G7 price cap on Russian oil

Finance Ministers of all G7 countries as well as the European Union announced their plan to implement a price cap on oil exports from Russia.

What is the price cap plan?

• The introduction of a price cap on Russian oil means countries that sign up to the policy will only be permitted to purchase Russian oil and petroleum products that are sold at or below the price cap.
• The price cap is being designed to limit Russia from profiting from its war of aggression while limiting the impact on global energy prices.
• The U.S. and EU officials have been trying to convince countries including India, China and Turkey to join the coalition or to at least support the price cap.
• As per them, price cap is in the interests of all oil buyers from Russia as it will give them leverage to lower purchase prices.

How will it be enforced?

• For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined.
• For countries that do not join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries.
  • Services provided by the coalition countries include: insurance, currency payment, facilitation and vessel clearances for their shipments.
  • E.g. – London is a major global centre for maritime insurance.
• G7 countries say they are aiming to reduce the price of oil, but not the quantity of oil that Russia sells, so as to control inflation globally while hurting the Russian economy.
• This could only work, of course, if all countries joined the coalition.

Russian reaction –

• Russia has warned that it would not supply anything at all if it contradicts Russian interests.
• While speaking at recently concluded Eastern Economic Forum (EEF) summit, Russian President threatened that Russia could stop supplies of gas, oil, etc. leaving European countries to freeze.
  • Recently, Russia announced a halt on all supplies via the Nord Stream 1 pipeline to Europe due to maintenance issues.
  • Experts believe that this action has resulted from the EU sanctions already in place. It has raised fears of a very difficult winter for European countries.

India’s response –

• Western countries have tried to pressurised India by asking it —
  • to change its uncritical stance on Russia at the United Nations,
  • to cut down oil imports,
  • to stop defence and other purchases from Russia, and
  • to avoid the rupee-rouble payment mechanism that circumvent their sanctions.
• However, so far, India has not obliged, and there is little indication that New Delhi is likely to, just yet.
  • At the recently concluded EEF summit, Indian PM expressed his desire to strengthen ties with Russia in the energy field and boost India’s $16 billion investment in Russian oilfields.
• India’s oil intake from Russia, which was minuscule prior to the war has soared 50 times over.
  • Indian government’s stand is believed to be driven by its national interest which, at this moment, is to provide affordable oil to Indian consumers.
• It also remains to be seen whether India will bargain with the U.S. to set aside sanctions against Iran and Venezuela in exchange for joining the price cap coalition.
  • India had cancelled oil imports from Iran and Venezuela under pressure from the U.S. in 2017-18.

Origin –

• The origin of G7 lies in the oil shocks of 1973 and the corresponding financial crisis.
• In order to address the situation after oil shock, the heads of the world’s six leading industrial nations decided to hold a meeting in 1975.
• These six nations were – the US, UK, France, Germany (West), Japan and Italy.
• These countries were joined by Canada in 1976 and G7 came into existence.
• Current members — US, UK, Canada, France, Germany, Italy and Japan are the current members of this group. The European Union is also represented within the G7.

Purpose of G7 –

• To determine the course of multilateral discourse.
• To shape political responses to global challenges.
• Basically, G7 provides a platform to discuss and coordinate solutions to major global issues, especially in the areas of trade, security, economics, and climate change.

Powers of G7 –

• The G7 is not based on a treaty and has no permanent secretariat or office. The agenda of G7 is set by the presiding nation.
• It cannot pass any laws because it is made up of separate nations with their own democratic processes.
• However, decisions taken by G7 have global effects as the member countries are political and economic heavyweights.

India’s participation in G7 –

• Since 2014, this is the third time the Prime Minister will be participating in a G7 meeting.
• India had been invited by the G7 French presidency in 2019 to the Biarritz Summit as a “Goodwill Partner”.
• India was also invited at the 47th G7 Summit held under the presidency of UK.
• The US under President Donald Trump had extended an invitation to India in May 2020. However, due to the pandemic and the US election outcome, that did not happen.
• During Prime Minister Manmohan Singh’s tenure, India attended the G8 Summit five times. In March 2014, Russia was indefinitely suspended following the annexation of Crimea, reducing G8 to G7.