G7 aims to hurt Russia with price cap on oil exports

G7 leaders meeting for a summit in the Bavarian Alps are seeking a deal to impose a “price cap” on Russian oil as the group works to curb Moscow’s ability to finance its war in Ukraine.

Talks on the idea were set to continue overnight having begun on Sunday in the luxury resort of Schloss Elmau, where leaders want to enlist a range of countries beyond the G7 to put a ceiling on the price paid for Russian oil.

They hope that a cap would limit the benefit to the Kremlin war machine of the soaring price of crude while cushioning the impact of higher energy prices on western economies.

The idea has been strongly promoted by the US and recent comments by German officials suggest Berlin is also coming around to the idea.

Officials said that Mario Draghi, the Italian prime minister, told his fellow G7 leaders that energy price caps were needed because “we must reduce the amount of money going to Russia and get rid of one of the main causes of inflation”.

On Monday caps will be debated with a broader group as the leaders of Germany, the US, UK, France, Italy, Japan and Canada are joined by “partner” countries invited to the summit. They include India, which has become a big buyer of discounted Russian oil since the invasion of Ukraine, as well as Argentina, South Africa, Senegal and Indonesia.

Charles Michel, president of the European Council, said the EU was ready to decide with its partners on a price cap but stressed the need for a “clear vision” and awareness of possible knock-on effects. “We want to make sure the goal is to target Russia and not to make our life more difficult and more complex,” he said.

A senior German official said “intensive discussions” were under way on how a cap would be implemented and work with western and Japanese sanctions. “The issues we have to solve are not trivial, but we’re on the right track towards coming to an agreement,” he said.

The EU in May agreed to a phased-in ban on seaborne Russian oil shipments while temporarily allowing crude deliveries via pipeline to continue. The US has already banned Russian oil imports and the UK plans to phase them out by the end of this year.

Energy executives warn that Russia could cut oil supplies sharply in response to any attempt to impose a price cap or make further cuts to gas exports to Europe.

As the G7 leaders met, Russia fired missiles at residential areas of Kyiv for the first time in weeks, damaging an apartment building and a kindergarten in an attack US president Joe Biden condemned as an “act of barbarism”.

UK prime minister Boris Johnson on Sunday reiterated the need to maintain consensus, warning of “fatigue” among “populations and politicians”.

In a mark of solidarity with Ukraine, its president Volodymyr Zelenskyy has been invited to join the summit by video link on Monday.

The economic backdrop of the G7 meeting has been shaped by a war that has pushed up food and energy prices and increased fears of a looming recession. The blockade of Ukrainian ports has raised concern over food shortages in developing countries while Russia’s decision to cut gas supplies to Europe is threatening a continent-wide energy squeeze.

Host Olaf Scholz, the German chancellor, said all the G7 states were worried about the “crises we currently face”. But he said he was convinced the G7 would send a “very clear signal of unity and decisive action”.

The leaders are also targeting China. Biden said the G7 had built on a deal first announced in Cornwall a year ago to offer infrastructure funding to poor countries as an alternative to China’s Belt and Road Initiative.

“Collectively we aim to mobilise nearly $600bn from the G7 by 2027,” he said. The programme now has an official name — the Partnership for Global Infrastructure and Investment — and will focus on funding for health, digital connectivity, gender equality, and climate and energy.

He said it would let communities around the world “see for themselves the concrete benefits of partnering with democracies”.

Ursula von der Leyen, president of the European Commission, said the EU would mobilise €300bn by 2027. The aim, she said, was to “show the world that democracies, when they work together, provide the single best path to deliver results”.

As part of efforts to raise the economic pressure on Russia, Britain, Canada, Japan and the US announced moves to ban imports of Russian gold. “We need to starve the Putin regime of its funding,” said Johnson.

The idea of an oil price cap comes at a time when the high price of crude means Russia’s revenues from oil exports have not necessarily declined despite western restrictions on Russian oil imports.

Concern is mounting that attempts to ban ships carrying Russian oil from accessing western insurance markets later this year could drive global oil prices up to unprecedented levels. The International Energy Agency warns it could contribute to the shutdown of more than a quarter of Russia’s pre-invasion production.

Under the price-capping scheme, Europe would limit the availability of shipping and insurance services that enable the worldwide transport of Russian oil, mandating that the services would only be available if the price ceiling was observed by the importer. A similar restriction on the availability of US financial services could give the scheme added impact.

Scholz has stressed that the concept would need widespread buy-in around the world. It would also require the EU to amend its ban on insuring Russian crude shipments — introduced with the ban on seaborne oil imports — something that needs the buy-in of all 27 EU states.

The UK would need to come on board, given it is the home of the Lloyd’s of London insurance market. The EU and UK already agreed to co-ordinate on an insurance ban, but London has not finalised its scheme.

Additional reporting from Jasmine Cameron-Chileshe