On Sunday, G7 nations said they were standing with Ukraine for “as long as it takes” in their fight against Russia. On Monday, they translated those words into action with a plan to cap the price of Russian oil, depriving Vladimir Putin of a key revenue source.
What happened: G7 countries pledged to work toward fixing the price of Russian oil on the global market by securing an international agreement to only buy below a price cap. Officials are still determining the exact plan, but it would likely involve enforcing the price cap via certain services necessary for trading oil.
- For example: If oil was being sold above the cap, insurers—most of which are based in Europe—could be prohibited from insuring its shipment, effectively blocking it from being moved around.
G7 officials hope the impact of the price cap would be two-fold, limiting Russia’s oil revenue and lowering astronomical energy prices for Western consumers.
Plus: Following a few close calls, Russia is heading for a much-ballyhooed debt default after failing to pay ~US$100mn worth of interest on government bonds.
- In the short term, this means essentially nothing. The market has already adjusted to the long-expected default and Russia has already been cut off from borrowing, no bad credit rating necessary. But there could be long-term effects after the war ends that will make recovery difficult.
Why it matters: The endless Western sanctions on Russia have produced mixed results thus far. Sure, the country’s economy is projected to shrink ~10% this year (and citizens may never be able to eat a real McDonald’s Big Mac again) but Russia has been able to prop itself up through energy revenue, the profits of which have helped make the ruble the best-performing currency of the year. That could change if the G7 can put a global ceiling on the price of Russian oil.