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Economic warfare

At the meeting in Germany, the leaders are inching towards an agreement to begin the process of imposing price caps on Russian oil.

Statesman News Service | New Delhi |

It often happens that a clash of shields gradually gets transformed to economic warfare. So it has been with Russia’s invasion of Ukraine. Four months after Ukraine was invaded on 23 February, the Group of 7 is seemingly poised to turn the screws on Russia. At the meeting in Germany, the leaders are inching towards an agreement to begin the process of imposing price caps on Russian oil. Also on the anvil are other new economic penalties on Moscow in order to support Ukraine. The agreement on oil, which US Treasury Secretary, Janet L Yellen, has pushed aggressively in recent weeks, will attempt to limit how much more Russia can earn from every barrel of oil that it sells on the global market.

This is aimed at reducing the fossil fuel revenues that Russia is depending on to finance its war effort. It will also try to stabilize global oil markets. Hopefully, this will bring down prices by ensuring that Russian oil continues to flow to consumers worldwide even as wealthy democracies increasingly impose import bans on Russian oil in their countries. The fact of the matter must be that even with an agreement in principle, the finance ministers of G7 countries will have to work out details of how the plan will be implemented. A final agreement would also require complex discussions that would probably include private companies, notably insurance entities and major financial firms, besides countries outside the United States and Europe that import oil from Russia.

On Monday, US officials were cautiously optimistic that negotiators could work rapidly to set the details of the plan once G7 leaders finalise an agreement in principle. “I think it can be done relatively quickly,” Jake Sullivan, President Biden’s national security adviser, told reporters at the summit. America has already introduced a ban on Russian oil, and European allies have signaled their intent to prohibit the bulk of Russian oil and to reduce gas imports by the end of the year. One major feature of the paradigm must be that any price caps not interfere with existing bans. Officials in the United States do not want those bans to eventually force barrels of Russian oil off the global market each day.

This could increase the already high global prices and further fuel inflation for American consumers and their counterparts the world over. They are instead hoping to leverage the fact that western banking, insurance and shipping companies facilitate much of Russia’s oil exports to the rest of the world, and to use those industries as a choke-point to bring down the price of Russian oil. There is, however, a contradiction here. While Russia’s exports have fallen drastically, its revenues from oil sales have been on the rise. This has compelled G7 leaders to look for ways to both reduce Russian revenues and relieve energy price pressures.