Price cap on Russian oil: What stand will India take?

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US Treasury Secretary Janet Yellen will visit New Delhi on November 11 to hold a bilateral meeting with Indian Finance Minister Nirmala Sitharaman to discuss India’s assumption of the G20 presidency.

While Yellen is traveling primarily to co-chair the US-India Economic and Financial Partnership (EFP) dialogue, India’s oil purchases from Russia amid the latter’s invasion of Ukraine may be an important topic of discussion. Ahead of her visit, Yellen has said that India will “benefit” from the proposed price cap on oil, explaining that the US move is only aimed at ensuring Russia does not “profit unduly” from the war by enjoying prices that have soared largely because of the invasion.

On September 2, the group of seven advanced economies (G7) had agreed to a future implementation of a price cap on oil exports from Russia to limit its largest source of income.

The G7, though, had not announced the price ceiling at the time and said that it invites all countries to provide input.

“Russia has said it will not supply oil to the nations that impose a price cap. This will distort the market, which has been tight for a year because of the curtailment of supplies in terms of supply-demand equilibrium and would elevate prices. So, it’s kind of a self-defeating proposition,” said Hitesh Jain, Lead Analyst, Yes Securities.

What is a price cap and how will it impact Russia?

A price cap — generally established by governments — is implemented to regulate the price of goods or services by limiting or setting its maximum price.

The G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, with the European Union as a “non-enumerated member”. The inter-governmental forum had agreed on imposing a price cap on Russian oil while allowing it into the market to limit the impact on global prices.

According to the G7 decision, transportation services such as shipping and insurance will be allowed for oil exports from Russia only if oil is purchased below or at the price cap.

The G7 plans to introduce the price cap on December 5, which is when the EU will also ban seaborne imports of crude oil from Russia.

Russia’s stand

Moscow had responded by saying that it would stop selling oil to countries that impose a price cap on Russian oil, destabilising global oil markets.

“Russia may stop supplies to countries imposing the cap, and hypothetically in case the supply of Russian crude is restricted to a considerable extent, international oil prices may rise substantially, which would not be palatable to most countries that are already grappling with high inflation,” said Prashant Vasisht, Vice President and Co-Head – Corporate Ratings, ICRA Limited.

Where does India stand?

The ambitious price cap on Russian oil by the G7 and the EU faces several challenges, including gaining support from other countries, such as China and India, and risks to the international oil market.

Union Minister for Petroleum and Natural Gas Hardeep Singh Puri has often said that India will examine the prospect of a price cap on Russian oil and will respond according to its supreme national interest.

Defending India’s purchase of Russian oil, Puri has also said there was no moral conflict in buying Russian oil and that the government has to ensure that consumers are supplied with energy.

What are India’s options?

Several countries, including China, have not yet extended support for the price cap, defeating the G7’s goal of paralysing Russia’s economy.

“A price cap would be effective if almost all consuming countries agreed to the same. China would most likely not cooperate on this issue, and India is yet to make its stand clear,” said Vasisht.

“The price cap is proposed to be imposed by denying maritime services, such as shipping, insurance, etc., to cargoes procured at prices beyond the price cap. However, other countries, such as China, could offer such services,” he added.

Experts believe that India might not abide by the price cap as it is receiving oil at discounted price from Russia.

“India is trying to walk a tightrope in terms of aligning its own interests and having a good rapport with the West. External Affairs Minister S Jaishankar has clearly proclaimed that our actions are independent and will be India-centric. India is an energy consumer, with 85 percent of its needs dependent on imports. Therefore, I don’t think that India will abide by the price cap,” said Jain.