The West Wants A Price Cap On Russian Oil. Could It Work?

Curtailing Russia’s energy revenue has been a tough nut to crack for Western governments so far.

After President Vladimir Putin launched a large-scale invasion of Ukraine on February 24, the United States and the European Union imposed sanctions on Russian energy imports in an attempt to undermine the Kremlin’s ability to fund the war.

While the volume of Russian oil and gas output has declined on the back of those sanctions, that has been offset by surging energy prices — driven higher in large part by fear of further supply disruptions from Russia in an already tight market.

Even with Russian oil selling at a steep $30 discount to global market prices of between $100 and $120 due to the sanctions, Putin’s government is still earning more per barrel today than in the months prior to the invasion.

Now, Western nations are working on a new strategy to target the price Russia receives for its oil to curtail revenue while at the same time hoping to avoid deepening the supply crunch, U.S. Treasury Secretary Janet Yellen said on June 20.

The goal is to “push down the price of Russian oil and depress Putin’s revenues, while allowing more oil supply to reach the global market,” she said.

Oil accounts for about one-third of Russia’s federal budget revenues and a sharp drop in its price — by market forces or a price cap — could seriously crimp the government’s ability to finance its war in Ukraine.

U.S. President Joe Biden may discuss the issue with his counterparts at a summit of the Group of Seven leading industrial nations in Germany on June 26-28.

However, some analysts have thrown cold water on the prospects of imposing a price cap, saying it would be difficult to implement and monitor.

“I think they are grasping at straws right now,” said Ed Chow, an energy analyst at the Center for Strategic and International Studies in Washington.

It may “sound good” on paper, “but in practice [it] won’t work,” Chow said.

Yellen seemed to suggest that one way the West could impose the cap is to ban insurance for ships delivering Russian oil above a certain price per barrel.

Europe And Asia

The European Union, the largest consumer of Russian energy, earlier this month formally approved a plan to phase out seaborne imports of Russian oil by December and Russian oil products by February 2023, a move that will force Moscow to look for other markets.

China and India have been snapping up most of the Russian oil that the EU has forgone.

The EU and Britain also agreed to bar their companies from insuring tankers carrying Russian oil, which could potentially limit the amount delivered to Asia, thus worsening the global oil supply crunch and driving prices even higher. The International Group of Protection & Indemnity Clubs in London insures about 95 percent of the global oil shipping fleet, according to Rystad Energy, an Oslo-based research firm.

The new policy under consideration by the G7 would apparently create a carve-out to allow those shipments of Russian oil to continue if below a certain price.

But a price cap on Russian oil might not mean a discount for its buyers. Why not? Because the West is looking for ways not just to deprive Moscow of money it can use to fund the war but to put that money to work for Ukraine.

Amos Hochstein, a senior adviser for global energy security at the U.S. State Department, told a Senate hearing earlier this month that the Biden administration and European allies are looking at a “variety of options” to rebuild Ukraine with Russian energy revenue.

He said the administration wants to make sure that “nobody’s profiteering” from the Western sanctions imposed on Russian energy, a reference to the $30-a-barrel discount India and China are currently receiving.

However, China could help Russia get around the price cap, and presumably any revenue diversion, “by accepting inferior Russian insurance,” Rystad said in a June 23 note.

‘No Return To Profit’

Craig Kennedy, a fellow at Harvard University’s Davis Center for Russian and Eurasian Studies, earlier this year proposed an alternative policy to reduce the Kremlin’s energy revenue while setting aside money for Ukraine’s reconstruction.

Kennedy suggested that Western nations bar all Russian oil imports except those purchased through a specialized body, which would receive the market price from the buyer but pass on only the cost of production to the Russian company, or about $20-$25 a barrel, setting aside the remaining cash into a fund for rebuilding Ukraine.