A proposed cap on the price of Russian oil and pipeline gas to slash the Kremlin’s revenues and reduce inflationary pressures in the west gathered support on Sunday as G7 leaders met in Bavaria.
The three-day event will be dominated by discussion of how to tighten the economic and military vice around Vladimir Putin without leading to disastrous spillovers, including a backlash among western consumers and starvation in a rain and grain-starved global south.
Joe Biden, at the outset of the summit held in the Bavarian alpine castle that formed the venue for the 2015 G7 meeting, said Putin had been thwarted by the degree of unity shown by the west. “Putin has been counting on it from the beginning that somehow Nato and the G7 would splinter. But we haven’t and we’re not going to,” Biden said.
But behind the scenes, as Putin rained missiles on Kyiv and made further territorial gains in the east of Ukraine, there is deep concern that the west has not yet assembled the policy mix that will force him to back down. A plan to ban imports of Russian gold trailed by the US and the UK, regarded as an incremental not decisive step, does not yet have the clear support of the EU.
Twin caps on the price of Russian oil and pipeline gas are being canvassed heavily by the Italian prime minister, Mario Draghi, and at Sunday’s opening meeting he gained the support of the French president, Emmanuel Macron. “There is now more than mild optimism that this will work,” one source said.
The gas cap would operate simply by European countries refusing to pay above an as-yet unspecified fixed price for Russian gas. It is argued Russia in the short term has no alternative market to sell the pipeline gas, and unless it was prepared to take a huge hit to its revenues by shutting down the pipeline altogether would have no option but to sell at the price dictated by Europe. Liquid gas would be exempted from this maximum price.
“Putting a ceiling on the price of fossil fuels imported from Russia has a geopolitical goal as well as an economic and social one,” Draghi told the G7. “We need to reduce our funding to Russia. And we need to eliminate one of the main causes of inflation. We must avoid the mistakes made after the 2008 crisis: the energy crisis must not produce a return of populism.
“We must mitigate the impact of rising energy prices, compensate families and businesses in difficulty, and tax companies that make extraordinary profits.”
A price cap would operate by dictating to the quasi-monopoly responsible for insuring Russian oil tankers that they will be sanctioned if they allow oil to be sold above a fixed price. About 95% of the world’s tanker liability coverage is arranged through a City of London-based insurance organisation called the International Group of Protection and Indemnity Clubs, which has to heed European law.
The proposal has been promoted most heavily by the US Treasury secretary, Janet Yellen, and may have to be squared with Opec, the oil producers club.
Russian oil production has fallen under the pressure of sanctions, but its per barrel revenues are up due to the high price of oil globally, the polar opposite of what western leaders want.
The US and Canada have banned imports of Russian oil while the European Union has agreed to prohibit seaborne imports of Russian crude by the end of the year.
Germany is probably the single G7 country most queasy about price caps. It fears a bust-up inside the EU over the proposal and that Putin may simply turn off the supplies of gas to Europe. Last week Russia cut gas flows by 60%, citing delays in maintenance equipment, but the explanation was not regarded as credible within the G7. A cut off now would leave Europe struggling to build up the gas reserves it needs to survive what could be a fraught winter.
EU countries have been directed to fill their gas reserves to a minimum of 80% but they are well short of that.
The Ukrainian president, Volodymyr Zelenskiy, will address the G7 by video link on Monday, where he is expected to appeal for more heavy weapons and artillery.
In further outreach to the global south, the German chancellor, Olaf Scholz, has invited the leaders of Argentina, India, Indonesia, Senegal and South Africa to the alpine summit on Monday.
While Argentina and Indonesia voted at a crucial UN vote to condemn Russia, the other three abstained.
But all are being directly hit by a long-term hunger crisis sparked by the holdup in grain and wheat exports from Ukraine, and India has imposed restrictions on wheat exports.