The finance ministers from the Group of Seven major economies ("G-7") have issued a plan to impose a cap on the price importers pay for Russian oil, in a bid to shrink a key source of revenue the Kremlin uses to finance its war in Ukraine. As described in the G-7 statement, the G-7 countries, along with other allies and partners, plan to ban the provision of services tied to seaborne transportation of Russian-origin crude oil and petroleum products unless purchased at or below a price level determined by the coalition of countries adhering to and implementing the price cap.
The price at which Russian oil will be capped will be discussed further, and its functioning may be somewhat complex. The initiative is expected to hinge on a system whereby importers of Russian oil seeking insurance cover and shipping services from companies based in, or subject to the sanctions requirements of, G-7 and EU countries would need to observe the price ceiling. Russia could, in theory, offer alternative shipping and insurance for some of its oil shipments, but such a system would likely be less effective and more expensive, raising incentives for buyers to opt into the price cap system.
G-7 finance ministers reaffirmed their commitment to enforcing existing restrictions against Russia and pledged to "remain vigilant against sanctions evasion, circumvention and backfilling," while U.S. Treasury Secretary Janet Yellen emphasized in a separate statement that the price cap will "significantly reduce Russia's main source of funding for the war in Ukraine."
The U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") anticipates publishing preliminary guidance on the implementation of the price cap in September. The preliminary guidance will provide a "high-level overview" of this mechanism, including how U.S. persons can comply, in advance of formal guidance and legal implementation to be issued at a later date.
In a statement, the EU Commission noted that the G-7 agreement "builds on and further strengthens" the EU's sixth sanctions package (discussed in more detail in our previous blog post) and noted that the Commission's aim is to work with Member States in order to implement the price cap in the EU in line with the timeline agreed under the sixth sanctions package, namely 5 December 2022 for crude oil, and 5 February 2023 for petroleum products.
The UK's Chancellor of the Exchequer also welcomed the G-7's announcement in a separate statement, although neither the EU or UK has, at the time of writing, indicated whether or when any specific guidance on the implementation of the price cap will be published.
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