The G-7 has just agreed to cap the price of Russian oil. What does that mean?

Since the United States and its allies began avoiding Russian oil, there has been no indication that the measures are inflicting the kind of pain that could force President Vladimir Putin to rethink his war in Ukraine. Other countries, including China and India, continue to buy Russian energy, and a spike in prices has softened the blow from the sanctions. Putin’s opponents have therefore come up with a new idea: to make Russia sell its oil so cheaply that it can no longer afford to go to war. The move, while difficult to execute, would also help a global economy struggling with higher energy prices that have fueled inflation.

1. What is on offer?

The United States, United Kingdom and Canada have announced bans on Russian oil, while the European Union plans to ban maritime imports of Russian crude and refined fuels. In a further step, the Group of Seven most industrialized countries agreed in September to put in place a price cap on global purchases of Russian oil. Buyers from third countries could only access European insurance and financial services to facilitate oil purchases if they adhere to a price cap that would reduce Moscow’s profits on those sales.

2. How might an oil price cap work?

Under a mechanism agreed by G-7 countries in June, a maximum price would be “agreed in consultation with international partners” and applied to maritime deliveries of crude oil and petroleum products. Their main leverage is their ability to lock in insurance coverage for these deliveries. About 95% of the world tanker fleet is covered by the International Group of Protection & Indemnity Clubs in London and some companies based in mainland Europe. Governments could let buyers negotiate for Russian crude and then get an exception to insurance bans if they get a price at or below the agreed cap, senior US Treasury officials have said.

3. What could be the impact?

Putin says Western countries are suffering more than Russia from the economic sanctions they imposed during his invasion of Ukraine. Soaring prices for Russian commodity exports have generated surplus revenue that has helped its government overcome sanctions. Proponents of a price cap hope that setting prices closer to the cost of production would deal a blow to Moscow’s finances, while ensuring that energy flows to where it is needed. As Russia is one of the world’s largest oil suppliers, a price cap could also ease the inflationary pressure that is causing economic hardship around the world.

4. What are the obstacles?

The plan came closer to reality on October 5, when the EU agreed on a new sanctions package that would ban the shipment of Russian oil to third countries above a price cap. However, the 27 EU member states will have to unanimously approve the exact level of the cap which has yet to be decided by the G-7. If it goes into effect but does not hold, it would give Putin a symbolic victory. There are many ways that could happen: There is no guarantee that Russia would agree to ship oil at capped prices, especially if the cap is close to the cost of production. The Kremlin may believe that keeping its oil off the market for a while would hurt the economies of Europe and North America more than its own.

5. Would the big buyers of Russian oil side?

A price cap can be incredibly profitable for Chinese and Indian companies, and good for fighting inflation. But there are broader considerations for Beijing and New Delhi, such as their long-term relationship with Moscow. They may agree to take out lower Russian insurance rather than being told how much to pay for a key product, even if it is attractively priced. During a visit to India in August, US Treasury Undersecretary Wally Adeyemo said the coalition for implementing a Russian oil price cap had grown and a number countries had joined it, while refusing to name them. US officials have argued that even if countries like India do not officially join the coalition, they can use the transparency of a low price cap to negotiate a better deal with Russia themselves.

6. How does Russia react?

Russia has said it will not supply crude oil, refined products or gas to countries that introduce price caps on Russian commodities, and that Russian oil will find alternative markets. It is already setting up an alternative to P&I clubs, offering insurance through the Russian National Reinsurance Company. In late September, there were reports of some Russian oil shipments to India being handled by Russian companies. However, it is not clear that most buyers are willing to accept Russian liability coverage. Moscow also plans to launch a national oil trading platform independent of Western energy markets. Foreign buyers of Russian oil will be encouraged to trade there with the aim of establishing a local benchmark price.

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