price-cap-on-russian-oil

Context: Recently, G-7 countries and European Union announced plan to implement comprehensive prohibition of services which enable maritime transportation of Russian-Origin Oil and petroleum products.

Do you know?

  • Nord Stream consist of 2 pipelines, which have two lines each.
  • Nord Stream 1 was completed in 2011 and runs from Vyborg in leningra (Russia to Lumbin near Greifswald, Germany.
  • Nord Stream 2 runs from Ust-Luga in Lenigrad to Lumbin which complted in September 2021.
  • Both the pipelines has combined capacity of 110 billion cubic meters of gas to Europe.

About Price Cap Plan:

It is a form of sanction proposed by western countries against Russia for its invasion on Ukraine, as well as Belarus for its support to Russia.

The Group of Seven (G-7) countries have also been trying to convince key South Asian economies such as India, China to join coalition or support price cap which would be in interests of all oil buyers from Russia as it will give them leverage to lower purchase prices.

 

Process of Enforcement of Plan:

  1. Countries that join coalition will not buy Russian oil unless price is reduced to where cap is set.
  2. Countries who don’t join the coalition or buy oil higher than cap price will lose access to services provided by coalition countries such as insurance, currency payment, facilitation and vessel clearances for their shipments.
  3. The price-cap is expected to be finalized in G-20 Summit in upcoming November 2022.

Russia’s Response:

  1. Russian President indicated that the country may not “supply at all” creating scarcity of oil in market as G-7 are major consumers of oil and could sky-rocket the prices of oil which will increase the inflation and increase stress on distressed economies such as UK, US who are suffering from life-time high inflation and unemployment.
  2. Recently, Russia has stopped Natural Gas supplies through Nord Stream 1 pipeline citing maintenance work. On average basis, the pipeline is only running at 20% capacity in last weeks.

India’s stance:

  1. So far, India has not obliged to boycott Russia or support price-cap plans and rather used Rupee-Ruble payment mechanism to circumvent sanctions.
  2. In Eastern Economic Forum, Prime Minister of India stated India wants to strengthen ties with Russia in energy field and boost $16 billion investments in Russian Oil fields.
  3. India which imported miniscule amount of oil prior to the war has increased 50 times.
  4. In a statement, Finance Minister of India stated importing Russian oil was part of Inflation management strategy.

India is not client state of any great power or alliance and retains the right to take policies based on pragmatic realism and core national interests. India opted to adopt neutral position docked in strategic autonomy to keep diplomatic channels open on both sides.