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G7 Agreed To Impose a Price Cap on Russian Oil

Context

Finance Ministers from all G7 countries and the European Union announced a plan to impose a price cap on Russian oil exports.

Relevance

GS Paper 2: Bilateral, regional and global grouping.

Mains Question

India can no longer avoid the conclusion that China is the greatest impediment to India’s global ambitions. Discuss the possibility of India joining the G-7 in light of this statement. (150 Words)


Origin : G7

  • The G7 was formed in response to the 1973 oil shocks and ensuing financial crisis.
  • To address the situation following the oil shock, the heads of the world’s six leading industrial nations decided to meet in 1975.
  • The six countries were the United States, the United Kingdom, France, Germany (West), Japan, and Italy.
  • When Canada joined these countries in 1976, the G7 was formed.

Members in Good Standing

  • The current members are the United States, the United Kingdom, Canada, France, Germany, Italy, and Japan.
    • Russia was formally admitted to the G7 in 1998, transforming it into the G8. Russia, on the other hand, annexed Crimea in 2014. As a result, it was removed from the group.
  • As a result, the group was renamed the G7 in 2014.
  • Members of this group are said to have the most developed and advanced economies in the world.
  • The European Union is also a member of the G7.

The Goal of the G7

  • determining the direction of multilateral discourse
  • Developing policy responses to global challenges.
  • Essentially, the G7 serves as a forum for discussing and coordinating solutions to major global issues, particularly those relating to trade, security, economics, and climate change.
  • G7 members have agreed to impose a price cap on Russian oil in order to limit Moscow’s ability to fund the Ukrainian war.
  • The plan, however, excludes Russian gas, on which Europe remains heavily reliant.

Price cap strategy

  • The imposition of a price cap on Russian oil means that countries that sign up to the policy will only be able to buy Russian oil and petroleum products at or below the price cap.
  • The price cap is intended to prevent Russia from profiting from its aggressive war while limiting the impact on global energy prices.
  • US and EU officials have been attempting to persuade countries such as India, China, and Turkey to join the coalition or, at the very least, to support the price cap.
  • According to them, a price cap is in the best interests of all Russian oil buyers because it gives them leverage to negotiate lower purchase prices.

How will it be implemented?

  • For countries that join the coalition, it would simply mean not buying Russian oil until the price is reduced to the cap.
  • Countries that do not join the coalition or purchase oil at a price higher than the cap would lose access to all coalition-provided services.
    • The coalition countries offer insurance, currency payment, facilitation, and vessel clearances for their shipments.
    • As an example, London is a major global centre for maritime insurance.
  • The G7 countries say they want to lower oil prices but not the amount of oil Russia sells in order to control global inflation while harming the Russian economy.
  • Of course, this could only work if all countries joined the coalition.

Russian retaliation

  • Russia has threatened to withhold all supplies if they contradict Russian interests.
  • Speaking at the recently concluded Eastern Economic Forum (EEF) summit, Russian President Vladimir Putin threatened to cut off supplies of gas, oil, and other commodities, causing European countries to freeze.
    • Russia recently announced a halt to all supplies to Europe via the Nord Stream 1 pipeline due to maintenance issues.
    • Experts believe that this action is the result of existing EU sanctions. It has raised concerns about a harsh winter for European countries.

India’s reaction:

  • Western countries have attempted to put pressure on India by asking it:
    • to reconsider its uncritical attitude toward Russia at the United Nations,
    • to reduce oil imports,
    • to halt Russian defence and other purchases, and
    • to avoid the rupee-rouble payment mechanism that allows them to avoid sanctions
  • However, India has yet to comply, and there is little reason to believe that it will soon.
    • At the recently concluded EEF summit, Indian Prime Minister Narendra Modi expressed his desire to strengthen energy ties with Russia and increase India’s $16 billion investment in Russian oilfields.
  • India’s oil imports from Russia, which were negligible prior to the war, have more than doubled.
    • The Indian government’s stance is thought to be motivated by its national interest, which is currently to provide affordable oil to Indian consumers.
  • It is also unclear whether India will bargain with the US to lift sanctions against Iran and Venezuela in exchange for joining the price-control coalition.
    • Under US pressure, India cancelled oil imports from Iran and Venezuela in 2017-18.

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October 2022
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