How the G7 oil price cap helped choke off revenue for Russia

In early June, at the behest of the Biden administration, German leaders gathered top economic officials from the Group of Seven nations for a video conference with the goal of delivering a major financial blow to Russia.

The Americans, in a series of one-off conversations last year, were trying to get their counterparts in Europe, Canada and Japan to know about an unusual and untested idea. Administration officials wanted to try to determine the price Moscow could charge for each barrel of oil it sold on the world market. Treasury Secretary Janet L. Yellen laid out the plan a few weeks ago at a meeting of finance ministers in Bonn, Germany.

Reception was mixed, in part because other states were unsure how seriously the administration should take it. But the call in early June left no room for doubt: US officials said they were committed to the idea of ​​a cap on oil prices and urged everyone to join. At the end of the month, the G7 leaders signed off on the concept.

As the G-7 prepares to meet again this week in Hiroshima, Japan, official and market data suggest that the untried idea has helped achieve its dual initial goals since the price cap came into effect in December. The ceiling seems to force Russia to sell its oil for less than other major producers, when crude oil prices drop significantly from their levels immediately after Russia’s invasion of Ukraine.

Data from Russia and international agencies suggest Moscow’s revenues have plummeted, forcing budget choices that administration officials say could begin to hamper its war effort. Drivers in America and elsewhere pay much less at the pump than some analysts fear.

Russia oil revenues The International Energy Agency reported last month that March was down 43 percent from a year earlier, despite growth in total export sales volume. this week, The agency reported Russia’s revenue has rebounded slightly but is still down 27 percent from last year. Government tax revenues from the oil and gas sectors are down about two-thirds from last year.

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Russian officials have had to change the way they tax oil production in an apparent effort to make up for some of the lost revenue. They also appear to be spending government money to try to start building their own network of ships, insurance companies and other essentials to the oil trade, an effort that European and US officials say is a clear sign of success.

“The Russian price cap is working, and it’s working very well,” Wali Adeyou, deputy secretary of the Treasury, said in an interview. The money they spend building this ecosystem to support their energy trade is money they can’t spend building missiles or buying tanks. And what we’re going to continue to do is force Russia to make these kinds of hard choices.”

Some analysts suspect the plan works nearly as well as administration officials claim, at least when it comes to revenue. They say the oft-cited data about the prices Russia receives for exporting its oil is unreliable. They say other data, such as customs reports from India, suggest Russian officials may be using elaborate deception measures to evade the cap and sell crude at prices well above the cap.

“I worry that the Biden administration’s desperation to demand that it win the price cap is preventing it from actually acknowledging what isn’t working and taking the steps that might actually help it win,” said Steve Cicala, an energy economist at Tufts University. books About possible evasion under the hood.

The price ceiling was invented as an escape hatch from the financial sanctions that the United States, Europe and others announced on Russian oil exports in the immediate aftermath of the invasion. Those sanctions included an embargo that prevents wealthy democracies from buying Russian oil on the world market. But early in the war, they backfired. They have raised the cost of all oil globally, no matter where it is produced. Higher prices generated record export revenues for Moscow, while pushing US gasoline prices above $5 a gallon and contributing to a decline in President Biden’s approval rating.

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A new round of European sanctions was set to hit Russian oil hard in December. Economists on Wall Street and in the Biden administration have warned that these sanctions could send oil out of the market, sending prices up again. So administration officials decided to try to take advantage of the West’s dominance in the oil shipping trade — including how it is transported and financed — and force a hard bargain with Russia.

Under the plan, Russia could continue to sell oil, but if it wanted access to shipping infrastructure in the West it would have to sell at a steep discount. In December, European leaders agreed to set a ceiling at $60 a barrel. They followed with other covers of various types of petroleum products, such as diesel.

Many analysts were skeptical of its potential for success. A cap that was punitive would have encouraged Russia to severely restrict the amount of oil it pumps and sells. Such a move could push crude oil prices higher. Alternatively, a cap that was too lenient may have failed to affect Russian oil sales and revenues at all.

Neither scenario happened. Russia announced a modest production cut this spring, but has continued to produce mostly at the same levels as when the war began.

Fatih Birol, executive director of the International Energy Agency, called the price cap an important “safety valve” and a crucial policy that forced Russia to sell oil well below record international prices. Treasury officials estimate that Russian oil now trades between $25 and $35 per barrel less than other oil on the global market.

Mr. Birol: “Russia played the energy card, it didn’t win” wrote in the February report. Given that energy is the backbone of the Russian economy, it is not surprising that its difficulties in this area lead to broader problems. Its budget deficit is rising exponentially as military spending and subsidies for its population greatly exceed its income from exports.”

Biden administration officials say there is no evidence of large-scale Russian evasion, and that Mr. Sikala’s analysis of Indian customs reports does not explain the higher cost of transporting Russian oil to India, which is implicit in the customs data.

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There is no disputing that the world has avoided what was particularly the biggest concern of Biden officials last summer: another round of skyrocketing oil prices.

American drivers were paying about $3.54 a gallon on average for gasoline on Monday. That was about $1 less than a year ago, and nowhere near the $7 a gallon price some administration officials feared if the cap failed to prevent a second oil shock from the Russian invasion. Gas prices are a moderate relief for Biden as high inflation continues to hamper his approval among voters.

After rising sharply in the months surrounding the Russian invasion, global oil prices have fallen back to levels in late 2021. The decline is due in part to economic cooling around the world, and has persisted even as major producers such as Saudi Arabia have scaled back production.

Lower global prices have contributed to Russia’s lower revenues, but it’s not the whole story. Reported sales prices for exported Russian oil, known as Urals, have fallen by twice the global price of Brent crude.

The G7 leaders meeting in Japan this week will probably not spend much time putting the cap on, and instead turn to other collective efforts to constrain Russia’s economy and revenues. And the biggest winners from the cap decision won’t be at the top.

“The direct beneficiaries are mostly emerging market and low-income countries that import oil from Russia,” Treasury officials noted in a recent report.

The officials were pointing to a handful of countries outside the Group of Seven — notably India and China — that have used the cap as leverage to pay a discount on Russian oil. Neither India nor China has joined the official capping effort, but it is oil consumers who are seeing the lowest prices from it.

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