners said officials were talking about a range of $40 to $60 a barrel of crude. The upper end of this range is consistent with historical Russian crude prices, while the lower end is closer to Russia’s marginal cost of production, analysts said. Read more

Coalition members with long economic and military ties to Russia could push for a higher cap, while too low a limit could rob Saudi Arabia and other oil producers of market share. “The level will be determined by both quantitative and qualitative reasons,” said Bob McNally, president of Rapidan Energy Group.

The price of Russian crude is lower than the international benchmark Brent and the G7 wants to maintain this wide gap in order to limit Russian oil revenues.

However, achieving a wide spread could mean higher prices for Western consumers, as Russia is the world’s second largest exporter of rough, after Saudi Arabia.

WHAT DOES THE G7 EXPECT FROM MARITIME SERVICES?

The G7-agreed plan calls on participating countries to deny Western-dominated services, including insurance, finance, brokerage and shipping, to oil cargoes priced above the cap. Read more

To guarantee these services, oil buyers would provide “attestations” to suppliers that they had purchased Russian oil at or below the cap.

Shipping service providers will not be held liable for false price information provided by buyers and sellers of Russian oil, the US Treasury said. Read more

G7 officials believe the plan will work because the London-based International Group of Protection & Indemnity Clubs provides marine liability cover to around 95% of the world’s tanker fleet.

Traders point to parallel fleets that can handle Russian oil using Russian and other non-Western assurances that could be used to circumvent enforcement efforts. Read more

It remains unclear how many ports around the world will accept Russian-insured vessels.

Craig Kennedy, associate at Harvard University’s Davis Center for Eurasian and Russian Studies, said the G7 has long-term leverage because Moscow is limited by a small fleet of tankers compared to the vast scale of exports it needs to get out. If Russia is unwilling to sell at the cap, it may have to shut down production, which could impose long-term costs on its oilfields.

HOW COULD RUSSIA FIGHT BACK?

Putin said Russia would withhold exports to countries that enforce the cap, and fears over the threat could drive oil markets higher before December.

Higher prices could also be risky for US President Joe Biden ahead of the midterm elections in November, when fellow Democrats hope to retain control of Congress.

Some analysts fear that Moscow will react by taking action across Russian borders before the cap takes effect.

“My biggest worry is that I think Putin is going to make things very, very painful on the way to December 5,” Helima Croft, head of global commodities strategy at RBC Capital Markets, said at an event. at the Brookings Institution on September 9. “They also have assets in other producing countries, whether it’s Libya, whether it’s Iraq, and they have the ability to cause problems in other producing states.”

HOW WILL THE CAP BE ENFORCED?

The US Treasury has warned service companies to be vigilant for red flags indicating potential evasion or fraud by Russian oil buyers. These may include evidence of deceptive shipping practices, refusal to provide requested pricing information, or excessively high service costs. Read more

U.S. Assistant Treasury Secretary Wally Adeyemo said on Friday that those who falsify documents or conceal the true origin or price of Russian oil will face consequences under the domestic law of jurisdictions implementing the price cap.

Reporting by Timothy Gardner; Additional reporting by David Lawder and the London Energy Team; Editing by Daniel Wallis

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