In News: The Group of Seven countries are working to cap the price of Russian oil in an attempt to limit Moscow’s ability to fund its invasion of Ukraine.
- Russian crude is priced at a discount to the international Brent benchmark and the G7 wants to keep that spread wide, to keep down Russian oil revenue.
- Set to begin on Dec. 5, this move will cut the price Russia receives for oil without reducing its petroleum exports to world consumers.
- Russia may in retaliation withhold exports to countries that enforce the cap.
- Russia is the world’s second-largest crude exporter, after Saudi Arabia.
Who initiated the move?
- The G7 are hammering out details of the plan and wants to enlist other countries, including India and China, which have been snapping up heavily-discounted oil from Russia since its Feb. 24 invasion of Ukraine.
- Even if India and China don’t join, a cap could help force down prices for Asia and other consumers.
- The consensus on the price cap level will be reached with the aid of a “rotating lead coordinator,” that countries in the coalition will have a temporary leadership role as the plan proceeds.
What is the price cap?
- The level will be determined by both quantitative and qualitative reasons
- Coalition members with long economic and military relations with Russia could push for a higher cap, while a limit too low could take market share away from Saudi Arabia and other oil producers
- A $40-$60 per barrel range for crude – The upper end of that range is consistent with historical prices for Russian crude, while the lower end is closer to Russia’s marginal production cost.
How the price cap be enforced?
- Vigilance about red flags indicating potential evasion or fraud by Russian oil buyers including evidence of deceptive shipping practices, refusal to provide requested price information, or excessively high services costs.
- Consequences under the domestic law of jurisdictions implementing the price cap for those who falsify documentation or otherwise hide the true origin or price of Russian oil would face.
- The plan agreed by the G7 calls for participating countries to deny Western-dominated services including insurance, finance, brokering and navigation to oil cargoes priced above the cap.
- To secure those services, petroleum buyers would make “attestations” to providers saying they bought Russian petroleum at or below the cap.
- Moscow is constrained by a small tanker fleet versus the vast scale of exports it needs to get out. If Russia doesn’t want to sell at the cap, it may have to shut in production, which could impose long-term costs on its oilfields.
- The Group of Seven (G7) is an inter-governmental political forum for maintaining mutually close political, economic, social, legal, environmental, military, religious, cultural, and diplomatic relations.
- Members are the world’s largest IMF advanced economies and liberal democracies – the United States, Japan, Germany, Britain, France, Italy and Canada – and the EU
- Features: shared values of pluralism and representative government. As of 2020, the collective group accounts for over 50 percent of global net wealth and 32 to 46 percent of global gross domestic product including 10 percent of the world’s population.
- From 2022, Germany has taken over the rotating presidency of the G7, following the presidency of the United Kingdom
- Objectives: Discussing and coordinating solutions to major global issues, especially in the areas of trade, security, economics, and climate change.
- The G7 is not based on a treaty and has no permanent secretariat or office
- The group has been criticized for its allegedly outdated and limited membership, narrow global representation, and ineffectualness. It is also opposed by anti-globalization groups, which often protest at summits.
Source: Indian Express