How will imposing a price cap on oil purchases from Russia take off on the ground? How is India responding to the West’s call?
The story so far: On September 2, Finance Ministers of all G7 countries, the U.S., Canada, the U.K., France, Germany, Italy, Japan, as well as the European Union announced their plan to “finalise and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally”, unless they are purchased at or below a “price cap” they will fix. The plan, however, doesn’t include Russian gas, which Europe is still quite dependent on.
What is the price cap plan?
The price cap plan is the latest of the sanctions proposed by Western countries against Russia for its invasion of Ukraine, as well as Belarus for its support to Russia. For the past few weeks, U.S. and EU officials have been trying to convince countries including India, China and Turkey to join the coalition or to at least support the price cap, which they say is in the interests of all oil buyers from Russia as it will give them leverage to lower purchase prices.
How will it be enforced?
For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined. For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries including for example, insurance, currency payment, facilitation and vessel clearances for their shipments. In addition, the price cap is expected to be finalised when members of the G-20 countries meet in Bali in November, and will go into effect on December 5. This is the day that the European Union begins its sixth set of sanctions, to ban all Russia crude oil imports by sea, which would increase the pressure on Russia to reduce its selling price of oil. G7 countries say they are aiming to reduce the price of oil, but not the quantity of oil that Russia sells, so as to control inflation globally while hurting the Russian economy and its ability to fund the war in Ukraine. This could only work, of course, if all countries joined the coalition. However, if Russia is able to sell its price higher than the price cap, it would mean a huge squeeze on oil available to the coalition countries, especially the G7 which are major consumers, and could result in oil prices sky-rocketing.
How has Russia reacted to the plan?
Russian President Vladimir Putin has lashed out at the plan, warning that Russia would not supply “anything at all” if it contradicts Russian interests. Speaking at the Eastern Economic Forum (EEF) in Vladivostok this week, that Prime Minister Narendra Modi joined virtually, he threatened that Russia could stop supplies of gas, oil, coal, heating oil… leaving European countries to “freeze”. On September 5, Russia also announced a halt on all supplies via the Nord Stream 1 pipeline to Europe due to “maintenance issues” arising from the EU sanctions already in place, raising fears of a very difficult winter for European countries.
Will the Modi government comply with the price cap?
The price cap is only the latest in a number of sanctions to hurt the Russian economy that the U.S. and EU have tried to bring India on board with: from asking India to change its uncritical stance on Russia at the United Nations, to cutting down oil imports, to stopping defence and other purchases from Russia, and to avoid the rupee-rouble payment mechanism that circumvent their sanctions. Thus far, India has not obliged, and there is little indication that New Delhi is likely to, just yet. India’s oil intake from Russia, which was minuscule prior to the war has soared 50 times over. When asked, Petroleum Minister Hardeep Puri rejected any “moral” duty to join the price cap coalition, and said his only duty was to providing affordable oil to Indian consumers. At the EEF, Mr. Modi said he wanted to “strengthen” ties with Russia in the energy field and boost India’s $16 billion investment in Russian oilfields. This week, Mr. Modi will also join President Putin, Chinese President Xi Jinping, Turkish President Recep Tayyip Erdogan and other leaders at the Shanghai Cooperation Organisation summit in Uzbekistan, where the price cap issue will no doubt be discussed from the opposite viewpoint to the G7’s. It also remains to be seen whether India will bargain with the U.S. to set aside sanctions against Iran and Venezuela, from which it cancelled oil imports under pressure from the U.S. in 2017-18, in exchange for joining the price cap coalition.
Explained | What is the G7 planning on Russian oil?
How will imposing a price cap on oil purchases from Russia take off on the ground? How is India responding to the West’s call?
The story so far: On September 2, Finance Ministers of all G7 countries, the U.S., Canada, the U.K., France, Germany, Italy, Japan, as well as the European Union announced their plan to “finalise and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally”, unless they are purchased at or below a “price cap” they will fix. The plan, however, doesn’t include Russian gas, which Europe is still quite dependent on.
What is the price cap plan?
The price cap plan is the latest of the sanctions proposed by Western countries against Russia for its invasion of Ukraine, as well as Belarus for its support to Russia. For the past few weeks, U.S. and EU officials have been trying to convince countries including India, China and Turkey to join the coalition or to at least support the price cap, which they say is in the interests of all oil buyers from Russia as it will give them leverage to lower purchase prices.
How will it be enforced?
For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined. For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries including for example, insurance, currency payment, facilitation and vessel clearances for their shipments. In addition, the price cap is expected to be finalised when members of the G-20 countries meet in Bali in November, and will go into effect on December 5. This is the day that the European Union begins its sixth set of sanctions, to ban all Russia crude oil imports by sea, which would increase the pressure on Russia to reduce its selling price of oil. G7 countries say they are aiming to reduce the price of oil, but not the quantity of oil that Russia sells, so as to control inflation globally while hurting the Russian economy and its ability to fund the war in Ukraine. This could only work, of course, if all countries joined the coalition. However, if Russia is able to sell its price higher than the price cap, it would mean a huge squeeze on oil available to the coalition countries, especially the G7 which are major consumers, and could result in oil prices sky-rocketing.
How has Russia reacted to the plan?
Russian President Vladimir Putin has lashed out at the plan, warning that Russia would not supply “anything at all” if it contradicts Russian interests. Speaking at the Eastern Economic Forum (EEF) in Vladivostok this week, that Prime Minister Narendra Modi joined virtually, he threatened that Russia could stop supplies of gas, oil, coal, heating oil… leaving European countries to “freeze”. On September 5, Russia also announced a halt on all supplies via the Nord Stream 1 pipeline to Europe due to “maintenance issues” arising from the EU sanctions already in place, raising fears of a very difficult winter for European countries.
Will the Modi government comply with the price cap?
The price cap is only the latest in a number of sanctions to hurt the Russian economy that the U.S. and EU have tried to bring India on board with: from asking India to change its uncritical stance on Russia at the United Nations, to cutting down oil imports, to stopping defence and other purchases from Russia, and to avoid the rupee-rouble payment mechanism that circumvent their sanctions. Thus far, India has not obliged, and there is little indication that New Delhi is likely to, just yet. India’s oil intake from Russia, which was minuscule prior to the war has soared 50 times over. When asked, Petroleum Minister Hardeep Puri rejected any “moral” duty to join the price cap coalition, and said his only duty was to providing affordable oil to Indian consumers. At the EEF, Mr. Modi said he wanted to “strengthen” ties with Russia in the energy field and boost India’s $16 billion investment in Russian oilfields. This week, Mr. Modi will also join President Putin, Chinese President Xi Jinping, Turkish President Recep Tayyip Erdogan and other leaders at the Shanghai Cooperation Organisation summit in Uzbekistan, where the price cap issue will no doubt be discussed from the opposite viewpoint to the G7’s. It also remains to be seen whether India will bargain with the U.S. to set aside sanctions against Iran and Venezuela, from which it cancelled oil imports under pressure from the U.S. in 2017-18, in exchange for joining the price cap coalition.
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