G20: Selling Oil Caps to Russia’s Allies

Published on July 11, 2022
SGH Insight
US Treasury Secretary Janet Yellen has been tasked with the formidable challenge of selling a buyer’s cartel/oil price cap scheme to America’s major economic global counterparts when she travels to Bali, Indonesia for the G20 meeting of finance ministers and central bank governors later this week.
Intended to force Russia to sell its oil at a substantial discount from market prices, a unified “G20-minus 1” position on the oil price caps – Russia, of course, would never agree — would entail convincing Moscow’s allies and major swing importers of Russian oil China and India to go along with the scheme. It would also need sign off from other member states who have tended to avoid taking sides against Russia in its aggression against Ukraine, including South Africa, Brazil, and the host country itself, Indonesia.
That is not likely to happen.
Market Validation
Bloomberg 7/17/22

An oil-price cap initiative to mitigate global inflation
while punishing Russia over what she calls “horrific
consequences” of the war in Ukraine has been high on the agenda
for US Treasury Secretary Janet Yellen, but a non-starter for
others like China and India. Indrawati said she will discuss the
proposal with Indonesia’s energy-related ministries.
Treasury said in a statement Yellen held a number of
bilateral meetings including sessions with Saudi Arabia’s
Finance Minister Mohammed Al-Jadaan, Australian Treasurer Jim
Chalmers, South African Minister of Finance Enoch Godongwana and
Singapore’s Deputy Prime Minister Lawrence Wong. The statement
didn’t include details with how ministers responded to Yellen’s
appeal on the oil price cap.

US Treasury Secretary Janet Yellen has been tasked with the formidable challenge of selling a buyer’s cartel/oil price cap scheme to America’s major economic global counterparts when she travels to Bali, Indonesia for the G20 meeting of finance ministers and central bank governors later this week. 

Intended to force Russia to sell its oil at a substantial discount from market prices, a unified “G20-minus 1” position on the oil price caps – Russia, of course, would never agree — would entail convincing Moscow’s allies and major swing importers of Russian oil China and India to go along with the scheme. It would also need sign off from other member states who have tended to avoid taking sides against Russia in its aggression against Ukraine, including South Africa, Brazil, and the host country itself, Indonesia.

That is not likely to happen.

The oil cap idea was discussed previously at the G7 summit in Schloss Elmau in Germany’s Bavarian Alps, on June 26-28. 

The ink was barely dry on the communique before it became clear that the inclusion of the proposal in the final G7 statement was more a reflection of polite solidarity with Washington than any real enthusiasm from skeptical European Union officials for a proposal that may have seemed politically enticing to the White House, but which many believe stands little chance of success in the real world.

Indeed, EU officials openly concede that the oil price cap made it to the final G7 communique only after intense pressure from the United States.

To recap, the idea is to enforce a cap on the price paid for Russian oil through the insurance channel that worked so well in squeezing Iran’s oil exports, in essence, to ban firms from insuring tankers carrying Russian oil unless that oil has been sold at a price set by an international cartel of buyers.

In theory, if such a price were to be set somewhat above Russian production costs it would be still profitable for Moscow to keep pumping and selling its oil on European markets. The Russians, the argument goes, would also have the added incentive of keeping oil wells in operation, as shutdowns would later entail a costly and complex re-initialization process.

For that to work, Russia would have to be denied both its ability to get insurance and to divert its oil exports to alternative markets elsewhere. The threat, if not unanimously agreed to by the world’s major consumers, otherwise goes with the non-negligible chance that Russia responds with a diversion of yet more of its oil exports from Europe and the West to alternative buyers – hence the European concerns with the plan from the start.

Indeed, just one day after the G7 summit, at a closed-door meeting in Brussels, officials from Germany, backed by Hungary and Belgium, expressed strong skepticism toward the idea, and said that for it to work it should be the G20, rather than the G7, that agrees to such a measure. Critically, G20 members India and China would have to support, rather than undermine, any such measures.

Whether the two countries would agree remains, shall we say, “to be seen.” But in one clear signal of at least India’s view on this matter — news reports emerged last month that Delhi was providing safety certifications for dozens of ships managed by a Dubai subsidiary of the top Russian shipping group Sovcomflot to enable oil exports to India and elsewhere after Western certifiers removed their services. China’s position almost goes without saying.

Many European Union leaders, who struggled mightily to forge consensus on a geopolitically historic plan to wean off Russian oil imports over time, were frankly surprised to have the matter opened again by a White House worried about domestic high prices at the gas pump. Annoyed might be a better characterization.

However, in a mark of continued solidarity with the US against Russia, they asked the European Commission to “work with international partners” to find a way to introduce such price caps. This, according to sources in Brussels, could take “quite a while,” with the November G20 summit in Indonesia as a place where such a deal is made – if at all.

For now, EU officials do not expect an agreement on oil price caps any time soon. We suspect, more likely, the idea will simply fade away, to be subsumed by other developments over time.

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