Equipo Nizkor - Five Reasons Why G7's Price Cap on Russia's Oil is Doomed.

Western allies are scheduled to approve a price cap on Russia's oil exports on Wednesday. The cap will ban companies from providing shipping and financial services needed to deliver Russian crude unless it is sold below the agreed limits. Will the plan work?

The US and its allies slapped unprecedented sanctions on Russia's energy sector over Moscow's special operation to demilitarize and de-Nazify Ukraine earlier this year. However, the energy embargo backfired on western countries by sending oil and gas prices sky-high and granting a further boost to inflation.

In June, the G7 group - the US, Canada, France, Germany, Italy, Japan and the UK - outlined a mechanism to set a maximum price on Moscow's crude which would be "agreed in consultation with international partners" and applied to seaborne deliveries of the commodity originating from Russia. The plan was meant to kill two birds with one stone: first, to deal a heavy blow to Moscow's finances; second, to reduce inflationary pressure.

Similarly, US Treasury Secretary Janet Yellen claimed on July 14 that a price cap on Russia's crude would help fight inflation.

"A price cap on Russian oil is one of our most powerful tools to address the pain that Americans and families across the world are feeling at the gas pump and the grocery store right now," Yellen asserted to reporters ahead of the G20 foreign ministers' July meeting in Bali.

Thus, G7 is expected to bar Russian seaborne crude imports from December 5 and purchases of the country's petroleum products from February 5. The US and the UK signaled that their firms will be given "a grace period" to receive Russian hydrocarbons until January 19 for shipments that were loaded before the cap came into force. The EU is said to have followed in the footsteps of Washington and London.

Nonetheless, Moscow has repeatedly said that it won't supply crude or oil products to nations that implement a price cap. Deputy Prime Minister Alexander Novak stated earlier this week that Russia will either redirect its crude supply to "market-oriented partners" or will slash production. Novak warned that the measure could lead to a "potential deficit in oil supply and any commodity where such a mechanism is applied."

International observers and energy experts have been skeptical about the G7's price capping from the outset.

First, Indonesian Finance Minister Sri Mulyani Indrawati told the US press on July 15 that capping Russian oil prices won't solve the world's energy problems. She explained that prices are high because demand outstrips supply, which was disrupted during the COVID pandemic.

According to Indrawati, no price capping can solve this dilemma amid the energy crunch.

Second, some observers suggested that Russia could take strong measures and cut its oil production, thus creating an artificial shortage of the commodity on the global market. As a result, the G7, which is seeking to cap Russia's oil at around $65-$70 a barrel, would end up buying the commodity substantially higher than $100.

Third, former US Treasury Secretary Steve Mnuchin denounced the plan for a price cap on Russian oil at the Milken Institute's Middle East and Africa Summit earlier this month: according to him, the initiative is "not only not feasible" but also "the most ridiculous idea" he has ever heard. Mnuchin drew attention to the fact that the G7 has no leverage to persuade OPEC+ to step up oil production to fill Russia's shoes, thus taming skyrocketing energy prices. In fact, US President Joe Biden has "been there, done that" in Saudi Arabia where he failed to convince Crown Prince Mohammed bin Salman to increase oil extraction.

Fourth, the group of those championing price capping is not big enough to overhaul existing rules of the global energy game: there are plenty of world players who are buying Moscow's crude regardless of the West's sweeping energy embargo. India and China have not signaled any willingness to join the G7 bandwagon so far.

Fifth, while the G7 plan largely relies on prohibiting shipping and insurance companies from providing services to Russia unless the latter bows to the Group of Seven demands, Moscow has already instrumentalized its own fleet of tankers and insurance companies to deliver crude to its customers.

Thus, it was reported in May, Rosneft PJSC and Gazprom Neft PJSC, the country's two major oil producers started increasing the bookings of tankers owned by Sovcomflot PJSC, Russia's largest shipping company specializing in the maritime transportation of hydrocarbons.

In June, the western press found out that the Russian National Reinsurance Company (RNRC) became the main insurer of Russian ships, including Sovcomflot's fleet, after western insurance firms stopped providing services to the country's shipowners due to sanctions. The state-owned insurance company was set up in 2016 with the Central Bank of Russia being a full shareholder.

In November, it was reported that Russia's oil tankers could also be insured by IPJSC Ingosstrakh, the legal successor of the Chief Agency of Foreign Insurance of the USSR founded in 1947. It's the country's fourth-largest general insurer, which already covers some 2,000 vessels, according to the US mainstream media.

While G7 is pushing ahead with its price capping, the most likely outcome will be higher crude prices and further de-globalization of the world's market. Time will tell who will benefit the most from it.

23Nov22

Five Reasons Why G7's Price Cap on Russia's Oil is Doomed

[Source: By Ekaterina Blinova, Sputnik Moscow, 23Nov22]

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