How the G7 oil price cap has helped choke Russia’s revenues
In early June, at the behest of the Biden administration, German leaders gathered top economic officials from the Group of 7 nations for a video conference with the goal of dealing Russia a major economic blow.
The Americans had tried, in a series of one-off talks last year, to give their counterparts in Europe, Canada and Japan an unusual and untested idea. Administration officials wanted to try to cap the price that Moscow could charge for each barrel of oil it sold on the world market. Treasury Secretary Janet L. Yellen had put forward the plan a few weeks earlier at a meeting of finance ministers in Bonn, Germany.
The reception had been mixed, partly because other countries were not sure how serious the administration was about going ahead. But the talk in early June left no doubt: US officials said they were committed to the idea of an oil price cap and urged everyone else to get on board. At the end of the month, the group of 7 managers signed off on the concept.
As the Group of 7 prepares to meet again this week in Hiroshima, Japan, official and market data suggest the unproven idea has helped meet the first two targets since the price cap took effect in December. The tariff appears to force Russia to sell its oil for less than other major producers, when crude prices are significantly down from levels immediately following Russia’s invasion of Ukraine.
Data from Russia and international agencies suggest Moscow’s revenues have fallen, forcing budget choices that administration officials say could begin to hamper the war effort. Drivers in America and elsewhere are paying far less at the gas pump than some analysts feared.
Russia’s oil revenues in March were down 43 percent from a year earlier, the International Energy Agency reported last month, even as overall export sales volume had increased. This week, the agency reported that Russian revenues had risen slightly, but were still down 27 percent from a year ago. The state’s tax revenues from the oil and gas sectors decreased by almost two-thirds from a year ago.
Russian officials have been forced to change how they tax oil production in an apparent attempt to make up for some of the lost revenue. They also appear to be using government money to try to start building their own network of ships, insurance companies and other key parts of the oil trade, an effort that European and US officials say is a clear sign of success.
“The Russian price ceiling is working, and working extremely well,” Wally Adeyemo, assistant 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 on building missiles or buying tanks. And what we’re going to continue to do is force Russia to have these kinds of difficult choices.”
Some analysts doubt the plan is working nearly as well as administration officials claim, at least when it comes to revenue. They say the most commonly cited data on the prices Russia receives for its exported oil is unreliable. And they say other data, such as customs reports from India, suggest Russian officials may be using elaborate deception schemes to avoid the tariff and sell crude at prices well above the border.
“I’m concerned that the Biden administration’s desperation to claim victory with the price cap is preventing them from actually acknowledging what isn’t working and taking the steps that might actually help them win,” said Steve Cicala, an energy economist at Tufts University. have written about potential evasion under the hood.
The price ceiling was invented as an escape hatch to the economic penalties that the US, Europe and others announced on Russian oil exports in the immediate aftermath of the invasion. These sanctions included bans on preventing wealthy democracies from buying Russian oil on the world market. But early in the war they actually struck back. They raised the price of all oil globally, regardless of where it was produced. The higher prices brought record export earnings to Moscow, while driving U.S. gasoline prices above $5 a gallon and contributing to President Biden’s plummeting approval rating.
A new round of European sanctions should hit Russian oil hard in December. Economists on Wall Street and in the Biden administration warned that these penalties could knock oil out of the market and send prices soaring again. So administration officials decided to try to take advantage of the West’s dominance of the oil shipping trade — including how it is transported and financed — and force Russia into a hard bargain.
Under the plan, Russia could continue to sell oil, but if it wanted access to the West’s shipping infrastructure, it would have to sell at a steep discount. In December, European leaders agreed to set the limit at $60 a barrel. They came with other capsules for different types of petroleum products, such as diesel.
Many analysts were skeptical that it could work. A cap that was too punitive had the potential to strongly encourage Russia to limit how much oil it pumps and sell. Such a move could drive crude oil prices sky high. Alternatively, a cap that was too lenient may not have affected Russian oil sales and revenues at all.
Neither scenario has happened. Russia announced a modest production cut this spring, but has largely continued to produce at roughly the same levels as when the war began.
Fatih Birol, executive director of the International Energy Agency, has called the price cap an important “safety valve” and a crucial policy that has forced Russia to sell oil for far less than international reference prices. Russian oil now trades for $25 to $35 a barrel less than other oil on the global market, Treasury officials estimate.
“Russia played the energy card and it didn’t win,” Mr. Birol wrote in a February report. “Given that energy is the backbone of Russia’s economy, it is not surprising that the difficulties in this area lead to bigger problems. The budget deficit is skyrocketing as military expenditure and subsidies to the population largely exceed export earnings.”
Officials in the Biden administration say there is no evidence of widespread evasion by Russia, and that Mr. Cicala’s analysis of Indian customs reports does not take into account the rising costs of transporting Russian oil to India, which are embedded in the customs data. A White House official told reporters traveling with Mr. Biden in Hiroshima on Thursday that the Group of 7 leaders would adopt new measures to counter price cap evasion at their meeting this weekend.
There’s no disputing that the world has avoided what was privately the top concern of Biden officials last summer: another round of skyrocketing oil prices.
American drivers paid an average of about $3.54 per gallon for gas on Monday. That was down nearly $1 from a year ago and nowhere near the $7 a gallon some administration officials feared if the cap had failed to prevent another oil shock from the Russian invasion. Gas prices are a mild source of relief for Mr. Biden as high inflation continues to hamper his approval rating among voters.
After rising sharply in the months surrounding the Russian invasion, global oil prices have fallen back to late 2021 levels. The fall has been driven in part by economic cooling around the world, and it has persisted even as major producers such as Saudi Arabia have cut the production.
Falling global prices have contributed to Russia’s declining revenues, but that is not the whole story. Reported sales prices for exported Russian oil, known as Urals, have fallen twice as much as the global price of Brent crude.
The Group of 7 leaders meeting in Japan this week are unlikely to spend much time on the roof, instead turning to other collective efforts to limit Russia’s economy and revenues. And the biggest winners from the cap decision will not be at the summit.
“The direct beneficiaries are mostly emerging markets and lower-income countries that import oil from Russia,” the finance ministry noted in a recent report.
The officials cited a handful of countries outside the Group of 7 — notably India and China — that have used the cap as leverage to pay a discount for Russian oil. Neither India nor China joined the formal cap effort, but it is their oil consumers who see the lowest prices from it.