Explained | What does a price cap for Russian oil mean?  Premium

Why did the Group of Seven nations feel this step was necessary? How has Russia reacted to the move? Where does India stand on imports of Russian oil? 

The story so far: After months of negotiation, western countries comprising the Group of Seven nations, the European Union and Australia, agreed to a price ceiling of $60 per barrel of seaborne Russian Urals crude oil that came into force just as sanctions against freighters carrying Russian crude oil took effect earlier this week.

Western nations, led by the G-7, want to punish Russia for having invaded Ukraine and rein in the profits accruing to Russia from oil exports. But they also want to keep some oil from Russia flowing globally so that supply is not significantly affected, which could push up energy prices. With a recession in parts of the western world already a possibility, oil price spikes would only hasten the spiral into economic contraction. So western nations came up with the concept of a price cap, above which accessorial services such as ship insurance, vessel clearances and the like would not be available to freighters carrying Russian oil. About 95% of global insurance for freighters by tonnage comes from European countries, especially the United Kingdom. Without such services, Russia would find it difficult to sell its crude above the price cap.

Russia had first said the price cap might only impact its output minimally. Later, it also spoke about considering a ban on export to countries that insisted on the price cap. Deputy Prime Minister Alexander Novak has been quoted by the Russian media as saying that a mechanism was being worked out and that the ban on oil export to such countries would take effect before the year closed.

Russian news agency Interfax quoted Mr. Novak as saying, “Global consumption, economic growth in the world must be provided with energy resources. There is not much oil in the world, and Russian oil has always been and will be in demand. Yes, supply chains will change. Nevertheless, we do not see any tragedy in this.”

Russia is also said to be considering a floor price in retaliation to the price cap, as another option. A floor price would aim to ensure that it did not sell below that level. This tug of war would theoretically put Russian oil buyers, who want European insurance and other services to continue, in a bind.

Between January and November, Russia’s production rose 2% to about 488 million tonnes, as per global media reports. China and India are popular examples of countries that bought discounted oil. But the likes of France and major oil producer Saudi Arabia too purchased oil from Russia. Saudi used the discounted price to buy oil to run its power plants, while selling its own costlier variant to the world.

Recently, India’s External Affairs Minister S. Jaishankar cited the European Union’s oil imports from Russia as being six times as much as India’s between February 24 and November 17.