G7 aims to hurt Russia with price cap on oil exports
G7 leaders meeting for a summit in the Bavarian Alps on Sunday seek a deal to impose a “price cap” on Russian oil as the group works to increase Russia’s ability to fund its four-month war in Ukraine to curb.
The goal would be for a wide range of countries beyond the G7 to impose a cap on the price paid for Russian oil in order to limit the benefit to the Kremlin’s war machine from the rising crude price. It would also cushion the impact of higher energy prices on western economies.
The idea has been heavily promoted by the US. While Germany has long had reservations about it, recent comments from German officials suggest that Berlin is coming up with the idea.
Charles Michel, the president of the European Council, said leaders will discuss the oil price ceiling in the coming hours, stressing the need for a “clear vision” and awareness of the potential knock-on effects.
Such a deal would require the support of all 27 EU member states and officials would have to solve tough questions about how it would work and fit into the US, UK, European and Japanese sanctions regimes.
The EU agreed in May to phase out Russian oil shipments by sea, while allowing temporary exemptions for crude oil delivered through pipelines. The measures are expected to cut Russian oil exports to the EU by 90 percent by the end of this year.
G7 leaders gather as the fallout from the war in Ukraine continues to cast a growing shadow over the global economy. The blockade of Ukrainian ports has pushed up food prices and Russia’s decision to cut gas supplies to Europe threatens to spark an energy crisis.
As inflation rises and central banks respond with more aggressive rate hikes than markets had anticipated, economists around the world are lowering their growth forecasts, with some even warning of a recession.
The meeting, in the luxury Bavarian resort of Schloss Elmau, is hosted by German Chancellor Olaf Scholz. He was joined by the leaders of the US, UK, France, Italy, Japan and Canada. Argentina, South Africa, Senegal, Indonesia and India have been invited as partner countries.
G7 leaders announced on Sunday that they would ban imports of Russian gold as part of efforts to step up sanctions against Moscow. “We must starve the funding of the Putin regime,” British Prime Minister Boris Johnson said. “The UK and our allies are doing just that.”
A German official said the G7 would like to convey a “message of unity” and “signal support” to Kiev with regard to Ukraine. Ukrainian President Volodymyr Zelenskyy will attend the summit via video link on Monday.
Johnson on Sunday reiterated the need to maintain consensus in the face of Russian aggression in Ukraine, warning that there could be “fatigue” among “populations and politicians”.
Asked if he was concerned about support for Ukraine’s weakening, Johnson replied: “I think the pressure is there and the fear is there, we have to be honest about that.”
The idea of an oil price cap comes at a time when experts worry that sanctions against Russia will backfire. Despite Western restrictions on Russian oil imports, Russia’s oil export revenues have not necessarily declined because the price of crude oil has risen so much.
Michel said: “We want to make sure that the goal is to target Russia and not to make our lives more difficult and complex. We need to make sure that when we make such a decision, there is a clear vision, a clear common understanding of what the direct effects are and what the side effects could be.”
He said the EU was ready to make a decision with its partners, but emphasized that he was being “careful and cautious” on the subject.
A senior German official said “intense discussions” were underway about how a price cap would be implemented and how Western and Japanese sanctions would work.
“The problems we need to solve are not trivial, but we are on the right track to reach an agreement,” he said.
Under the oil price cap, Europe would limit the availability of shipping and insurance services that allow the transportation of Russian oil around the world, by stipulating that the services would only be available if the oil importer adhered to the price cap . A similar restriction on the availability of US financial services could give the scheme an additional effect.
Scholz has emphasized that the concept requires widespread buy-in around the world to be effective.
It would also require the EU to change its ban on insuring Russian shipments of crude oil – introduced in conjunction with the ban on oil imports by sea – something that needs the support of all 27 EU member states.
The UK should get on board as it is home to the Lloyd’s of London insurance market. The EU and the UK have already agreed to coordinate an insurance ban, but London has yet to finalize its settlement.
At their summit, G7 leaders will also discuss how to avoid a global “hunger crisis” amid mounting food insecurity caused by the war in Ukraine. They will also discuss a German proposal for a ‘climate club’ in which participating countries will coordinate their efforts to decarbonise their economies.
Additional reporting from Jasmine Cameron-Chileshe