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G-7 announces oil price cap to weaken Russia

Finance ministers from the G-7 said they will impose a price cap on Russian oil to undercut the Kremlin's huge energy profits that pay for its war on Ukraine.

U.S. Treasury Secretary Janet Yellen meets with U.K. Chancellor of the Exchequer Nadhim Zahawi
U.S. Treasury Secretary Janet Yellen meets with U.K. Chancellor of the Exchequer Nadhim Zahawi to discuss a price cap on Russian oil (AN/U.S. Treasury)

Finance ministers from the Group of Seven wealthy industrialized nations agreed on Friday to impose a price cap on what importers pay for Russian oil in an effort to undercut the Kremlin's energy profits that pay for its war on Ukraine.

U.S. Treasury Secretary Janet L. Yellen pushed the plan, which she says will be put in place "in the weeks to come," as a way to deliver a major blow to Russia's finances and to hinder its ability to fight in Ukraine, without creating disruptions to the global economy that could lead to future price spikes.

The G-7, which accounts for about 45% of the global economy, includes Britain, Canada, France, Germany, Italy, Japan and the United States.

Britain, the European Union and the U.S. all imposed economic sanctions against Russia following its February 24 invasion of Ukraine. Yet global oil prices rose on fears of restricted supplies, providing Russia with hundreds of billions of dollars from its oil and natural gas sales.

Yellen said "Russia’s hurried attempts to negotiate bilateral oil trades at massive discounts" are evidence the anticipated price cap already is having an impact. The plan is to enact the price cap by cutting off insurance for all shipments of Russian oil sold above a certain price, making it difficult to ship oil priced above the cap.

"By committing to finalize and implement a price cap, the G-7 will significantly reduce Russia’s main source of funding for its illegal war, while maintaining supplies to global energy markets by keeping Russian oil flowing at lower prices," she said.

After the U.S. banned imports of Russian oil in March, the E.U. also banned them and prohibited insuring and financing maritime transport of Russian oil to other nations.

"The price cap is specifically designed to reduce Russian revenues and Russia's ability to fund its war of aggression whilst limiting the impact of Russia's war on global energy prices, particularly for low and middle-income countries, by only permitting service providers to continue to do business related to Russian seaborne oil and petroleum products sold at or below the price cap," says a G-7 finance ministers' statement.

"This measure would thus build on and amplify the reach of existing sanctions, notably the E.U.'s sixth package of sanctions, ensuring coherence through a strong global framework," the finance ministers say. "We welcome the decision of the European Union to explore with international partners ways to curb rising energy prices, including the feasibility of introducing temporary import price caps."

Putting 'downward pressure' on global prices

U.S. President Joe Biden's administration will announce a price cap level and market guidance within weeks, White House press secretary Karine Jean-Pierre told reporters at White House press briefing on Friday. The price cap would be set above what it costs Russia to produce the oil and gas with the aim of keeping supplies flowing to world markets.

Jean-Pierre said a price cap is a powerful tool "to put downward pressure on global energy prices in a way that will benefit consumers in the U.S. and globally." The agreement followed discussions about it at a summit earlier this year.

"A global price cap will help us accomplish our two goals. The first one is: significantly reduce Putin’s biggest source of revenue for his war chest," she said. "Number two: ensure that oil continues to flow into the market at lower prices and supply meets demand."

The Kremlin said on Friday it will close pipelines to countries that go along with the policy, raising the stakes for European nations still dependent on Russian energy supplies to keep homes and offices heated this winter. Russia’s state-owned oil firm Gazprom announced it will not resume natural gas shipments to Germany through its Nord Stream 1 pipline.

"Companies that impose a price cap will not be among the recipients of Russian oil," said Dmitry Peskov, a spokesman for Russia's President Vladimir Putin. “We simply will not cooperate with them on oil on such non-market principles.”