Yellen said the price cap would prove a powerful tool to fight inflation and deliver “a major blow for Russia’s finances.”
“By committing to finalize and implement a price cap on Russian oil, today the G-7 took a critical step forward in achieving our dual goals of putting downward pressure on global energy prices while denying [President Vladimir] Putin revenue to fund his brutal war in Ukraine,” she said in a statement.
Several elements of the plan remain unclear, however, including how many countries will ultimately sign on, the price at which the cap will be set and how Putin will respond.
The goal is to align the price cap’s effective date with new European sanctions set to take effect on Dec. 5 on shipping services for Russian oil exports. Under the agreement, importers that purchase Russian oil below the cap will be exempt from the new restrictions on financing and shipping services, which are largely provided by G-7 countries. That will allow oil to continue flowing while limiting Russia’s revenues, which have climbed in the wake of the Ukraine invasion.
Treasury officials are working with their international counterparts to complete legal frameworks for the cap in each jurisdiction, which are expected to be unveiled in mid-October.
Russian Central Bank Governor Elvira Nabiullina has said Russia will refuse to sell to countries that impose a cap, raising doubts about whether the plan
The G-7 in its statement committed to working urgently to finalize the measure in each of its jurisdictions and acknowledged that implementation in the European Union will require unanimous agreement among all 27 member states.
“The price cap is specifically designed to reduce Russian revenues and Russia´s ability to fund its war of aggression whilst limiting the impact of Russia´s war on global energy prices, particularly for low and middle-income countries, by only permitting service providers to continue to do business related to Russian seaborne oil and petroleum products sold at or below the price cap,” the statement read.
The G-7 consists of the U.S., the U.K., Germany, France, Italy, Canada and Japan. The EU itself also belongs to the group.
Senior Treasury officials confirmed Friday the agreement would include three prices caps — one for crude oil, and two for refined products — that would be set at a particular dollar amount, not as a discount or percent of a benchmark price. Those prices, which are still being determined by the G-7 members, could be revised as needed, one of the senior officials said on a call with reporters.
Some in the oil industry have warned the plan is overly complicated and will be difficult to implement, while economic and energy policy experts say it could have unintended consequences and push up the price of oil.
Yellen has said the alternative would be worse — if the European sanctions take effect without a price cap exemption, it could lead to a catastrophic supply shock that sends energy prices soaring and triggers a global recession, she has said.
U.S. oil prices, which had shot up in the morning to near $90 a barrel after the release of positive economic data, gave back some of the gains after Treasury’s announcement
Buyers will have to weigh whether Russia will continue to sell oil to them if a price cap is too low, said Paul Sankey, head of energy analyst firm Sankey Research.
“Russia has aggressively pushed back at G7 proposals to cap oil prices, by saying they will cut off any price cap participants,” Sankey said. That threat could be more salient if OPEC decides to cut its own production at a meeting of the oil producing countries scheduled for Monday, Sankey added.
It’s not clear whether the price cap will put more oil on the market, said Andy Lipow, president of consulting firm Lipow Oil Associates.
“It certainly increases the number of buyers for Russian oil which is bearish, but Russia may decide not to sell to them which is bullish,” Lipow said. “It begs the question of how you get China and India on board as they have already benefited by purchasing deeply discounted Russian oil.”
U.S. officials have made clear they don’t necessarily need India and China to formally sign on to achieve their goal. Already, there are signs that some importers are negotiating lower prices with Russia in anticipation of the price-cap announcement, and that the Kremlin is seeking to lock in long-term contracts at lower prices, another senior Treasury official said.
It will also cost Russia much more to obtain alternative services for financing and shipping its oil if it does choose to sell to countries outside of the price-cap coalition, further eating into its oil profits, the official said.
“The truth here for the Kremlin is that they’re going to have very tough choices, and those choices are going to continue to get harder,” the senior official said.
The G-7 finance ministers, in their statement Friday, said implementation would be based on “a recordkeeping and attestation model” covering all contracts, and said they “would aim to limit possibilities for circumventing the cap while at the same time minimizing the administrative burden for market participants.”
The initial cap will be set at a level based on a range of technical inputs, the group said, and will be decided by the full coalition in advance of the implementation date.
Ben Lefebvre contributed to this story.