WASHINGTON (AP) — U.S. officials celebrated in early September when key allies agreed to back a bold, groundbreaking plan to restrict Vladimir Putin’s access to cash as he waged war on Ukraine.
The idea seemed simple enough: countries would only pay reduced prices for Russian oil. This would deprive Putin of money to continue his war in Ukraine, but also ensure that oil continues to flow out of Russia and help keep world prices low.
A month later, the Group of Seven, representing some of the world’s major economies, is still trying to execute the plan – a far more complex task than it first appears – and the December 5 deadline to bring together the participants is fast approaching.
In the meantime, the war rages on.
As the United States and European countries have imposed thousands of financial and diplomatic sanctions on Russia, including recently announced sanctions, Treasury leaders say an oil price cap could deliver the most effective blow to the Russian economy, undermining its biggest source of income.
Pushed by Treasury Secretary Janet Yellen, the price cap plan is testing the limits of politics and capitalism. Yellen made a name for herself as the chairwoman of the Federal Reserve who helped steer the United States into the longest expansion in its history. Now it is trying to use global energy markets as a vice to stop a war and prevent oil prices from skyrocketing this winter.
Yellen and his Treasury team have been lobbying their international counterparts on price caps since at least May. The United States has already blocked imports of Russian oil, which were small to begin with.
“This is a whole new way to use financial measures against a global tyrant,” Elizabeth Rosenberg, the Treasury’s head of terrorism financing and financial crimes, said during a recent congressional hearing.
“A price cap coalition requires unprecedented coordination with international partners, as well as a close partnership with global maritime industries, and exceptional resolve in the face of hostile Russian bluster and threats, including the risk that Russia will seek to fight back,” Rosenberg said.
The risks of this new form of economic warfare are immense for the world’s oil supply. If it fails or if Russia retaliates by stopping the export of oil, energy prices around the world could skyrocket. U.S. consumers could feel the ramifications of another spike in gasoline prices.
“I don’t have a crystal ball. I don’t know exactly what Russia is going to do here. There are many different options,” Ben Harris, the Treasury’s assistant secretary for economic policy, said in a recent presentation at the Brookings Institution. He added: “The price cap provides an opportunity for a little relief valve and the hope that these Russian barrels will find the market, but at a reduced price.”
The December 5 deadline for pricing cut-price oil comes just ahead of a wider European year-end embargo on Russian crude oil transported by sea and a comprehensive ban on marine insurance designed to prevent the Russian oil to reach non-European buyers. The embargo and insurance ban could eliminate up to 4 million barrels per day from the world’s daily oil supply, a loss of around 4%.
The Treasury’s hope is that the price cap takes effect first and allows some of this oil to continue to flow through exceptions to the embargo and insurance ban, albeit at prices below market rates.
While Treasury officials and leading economists express confidence that the plan will work — and is already working — some oil analysts are hesitant to try to implement it before winter, in a global economy already battered by shocks. supply and a Europe facing rapidly rising inflation.
Oil is the mainstay of the Kremlin’s financial revenue and has kept Russia’s economy afloat so far during the war despite export bans, sanctions and central bank asset freezes that began with the February invasion.
Before the war, Russia exported about 5 million barrels of oil per day as one of the largest oil exporters in the world. This figure – representing around 9% of global crude exports – has remained largely unchanged despite all the sanctions.
Russia has pledged to take retaliatory measures to offset the impact of the price cap. Last week, Kommersant, a Russian business newspaper, reported that the Kremlin plans to raise $50 billion in additional revenue from taxes on exported energy in response to the plan.
Analysts hope the Russians are bluffing. Deutsche Bank recently assigned a “low probability” for Russia to halt exports and cut its crude price forecast by 10%. The German bank cited the US Treasury
announces that India may have the option to buy from non-EU suppliers if it does not join the price cap coalition, among other factors.
And while it is assumed that China and India will not be part of an official price cap coalition, lower prices paid to Russia by these countries would help achieve the coalition’s goal, according to Treasury officials, getting more oil to market with less revenue for the Kremlin.
Raoul LeBlanc, vice president of energy at S&P Global Commodity Insights, said in some ways the rebates Russia is already offering countries show that a price cap could work.
LeBlanc said the complete loss of Russian oil on the world market “would be catastrophic for the world economy” and that the losses would affect Latin America and much of South Asia the most.
Many European countries are already seeing major impacts of war on their economies without price caps in place. The Organization for Economic Co-operation and Development said last week that the global economy is expected to lose $2.8 trillion in output in 2023 due to war.