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The energy battle between Russia and the West escalated dramatically Friday, with Western countries making a concerted push to cap the prices of Moscow’s oil and gas exports, while Russia announced it won’t be restarting the crucial Nord Stream pipeline.
Finance ministers from the G7 group of industrialized democracies called for devising a system that would only allow the sale of Russian oil at below-market prices. The EU Commission president also called for capping Russian gas prices. The aim is to limit the Kremlin’s income from selling fossil fuels, which helps finance its invasion of Ukraine
Within hours, Moscow hit back. Gazprom announced an indefinite shutdown of its vital Nord Stream gas pipeline to Germany, a move likely to be seen as a fresh economic assault on the European Union by the Kremlin.
Friday’s rapid trading of blows between Russia and the West over energy shows how high the stakes now are. Western governments are grappling with an energy crunch that’s driving inflation, while at the same time seeking to pile maximum pressure onto Moscow by targeting Russian fossil fuel exports.
Russia, meanwhile, has benefited from record prices and hopes to hurt Western economies further by cutting supply.
“The price cap is specifically designed to reduce Russian revenues and Russia’s ability to fund its war of aggression whilst limiting the impact of Russia’s war on global energy prices,” the G7 ministers said in a statement after their virtual meeting.
On the same day, European Commission President Ursula von der Leyen said she was “firmly convinced” of the need to cap the price of Russian gas exported via pipeline to the EU — something the bloc wants to do both to squeeze Russia financially and to rein in soaring energy prices at home.
“A gas price cap can be proposed at European level,” she said.
It’s an effort to bring order to global energy markets that have been wildly destabilized by Putin’s invasion of Ukraine over six months ago.
There’s no sign that Russia is willing to play along.
The Kremlin warned it will stop selling oil to companies taking part in the G7 scheme, and Gazprom announced it won’t be restarting the Nord Stream pipeline to Germany on Saturday as had been planned.
The Russian gas export monopoly cited maintenance issues on the undersea pipeline. “Until the equipment malfunctions are corrected, gas transport to the Nord Stream gas pipeline is completely stopped,” it said.
Despite efforts to hinder Moscow’s energy exports — the mainstay of the country’s budget — a combination of high dependency on Russian energy in many EU countries, and strong demand from countries such as India and China, hasn’t stopped the flood of cash into the Kremlin’s coffers.
Although Russian oil exports fell in June, the country still earned $20.4 billion for the month, a 40 percent increase on the same month last year, according to the International Energy Agency.
The EU has balked at banning Russian natural gas — which last year accounted for 40 percent of the bloc’s imports — but has pledged to minimize its dependence. However, the Kremlin has cut off or limited exports to a dozen EU countries, and imports at the end of August were 68 percent lower than at the same point last year, according to the Bruegel think tank.
Nord Stream has been running at only 20 percent of its capacity in recent weeks, and Berlin is increasingly pessimistic about any return to normalcy.
“What I do expect is that we cannot rely in any way on Russia, or on Gazprom,” Germany Economy Minister Robert Habeck said Thursday.
However, Gazprom isn’t suffering; gas prices are about 10 times higher than a year ago, and it posted a record $41.3 billion net profit in the first half of this year.
That’s prompting the EU, the U.S. and other countries to work on hampering those earnings.
The EU’s sixth package of sanctions called for a complete ban on the import of seaborne Russian crude oil by December 5 and for refined products by February 5 — with exemptions for countries like Hungary that are heavily dependent on oil imports via pipelines. The G7 effort would dovetail with the EU timetable.
Last year, the EU imported €71 billion in Russian oil and oil products. The United States, which buys much less Russian oil, imposed its own ban in March.
The G7 plan calls for a broad coalition of countries to set a below-market price for Russian oil — the key is to find a level at which Russia will keep pumping but that is low enough that it doesn’t earn huge profits.
The plan would rely on refusing Russia access to the vital London insurance market, which covers 95 percent of the global oil shipping industry, if it does not respect the price cap. A lot of Russian crude is being shipped using tankers from countries like Greece, and such trade could be hampered by insurance restrictions.
Oil tankers are “central to everything,” said Robin Brooks, chief economist for IIF, a global financial services industry association. “And so if you want to enforce an embargo or if you want to enforce a price cap, you have to do it with the tankers. Otherwise it’s not credible.”
The ownership of oil tankers is far from straightforward, but according to Brooks’ analysis, 55 percent of the oil tanker capacity that sailed out of Russia between March and August had Greek beneficial owners — compared with 35 percent in the same period in 2020 and 2021. Because sanctions aren’t yet in effect, there is nothing illegal about such activity, although Ukrainian President Volodymyr Zelenskyy has criticized Greece’s role in shipping Russian oil.
The G7 goal is to make such shipments much less lucrative for Russia.
“Today, the G7 took a critical step forward in achieving our dual goals of putting downward pressure on global energy prices while denying Putin revenue to fund his brutal war in Ukraine,” said U.S. Treasury Secretary Janet Yellen.
The EU is also looking to wean itself off Russian gas. Soaring prices are having a knock-on impact on electricity prices, fueling inflation and causing growing political instability across the Continent.
EU energy ministers will hold an emergency summit to tackle the issue on September 9, and there are growing calls to cap Russia’s natural gas earnings.
“I think that this is something we certainly need to take into consideration … the question is to what extent we consider this something that we can afford,” Spain’s Ecological Transition Minister Teresa Ribera told POLITICO.
The European Commission spelled out its thinking on the energy price emergency in a draft paper obtained by POLITICO.
Moscow is incensed at the idea of price caps, and Dmitry Peskov, the Kremlin spokesperson, warned that Russia will halt exports to countries joining the effort to set such price limits.
“We simply will not cooperate with them as regards oil on such non-market principles,” he said.
But even if Russia stops exporting oil to countries setting a cap, it “will still impact their revenues” since it might force Moscow to put a discount on sales to other countries, predicted Simone Tagliapietra, a fellow at Bruegel.
He also said it might be worthwhile to minimize Russia’s gas earnings, “because it is clear that Russia might cut off all the supplies, in any case.”
Wilhelmine Preussen, Hanne Cokelaere and Victor Jack contributed reporting.
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