Livemint | Explainer: What is Russia oil price cap? India to examine West proposal

Oct 20,2022

Union Oil Minister Hardeep Singh Puri on Wednesday said that India will examine the price cap on Russian oil proposed by the West. India is averse to joining a US-led global initiative to cap prices of Russian crude oil, two people aware of the matter had said.

Speaking at an industry even in New Delhi, the minister said, “We will have a look at it." As the world’s third-largest oil importer, India’s stand is likely to influence the efficacy of the price cap plan.

What does Russia oil price cap mean?
The group of seven nations, G7 is working to set a price cap on Russian oil. The G7 decided to put such a price cap on Russian oil to limit its oil revenues. These seven nations include Canada, France, Germany, Italy, Japan, the United Kingdom, the United States and the European Union.

The price cap is specifically designed to reduce Russia’s revenues and its ability to fund the war in Ukraine and limit the impact on global energy prices, particularly for low and middle-income countries. Russia has warned that it will snap oil supplies to any country that joins the price cap plan.

Finance ministers of G7 countries on 2 September proposed that oil-related service providers be allowed to transact in Russian seaborne oil and petroleum products only at the price cap or lower.

Russian oil price cap: Yellen reveals expected range
US Treasury Secretary Janet Yellen had earlier said the exact dollar level of a price cap on Russian oil had not yet been determined, but insisted she had not suggested a price in the $60 per barrel range was being actively considered.

She said that there was wide agreement among international finance officials at the annual meetings of the International Monetary Fund and World Bank that Russia should stop its war against Ukraine, which is having serious negative consequences for the global economy.

Yellen told a news conference the exact level of the oil price cap would be determined together with other countries in the coalition in line with several benchmarks and could be adjusted. No decision had yet been made, she added.

On Wednesday, Yellen said that a price cap on Russian oil exports in the $60-a-barrel range would likely be sufficient to reduce Moscow's energy revenues while allowing profitable production.

Consequences of Russian oil price cap
Russia's Deputy Energy Minister Pavel Sorokin had said that the price cap on Russian oil suggested by Western countries would harm the whole oil market.

Speaking at the Moscow Energy Week conference, Sorokin said that Russia would not cooperate with countries that impose a price cap.

Meanwhile, Russian deputy prime minister Alexander Novak also warned that the European Union's plan to impose a price cap on Russian oil as part of fresh sanctions on the country for its war on Ukraine can have a ‘detrimental effect' on global oil markets. 

"Such a tool disrupts all market mechanisms and can have a very detrimental effect on the global oil industry," Novak said. 

India may not join US-led push on Russian oil price cap
A government official, on condition of anonymity, said that Russia has threatened to stop supplies to anyone participating in the plan led by the United States on price cap of Russian crude oil. 

“Overall, the way the US pitches is that a price cap is also good for India. On the other hand, Russia has threatened to stop supplies to anyone participating in this plan. That doesn’t leave us anywhere. In that case, why would we want to be part of it? The deal here is that we have to balance our interests," the official said. 

Russia, which has never been a major oil supplier to India, emerged as the third largest supplier to the energy import-dependent nation in FY23, as it snapped up supplies shunned by many countries. 

India gets Russian oil at an average discount of around $15-20 per barrel on a delivered-at-place (DAP) basis, wherein the seller bears the transportation risk for delivering at the designated port. In the current fiscal till August, India imported crude oil worth $11.41 billion from Russia, shows data from the Union ministry of commerce and industry.