Russian oil: payment issues

Subject :Economy

Section: External sector

Details:

Russian oil trade is under sanction of the G-7 countries because of the Ukraine conflict, as per which a price cap of $60 per barrel was decided for Russian crude. The measure was taken in an effort intended to reduce Russia’s ability to finance its war on Ukraine.
Till now India was importing Russian oil at rates below the sanction limit, and was making payments in dollars. This is likely to be a problem as the price of Russian oil is set to exceed the sanction limit of $60 per barrel.
The reason for the price rise is, firstly Russia is reducing the discount at which it was selling its oil driven by increased demand from China, and secondly a reduction in the supply of cheaper varieties of crude oil.
The only viable option in the present situation is to make payments in Rupee, but already Russia is struggling with rising levels of Rupee deposits (at over $2 billion), received due to India’s imports of defence equipment.
As India emerged as a reliable buyer for Russian oil with the country facing sanctions due to its attack on Ukraine, imports to India have reached a record level of $31 billion in 2022-23 from just $2.5 billion in 2021-22 (increased 13 times).

The Group of Seven (G7)

It is an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States; additionally, the European Union (EU) is a “non-enumerated member.”
It is organized around shared values of pluralism, liberal democracy, and representative government.
It originated from an ad hoc gathering of finance ministers in 1973 to address the ‘oil crisis’, the G7 has since become a formal, high-profile venue for discussing and coordinating solutions to major global issues, especially in the areas of trade, security, economics, and climate change.
Russia was a formal member (as part of the G8) from 1997 to 2014.

Price Cap Coalition (PCC)

The members of the Price Cap Coalition (PCC), composed of Australia, Canada, the EU, Japan, the UK, and the US
They have introduced three different price caps, which are currently in force and subject to periodic revision. The mechanism agreed by PCC are:
- one price cap for Russian oil
- Price caps for petroleum products shipped to third countries
- prohibition the provision of financial and other services
This mechanism helps address inflation and keep energy costs stable.
The price caps prohibit operators from members of the PCC to trade, broker or transport petroleum products that originate in or that have been exported from Russia to third countries, unless they are sold at or below the price caps.
They also prohibit the provision of services (e.g. insurance) or financial assistance related to this trading, brokering or transporting, unless the petroleum products are sold at or below the price caps.