The United States and its G7 allies have enacted a novel plan to cap Russian oil prices in 2022, setting two goals. It would limit Russia's ability to profit from energy exports while allowing its oil to continue flowing to international markets. To prevent global price shocks.
A year and a half later, only the latter goal seems to have worked. Energy prices have remained relatively stable around the world, including in the United States, which helped develop the plan. But Russia's war effort in Ukraine has intensified, and it has become increasingly clear that efforts by Western allies to squeeze Russia's oil revenues are stalling.
A variety of factors, including generous enforcement of price ceilings, have enabled Russia to continue to profit from strong oil revenues. The development of a large “shadow” tanker fleet has enabled Russia to largely circumvent that policy. The Russian economy has therefore been more resilient than expected, raising questions about the effectiveness of the coordinated sanctions campaign adopted by the G7.
The Biden administration has argued that this strategy has been effective, arguing that the price cap imposes costs on Russia and forces it to divert funds that would have been used to finance an alternative oil ecosystem in Ukraine. There is.
Treasury Secretary Janet L. Yellen said in an interview Sunday that Russian oil prices are not the only measure of profits, noting that Russia had to invest significant resources in response to the cap.
“It was very expensive for Russia to ship this oil to China and India in terms of acquiring a shadow fleet and providing insurance,” Yellen said on a flight to Europe, before calling a meeting in Germany. , attending international conferences. Finance ministers gather in Italy. “We think it's still working.”
Keeping oil flowing is a key priority for the Biden administration, which wants to avoid the kind of spikes in gas prices that angered American motorists two years ago.
The cap prohibits shipping companies and maritime insurance companies based in G7 countries from handling Russian crude unless it falls below the coalition's $60 per barrel limit set by the end of 2022.
After the law came into effect, the price of Russian crude oil fell below the $60 cap in early 2023, but by the end of last year it was trading above $70 per barrel. As Russia has increased its own supply of tankers and alternative insurance, it has shifted its exports to countries such as China, India and Turkey, which now account for the bulk of its sales. Russia also introduced a so-called price floor this year aimed at extracting more tax revenue from the oil that oil-producing countries sell.
According to a report released this month by S&P Global, 76.6% of Russia's oil exports in April (3 million barrels per day) went to companies that are not based in the G7 or do not receive Western insurance support. It is said that the cargo was transported by a tanker operated by the company. Russian oil exports last month were the highest since December 2022, and tax revenue from oil has doubled since April 2023.
In April, the International Monetary Fund raised its 2024 growth forecast for Russia to 3.2%, noting that most of the country's oil is exported at prices above the $60 cap.
Thanks to Russia's private tanker fleet and alternative insurance services, the impact of price caps is lessened as they do not apply to oil trades using ships or insurance outside the G7 countries. In response to a UK government inquiry, the International Insurance Group said last month that price caps are becoming “increasingly unenforceable as more vessels and associated services enter this parallel trade”.
G7 finance ministers will meet in Italy later this week to discuss price caps as part of continued deliberations on how to tighten sanctions against Russia and provide additional aid to Ukraine. As part of its efforts, it has warned international financial institutions and countries such as China that they could face sanctions if they facilitate the sale or transfer of weapons components to Russia.
However, for now, it seems unlikely that the policy will change significantly.
Energy and sanctions experts said the leakage of the price cap was the result of a design flaw primarily related to U.S. interests in keeping Russian oil flowing.
“It's hard to argue that price caps are working,” said Edward Fishman, a senior research fellow at Columbia University. “It is undeniable that Russia has transported large volumes of non-Western ships and found insurance alternatives to Western insurance sooner than U.S. policymakers thought.”
Fishman, a former State Department official who oversaw Russia sanctions in the Obama administration after Russia annexed Crimea in 2014, said the price cap has a large He pointed out that it contained a loophole. He said that for the cap to be truly effective, the price cap would have to apply to shippers shipping oil valued at more than $60, and buyers would have to face the threat of secondary sanctions.
“Just as Russia can adapt to sanctions, so can the United States and the G7,” Fishman said. “Unfortunately, we haven’t been able to adapt.”
Robin Brooks, a senior fellow in the Global Economic Development Program at the Brookings Institution, said the U.S. should seek lower price ceiling levels and that stricter enforcement could deter evasion and cause a fall in Russian oil prices. Said it was expensive. autumn. But Brooks suggested Europe was to blame for many of the problems with the cap, noting that Greek ships were supporting Russia's oil trade.
“The main problem is that there are a lot of oil tankers that have been sold to shadow fleets,” Brooks said, arguing that shipowners need to document who is buying their vessels. . “The EU is not doing what it should be doing.”
In the United States, the Treasury announced earlier this year that price caps would be more strictly enforced. It announced additional sanctions on Russian vessels and warned of evasion tactics, such as raising shipping costs to hide the price of oil that is actually being sold above the cap.
“We have certainly taken steps to more stringently enforce price caps, both in terms of G7 service providers and stricter documentation requirements,” Yellen said.
Eric Van Nostrand, assistant secretary for economic policy at the Treasury Department, said in a speech in India last month that the new measures had succeeded in increasing the discount rate for Russian crude oil relative to world oil prices. . He also pointed out that the policy has achieved its goal of suppressing oil prices.
“Price caps help maintain a stable supply of energy to consumers and businesses around the world,” Van Nostrand said.
But critics of price caps argue that encouraging Russia to sell oil to China and India will only enrich the Kremlin's coffers and that the United States should pursue tougher oil sanctions similar to those it has imposed on Iran. It is claimed that.
Marshall Billingsley, who served as the Treasury Department's assistant secretary for terrorist financing during the Trump administration, said, “The only way to end this war in a rational way is to defund the foreign currency that keeps Russia's war machine running.'' It’s about depleting it.”
Billingsley described the price cap as a bait-and-switch, saying it “appeared to be doing something without actually impacting the global energy market. In effect, it didn't reduce Russia's bottom line.” It means that,” he added.