The idea of putting a price cap on Russian oil exports in order to keep the oil flowing but reduce the Kremlin's revenues from it might sound rather exotic at first glance—but the idea has been around for a few weeks now.
It did just get a major push at the G7 meeting that began last weekend, but the challenges to its implementation are quite substantial.
An oil price cap for Russian crude was first floated during talks between U.S. Treasury Secretary Janet Yellen and EU officials on finding a solution for the inflation problem while limiting Russian oil revenues. It quickly became clear that limiting Russian oil exports was not the best idea.
The United States, the UK, and, more recently, the EU, have all imposed bans on the imports of Russian oil and oil products, but China and India have stepped up their purchases as Russian crude trades at a sharp discount to the international benchmark. The EU, meanwhile, is buying up Russian fuels ahead of the embargo that will come into effect at the end of the year.
In other words, it turned out that there is quite a high price to pay for stifling all Russian exports, so an alternative had to be formulated that could ensure both a sufficient supply of oil for international markets and lower revenues from the sales of this oil for Russia.
There is really only one way to do this.
As Italy's Mari Draghi put it during the first day of the G7 meeting, "We must reduce the amount of money going to Russia and get rid of one of the main causes of inflation," the Financial Times reported. Incidentally, Draghi earlier this year floated the idea of forming a buyers' OPEC as a way of prompting actual OPEC to produce more oil.
It will not be an easy task to complete, judging by the comments coming from Schloss Elmau—the castle resort in Germany where the leaders of the seven biggest liberal democracies in the world are meeting this year.
According to Charles Michel, president of the European Council, one big problem is making sure the price cap hurts Russia rather than the buyers of Russian oil.
"We want to make sure the goal is to target Russia and not to make our life more difficult and more complex," Michel said, as quoted by the FT, in comments that add more weight to evidence that current sanctions against Russia appear to be more painful for the citizens of those imposing them than they are for Russians.
"We are on a good path to reach an agreement," one unnamed German government official told Reuters a day before the meeting began. However, for this agreement to materialize, the G7 would need support from India and China. The former is joining them this week as a partner country, alongside Argentina, South Africa, Senegal, and Indonesia.
This suggests two things: one, that there is no point in trying to convince China to stop buying Russian oil, at least not in the conventional way of simply asking or offering something in return. There is little G7 could offer in return, especially now that it is challenging Beijing's Belt and Road initiative with a war chest of $600 billion to be spent on infrastructure projects in the poorer countries of the world.
India, however, is considered an ally of the West that perhaps can be persuaded to only buy Russian oil below a certain price. India has been a lot more open to dialogue with the sanctioning nations, but it has also clearly indicated it will not sing in any choir but rather follow its own priorities, the top of which is available and affordable energy.
Given India's heavy dependence on imported oil, a price cap would be welcome by the authorities in New Delhi, theoretically. As already noted, Russian oil is already selling at a discount to Brent and most other internationally traded blends, and India is taking full advantage of it.
The idea of a price cap, then, assumes that most if not all buyers of Russian crude will sign up for it, effectively tying Russia's hands: if it wants to sell its oil, it can only do so below a certain price.
The price cap idea also assumes that Russia will choose to continue selling its oil rather than halting all exports and watching how Brent crude hits $200 in weeks. This possibility was noted by energy industry executives, by the way.
Per an FT report from the first day of the G7 meeting, these executives said that if it was faced with a price cap for its oil exports, Russian could, instead of agreeing to sell at this price, choose to withhold oil from export markets. And that would put a lot more than Europe in a bit of a pickle like the one we are seeing now with Germany—and Russia hasn't even suspended gas deliveries yet.
By Irina Slav for Oilprice.com
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