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An elaborate United States-led plan to limit what Russia can charge for its oil exports is set to cap the price of Russian crude at $60 a barrel, the Group of 7 nations agreed on Friday. The threshold, which was settled on after protracted negotiations among European Union diplomats, is likely to make a small dent in the Kremlin’s energy revenue and, the White House hopes, help avert a global oil shock.
The deal was heralded by the E.U.’s executive body and won the quick approval of the rest of the G7 and Australia late on Friday.
“With this decision today, we deliver on the commitment of G7 Leaders at their summit in Elmau to prevent Russia from profiting from its war of aggression against Ukraine, to support stability in global energy markets and to minimize negative economic spillovers of Russia’s war of aggression, especially on low- and middle-income countries, who have felt the impacts of Putin’s war disproportionately,” the joint statement said.
The final agreement came after months of deliberations over how to keep economic pressure on Russia without creating an oil price shock that will cause a global recession. Negotiators in Europe worked through the week to settle on a price for the cap, completing it with little time to spare before an embargo on Russian oil takes effect on Monday.
“This price cap has three objectives: First, it strengthens the effect of our sanctions. Second, it will further diminish Russia’s revenues, and thirdly, at the same time, it will stabilize global energy markets,” said Ursula von der Leyen, president of the European Commission, shortly after the deal became final.
The United States praised the agreement and said it would curtail Russia’s ability to fund the war.
“Together, the G7, European Union, and Australia have now jointly set a cap on the price of seaborne Russian oil that will help us achieve our goal of restricting Putin’s primary source of revenue for his illegal war in Ukraine while simultaneously preserving the stability of global energy supplies,” said Treasury Secretary Janet L. Yellen.
The price threshold reflects what American officials have long said is their primary goal in pushing the plan: to keep millions of barrels of Russian oil flowing to the global market as a new wave of European sanctions on Russian oil exports takes effect, avoiding a sudden contraction in supply that could send gasoline and heating fuel prices soaring in the United States and around the world.
The limit of $60 a barrel seeks to lock in the steep discount that buyers of Russian oil are now able to pay relative to other sources of oil on the world market. While not dramatically slashing Russian export revenue, which is crucial to its war effort in Ukraine, it could still dent Russia’s finances. The cap will come with light-touch enforcement, but European allies agreed that it would be followed swiftly with a fresh round of sanctions against Russia.
Settling on the price has not been easy. European Union ambassadors in Brussels met many times over the past two weeks to discuss the cap, with some countries arguing for a much lower price than $60 and others urging a higher cap.. They settled on a price that reflects what Russia has recently sold its oil to countries like India and China for — between $60 and $65 a barrel.
Oil traders appeared to view the plan as a sign that a European Union embargo on Russian oil imports, which takes effect on Dec. 5, is unlikely to knock much, if any, Russian oil off the global market. Global oil prices fell on news of the cap and are down about 10 percent from a month ago. Biden administration officials call that proof the cap was already working to deny Russia the premium oil prices it enjoyed earlier this year.
E.U. diplomats agreed that the price should be reviewed every two months, or more frequently if needed, by a committee of policymakers from Group of 7 countries and allies. The first review would happen on Jan. 15, and the goal is to keep the cap at least 5 percent lower than the price Russian oil is being traded at the market, officials said. This approach will ensure that fluctuations in the market price, using the International Energy Agency’s price as a benchmark, will be followed by fluctuations in the price cap.
The G7 statement said that changes to the price would be enacted with a grace period to minimize disruption to oil markets. Acknowledging that the policy is a work in progress, the coalition said it would “consider further action to ensure the effectiveness of the price cap.”
That plan places the burden of putting into effect and policing the price cap on the businesses that help sell the oil: global shipping and insurance companies, which are mostly based in Europe.
The European Union embargo on Russian oil includes a ban on European services to ship, finance or insure Russian oil shipments to destinations outside the bloc, a measure that would disable the infrastructure that moves Russia’s oil to buyers around the world.
Some 55 percent of the tankers that transport Russian oil out of the country are Greek-owned, for example, according to maritime data and analysis by the Institute of International Finance.
To apply the price cap, these European shipping providers will instead be permitted to transport Russian crude outside the bloc only if the shipment complies with the price cap. It will up to them to ensure that the Russian oil they are transporting or insuring has been sold at or below the capped price; otherwise, the providers would be held legally liable for violating sanctions.
“The good news is that the West now has equipped itself with an important tool to exercise pressure on Putin,” said Simone Tagliapietra, a senior fellow at the Brussels think tank Bruegel.
Russia has repeatedly said it will ignore the policy and refuse to sell oil under a price cap; setting the level near the market price could help Moscow avoid looking like it is caving.
Earlier this year, economic forecasters expressed concerns that Russia taking oil off the market could send gasoline prices in the United States above $7 a gallon by the end of the year.
“Our motives are to hold down Russia’s revenues to impede its ability to fight the war,” Ms. Yellen said in an interview last month. “And second, to make sure that there’s enough global supply of oil that global oil prices don’t jump, because that would both exacerbate inflation and would likely cause a recession.”
American officials have been celebrating the imposition of the cap. “A lot of people doubted the resolve of the G7 and Europe in particular,” Ben Harris, the assistant secretary for economic policy at the Treasury Department, said in an interview. But, he said, the cap would help stabilize markets: “Sometimes you don’t get credit for the crisis avoided.”
The protracted talks in Brussels were evidence of the discord the cap has sown in Europe. For most of the process, E.U. officials and diplomats from some member countries worked to ameliorate two types of concerns.
One group of three E.U. maritime nations — Greece, Cyprus and Malta — demanded the price cap be placed very high, at or above $70 a barrel, to ensure that their business interests would not be disrupted. Another group of three hard-line pro-Ukraine countries — Estonia, Lithuania and Poland — demanded an ultralow cap, at or around $30 a barrel, to drastically slash the Kremlin’s oil revenue, no matter the disruption that would cause on the global oil markets.
The benchmark for the price of Russian oil, known as the Urals blend, traded from $60 to $70 a barrel in the year before the pandemic, close to global benchmark prices. A discount worth more than 20 percent to global prices opened up shortly after Russia’s invasion of Ukraine in February, but Russia was still able to sell Urals crude for around $100 a barrel at the post-invasion peak.
Since then, global oil prices have fallen while Russia signed agreements to sell its oil at a further discount to China, India and others. Those falling prices have strained Moscow’s finances, at least to some degree.