An oil tanker is moored at the Sheskharis complex, part of Chernomortransneft JSC, a subsidiary of Transneft PJSC, in Novorossiysk, Russia. The European Union has come about with a $60-per-barrel price cap on Russian oil, a key step as Western sanctions aim to reorder the global oil market to prevent price spikes and starve President Vladimir Putin of funding for his war in Ukraine. File image/AP
The Russia war in Ukraine, now in its 292nd day, continues to wage on. Western countries and its allies are trying to exert as much pressure as they can to limit Moscow’s ability to fund its invasion of Ukraine.
Earlier, on 5 December, after months of negotiations, western countries comprising the G7 nations, the European Union and Australia agreed to a price ceiling of $60 per barrel of searborne Russian Urals crude oil. These are some of the biggest sanctions to date, as Europe — once the destination for about half of Russia’s oil exports — further weans itself off Russian energy.
However, India, which has been vocal in calling for a diplomatic end to the war, has reiterated that it will continue to buy oil from wherever it gets a good deal.
Confused about what all this means? What exactly does a does a price cap mean? How does India figure in this? We take a closer look and try to simplify things — from the G7 sanction to where New Delhi stands on the matter.
What is the price cap on Russian oil?
For those who are confused, a price cap is a form of economic regulation that sets a limit on the prices that a provider can charge. Interestingly, price-cap regulation was first developed for the condom industry in the United Kingdom but has since been adopted for a range of utility industries around the world.
As a means to limit Russia’s funding of its war in Ukraine, the G7 countries — the United States, Japan, Germany, Britain, France, Italy and Canada — decided on a $60 price cap on Russian crude oil. The United States and Secretary of the Treasury Janet Yellen had championed the price cap as a way to stanch a sharp rise in energy prices as a result of Europe’s embargo.
Some European countries and Baltic nations, as per Vox, had wanted a lower price cap, but the US and other countries were wary that setting the price cap too low could force Russia to cut production a lot and broadly unsettle the global economy.
Also read: How Russia earned $98 billion from fuel exports in first 100 days of Ukraine war
What this means is that they don’t want to stop the purchase of Russian oil altogether, as this could have cascading effects on the world’s economy.
So, how does it work?
As per the G7 coalition, insurance companies and other firms needed to ship oil would only be able to deal with Russian crude if the oil is priced at or below the cap.
Most of the insurers are located in the European Union or the United Kingdom and could be required to participate in the cap. Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivering it.
It has to be noted here that the price cap covers all seaborne oil; there is an exemption for pipeline gas.
However, the effectiveness and implementation of a price cap like this are untested. Russia is already amassing a fleet of tankers to try to blunt the measures. Moreover, the penalties for carrying oil above the price cap aren’t so stringent. It has been decided that EU operators financing or servicing a vessel for the transport of Russian oil would be prohibited for 90 days. This is scaled back from a lifetime prohibition.
Where does India stand on the issue?
India is a big importer of Russian crude oil and many fear that the price cap could affect India negatively.
In fact, in recent times, India’s imports of crude from Russia has risen significantly. Data by the commerce department shows that before the Ukraine conflict in February, India’s total import of Russian crude was a mere 0.2 per cent. However, this has risen to a record 24.8 per cent from April to September.
India’s purchase of Russian crude has invited criticism from the West, with some stating that New Delhi was aiding Moscow’s invasion in Ukraine.
Also read: Why India purchased the most expensive LNG shipment in history
However, India has stoutly defended its import of crude oil from Russia amid the Ukraine conflict with External Affairs Minister S Jaishankar asserting that New Delhi’s procurement was just one-sixth of the European purchase in the last nine months. The foreign affairs minister’s comments came at a media briefing after talks with visiting German foreign minister Annalena Baerbock.
On 7 December, S Jaishankar had told the members of the Rajya Sabha that India will opt for best deals to buy oil that is in the interest of its people.
Earlier too, on 8 November, External Affairs Minister S Jaishankar had said that buying the Russian oil is to India’s advantage and India will continue doing that.
“The government does not ask Indian companies to buy oil from Russia but it is a sensible policy to get the best deal in the interest of Indian people.”
He further added that India does not stick to just one country for its oil purchase, but it will always opt for the deal amongst all available options.
“If tomorrow the market gives us more competitive options. Again, please do understand. It’s not just that we buy oil from one country. We buy oil from multiple sources, but it is a sensible policy to go where we get the best deal in the interest of the Indian people and that is exactly what we are trying to do.”
Union minister for petroleum and natural gas Hardeep Singh Puri has also stated that India will not be affected by the price cap.
In an interview to BOPrime, he was quoted as saying, “I would say that India does not fear that the West’s proposed price cap could constrain shipping and impede the flow of Russian oil. I have no anxiety about that, and I am sure the market will deal with it.”
When asked about having qualms about buying oil from Russia back in November, he had told CNN‘s Becky Anderson, “Absolutely none, there is no moral conflict, if somebody wants to take an ideological position… We don’t buy from X or Y, we buy whatever is available. I don’t do the buying, it’s the oil companies who do the buying.
In turn, Russia has welcomed India’s stance, with the Russian foreign ministry issuing a statement on 11 December: “The deputy prime minister welcomed India’s decision not to support the price cap on Russian oil, which was imposed on 5 December by the G7 countries and their allies.
Russia’s deputy prime minister Alexander Novak offered cooperation to India on leasing and building large-capacity ships in order to not depend on the ban on insurance services and tanker chartering in European Union and the United Kingdom, the statement said.
Novak described introducing a price cap on Russian oil as an “anti-market measure” which he stressed affects supply chains. “The introduction of a price cap on Russian oil is an anti-market measure. It disrupts supply chains and could significantly complicate the situation in global energy markets. Such non-market mechanisms disrupt the international trading system as a whole and set a dangerous precedent in the energy market,” Novak said in the statement.
With inputs from agencies
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