G7 countries and Australia have agreed to cap the price of Russian seaborne oil, with the aim of reducing Moscow’s income and limiting its ability to finance its war in Ukraine.
But critics, including Ukraine, say the cap of $60 a barrel is still higher than the current market price for Russian crude oil and is unlikely to affect the Kremlin’s war coffers.
In a statement on the deal, the UK chancellor, Jeremy Hunt, described the country’s support for Ukraine as unwavering and said it would “continue to look for new ways to clamp down on [the Russian president, Vladimir] Putin’s funding streams wherever we can”.
The deal was agreed by the UK, Japan, Germany, Italy, France, Canada and the US, together with the EU and non-G7 member Australia on Friday evening.
The cap on the price of Russian oil transported by sea is designed to affect the country’s exports worldwide, in addition to the EU-wide embargo on Russian crude oil, which comes into force on 5 December, which the UK is also adopting.
Countries not party to the deal will only be able to access services, such as insurance, shipping and brokerage, if they trade Russian oil at or below the $60 cap. As the countries involved in the deal, such as the UK, are the world’s largest service providers, the belief is that most countries and businesses will be forced to comply.
In a statement, G7 countries said they hoped the deal would also work to reduce the price of oil for low- to middle-income countries, “who have felt the impacts of Putin’s war disproportionately”.
But questions remain over whether the cap is radical enough to dent Russia’s budget or whether it will only work to lower the price of oil for developing countries. The price of Russia’s most-sold Ural grade oil is currently about $50 a barrel.
The US said it hoped that third countries would use the cap to demand lower prices from Russia.
“Whether these countries purchase energy inside or outside of the cap, the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in global energy markets,” said the US treasury secretary, Janet Yellen.
Yellen added that the Russian budget was stretched thin and the price cap would “immediately cut into Putin’s most important source of revenue”.
“We will not accept this cap,” the RIA news agency quoted Kremlin spokesperson Dmitry Peskov as saying. He said that Russia would analyse the agreement and respond.
On Thursday, Russia’s foreign minister, Sergei Lavrov, said Moscow had dismissed the impact of the price cap and would negotiate with its partners directly.
After the deal was announced on Friday, Russia’s embassy in Washington accused the US and its allies of trying to reshape the free markets. “Regardless of the current flirtations with the dangerous and illegitimate instrument, we are confident that Russian oil will continue to be in demand,” it said.
The G7 agreement came after much debate with Poland, party to the deal as an EU member and one of Ukraine’s closest allies, which had pushed for the cap to be as low as $30 a barrel, arguing that to squeeze Russian revenues it should be below the market price.
But G7 countries concluded that the price of $60 a barrel would prevent a rise in global oil prices that would put strain on countries already experiencing high inflation.
In reaction to the deal, Andriy Yermak, the head of Ukraine’s presidential administration, said the price was not low enough and it should be $30 a barrel “to destroy the enemy’s economy faster”.
In the G7 statement on the deal, the parties committed to reviewing the effectiveness and impact of the price cap and it could be adjusted as appropriate.
The US president, Joe Biden, said on Thursday that he would talk to Russia’s president about the conflict only if he could see an indication that Russia was prepared to pull out of Ukraine.
“There’s one way for this war to end – the rational way. Putin to pull out of Ukraine … it’s sick, what he’s doing,” said Biden. “I’m prepared to speak with Mr Putin if in fact there is an interest in him deciding he’s looking for a way to end the war.”
Reacting to Biden’s comments, Putin said he would enter into talks only if Ukraine recognised Russia’s annexation of the southern and eastern areas of Ukraine.
Ukraine remains adamant that no talks can take place until Russia withdraws its troops back to Ukraine’s internationally recognised borders.