On December 3, the G7 and European Union finally agreed upon capping the price of Russian seaborne oil at $60 per barrel. In an obvious reaction, Russia rejected the oil price ceiling and warned the West of retaliation.
Following the imposition of the price cap, G7, and European Union-based insurance and reinsurance companies that provide services for tankers carrying Russian crude oil, as well as institutions financing Russian crude transactions, will not be allowed to handle such cargoes unless the oil is bought at or below the price cap. Shipping companies will not be allowed to provide tankers for the transport of Russian crude as well unless the oil is sold at or below the $60 price cap.
The price cap came into effect from the 5th of December, aimed at reducing Russian revenue as it looks to finance its war against Ukraine.
Impact of the price cap on India
India has emerged as the second biggest importer of Russian crude after China in the post-Ukraine war world. India’s imports from the Middle East fell 16.2% to about 2.2 million barrels per day (bpd) in August, while imports from Russia increased 4.6% to about 896,000 bpd. In October, Russia’s share of India’s imports increased to 4.24 million tonnes, or nearly 1 million barrels per day, giving it a 21% share, comparable to Iraq’s and higher than Saudi Arabia’s share of around 15%. In November, India bought 40% of the Russian Urals seaborne export volume.
Since Indian refiners are already getting Russian crude at $60 a barrel or below, there will hardly be a negative impact of the price cap on India.
As India has reiterated that it will continue to purchase oil from Russia with Moscow assuring that it will directly negotiate with its crude buyers, the price cap is likely to benefit India. The price cap would furnish them with leverage to further reduce the price paid to Russia.
Hardeep Singh Puri, India’s Union Minister for Petroleum and Natural Gas, has said that the oil price cap will not have an impact on India. He mentioned that India’s oil import from Russia is very limited and that India now sources oil from 39 countries including Iraq, Saudi Arabia, UAE, and also exploring trade possibilities in Africa. Other than this, India may also buy more oil from the United States, Guyana, and other countries in the future.
Minister Puri also said that the global oil producers have assured India that there will be no disruption in oil supplies. India will turn the global oil challenges into an opportunity to secure affordable energy, the Minister said.
Speaking in Rajya Sabha on December 7, the External Affairs Minister, S Jaishankar said that Indian refiners look for the best deal they can find and that the Indian government does not direct them particularly to buy Russian oil. On the impact of the price cap on India, he said that it is not very clear yet.
We don’t ask our companies to buy Russian oil, we ask them to buy what’s the best option they get. It depends on the market, it’s a sensible policy to go where we get the best deal in the interest of the Indian people: EAM S Jaishankar pic.twitter.com/RDiJNOfNYy
— ANI (@ANI) December 7, 2022
Jaishankar reiterated in the Parliament that India has always urged both Ukraine and Russia to resolve disputes through dialogue and return to diplomacy. Prime Minister Narendra Modi had also told in strong words to the Russian President Putin that “this is not an era of war.”
EU and G7 impose a price cap on Russian oil
Last week, European Union and the G7 countries imposed a price cap on Russian oil.
President of the European Union, Ursula von Der Leyen, in a video message she posted on Twitter, highlighted that the oil price cap will “reduce Russia’s revenues significantly and stabilise global energy prices.”
The EU agreement on an oil price cap, coordinated with G7 and others, will reduce Russia’s revenues significantly.
— Ursula von der Leyen (@vonderleyen) December 2, 2022
It will help us stabilise global energy prices, benefitting emerging economies around the world. pic.twitter.com/3WmIalIe5y
Regarding the objectives of the oil price cap, the European Commission president stated that it will first solidify the effect of EU’s sanctions, secondly, it will reduce Russia’s revenues, and thirdly, it will stabilise global energy markets by allowing some Russian seaborne oil to be traded, brokered, and transported by EU operators to third countries as long as it is sold below the cap.
From December 5 onwards, Western shipping and insurance firms are not permitted to handle Russian oil sold above the price cap.
Russian Response
Reacting to the newly imposed oil price cap, Russian President Vladimir Putin said that the cap will have a limited impact on Russia and called it a “stupid, ill-conceived and miscalculated proposal and a harmful decision for the global energy markets.”
President #Putin: The cap on Russian #oil will not harm us in any way. It is a stupid, ill-conceived & uncalculated proposal and a harmful decision for world #energy markets. pic.twitter.com/pGmorYejaI
— Russian Embassy, UK (@RussianEmbassy) December 10, 2022
Earlier, President Putin while speaking to the media hinted at cutting oil production. “I am not saying that it is a decision, however, if necessary, we will think about production cuts,” Putin said on state-run Rossiya 24 TV.
Other than production cuts, Russia may soon withhold its oil supplies to countries backing the price cap. Besides, Russia may set maximum discounts to international benchmarks or may decide a fixed price per barrel for selling its crude.
In order to avert the sanctions levied by the west, Russia has been selling its crude to countries like India and China at discounted rates. Russia has volumes committed to multiple buyers at a 40-50% discount.
Russia welcomes India’s move not to back G7’s price cap
In his meeting with the Indian Ambassador to Russia, Russian Deputy Prime Minister Alexander Novak welcomed India’s decision not to back the price cap imposed on December 5 on Russian oil by the G7 and its allies.
As per the statement issued by the Russian Foreign Ministry, India’s imports of Russian oil surged to Rs 16.35 million tonnes till August 2022.
The Russian Deputy Prime Minister also offered India assistance in building large-capacity ships in order to avoid reliance on insurance and tanker chartering bans in the EU and the United Kingdom.
With India exploring various options to meet its energy demand and dealing with Russia for seamless crude supply and a balanced foreign policy, the impact of the G7 and EU-imposed oil price cap is unlikely to be negative.
