As winter deadline nears, G7 still working out how to impose Russian oil price cap

WASHINGTON (AP) — U.S. officials celebrated in early September when top allies agreed to back a bold, never-before-attempted plan to limit Vladimir Putin’s access to cash while he wages war on Ukraine.

The idea sounded simple: the countries would only pay reduced prices for Russian oil. That would deprive Putin of the money to continue his war in Ukraine, but would also keep oil flowing out of Russia and help keep global prices down.

CONTINUE READING: The G7 promise to introduce a price cap on Russian oil

A month later, the Group of Seven, which represents some of the world’s leading economies, is still pondering how to carry out the plan – a far more complex task than it might first appear – and the December 5 deadline for the line-up of participants is fast approaching expired.

Meanwhile the war goes on. The Kremlin is mobilizing another 300,000 troops to join the invasion of Ukraine, and Putin has annexed four Ukrainian regions after Kremlin-orchestrated referenda that the West denounced as hypocrisy.

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And while the US and European countries have imposed thousands of financial and diplomatic sanctions on Russia, including recently announced penalties, Treasury Department leaders say an oil price cap could deal the most effective blow to the Russian economy and erode its biggest source of revenue.

The price cap plan pushed by Treasury Secretary Janet Yellen is testing the limits of statecraft and capitalism. Yellen made a name for himself as Chair of the Federal Reserve, which helped lead the US into the longest expansion in its history. Now she’s trying to use the global energy markets as a vise to stop a war and keep oil prices from skyrocketing this winter.

CONTINUE READING: The US imposes new sanctions on Russia as tensions rise over Ukraine

Yellen and her team at the Treasury Department have been lobbying their international colleagues for the price cap since at least May. The US has already blocked Russian oil imports, which were initially small.

“This is a whole new way of using financial action against a global tyrant,” Elizabeth Rosenberg, Treasury Department director for terrorist financing and financial crime, said at a recent congressional hearing.

“A price-cap coalition will require unprecedented coordination with international partners, as well as a close partnership with the global maritime industry and extraordinary determination in the face of hostile Russian bluster and threats, including the risk that Russia may seek retaliation,” said Rosenberg.

The risks of this new form of economic warfare for the global oil supply are immense. If it fails or Russia halts oil exports, energy prices around the world could skyrocket. US consumers could feel the effects of a further hike in gasoline prices.

“I don’t have a crystal ball. I don’t know exactly what Russia will do here. There are many different options,” said Ben Harris, Assistant Treasury Secretary for Economic Policy, during a recent Brookings Institution presentation. He added: “The price cap offers an opportunity for a bit of a release valve and the hope that these Russian casks will find the market, but at a reduced price.”

The December 5 deadline for pricing concessionary oil comes just ahead of a broader year-end European embargo on Russian crude oil shipped by sea and a total ban on shipping insurance aimed at preventing Russian oil from reaching buyers outside of Europe. The embargo and insurance ban could cut up to 4 million barrels a day from the world’s daily oil supply, a loss of about 4%.

Treasury is hoping the price cap will kick in first, allowing some of that oil to continue flowing via exemptions from the embargo and the insurance ban, albeit at prices below market prices.

While Treasury officials and leading economists are confident the plan will work — and is already working — some oil analysts are wary of implementing it before winter, in a global economy already battered by supply shocks and a Europe grappling with a rapidly changing global economy facing rising inflation.

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The unknowns are too many, they say.

“The wildcard factor for me is what the Russians are doing because the Russians have made it clear that they don’t want to play on price caps,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.

“We should at least prepare for that,” she said, “so they can hold back oil.”

Ed Morse, head of resource research at Citi Group, recently said at the Brookings Institution, “It’s an experiment unprecedented in the history of the world. I think it’s bad judgment to do that at this point.

Oil is the main pillar of the Kremlin’s financial revenues and has kept the Russian economy afloat so far in the war, despite export bans, sanctions and the freeze on central bank assets that began with the February invasion.

Before the war, Russia, as one of the largest oil exporters in the world, exported around 5 million barrels of oil per day. That number — which accounts for around 9% of global crude oil exports — has remained largely unchanged despite all the sanctions.

Russia has promised to retaliate to offset the effects of the price cap. Last week, the Russian business newspaper Kommersant reported that the Kremlin is considering additional revenues of $50 billion from taxes on exported energy in response to the plan.

Analysts hope the Russians are bluffing. Deutsche Bank recently ranked a “low probability” of Russia halting exports and lowered its forecast for crude oil prices by 10%. Among other things, Deutsche Bank cited the US Treasury Department’s announcement that India could have the flexibility to buy from non-EU suppliers if it does not join the price cap coalition.

And while China and India are not expected to be part of an official price cap coalition, lower prices those nations pay to Russia would help meet the coalition’s goal, Treasury officials say, by adding more oil to market with less revenue for the Kremlin. Russia is already signing long-term deals to limit the loss of potential oil revenues.

Raoul LeBlanc, vice president of energy at S&P Global Commodity Insights, said that the rebates Russia is already giving countries do show in some ways that a price cap could work.

LeBlanc said the complete loss of Russian oil from the world market “would be catastrophic for the global economy,” and losses would hit Latin America and much of South Asia hardest.

CONTINUE READING: World trade suffers as Russia continues attacks on Ukraine

Many European countries are already seeing a major impact of the war on their economies, with no price cap 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 because of the war.

On other energy issues, European Union energy ministers on Friday imposed a tax on windfall profits from fossil-fuel companies but failed to agree on a price cap for natural gas.

The Treasury is navigating a variety of tricky questions as it works to implement the oil price cap plan. Among other things: figuring out what the price rebate the G-7 and others would impose on Russian oil, how the price cap would interact with the impending embargo and insurance ban, how companies would conduct business if they tried to avoid sanctions , and how to prevent Putin from circumventing any cap.

Ben Cahill, a senior fellow at the Center for Strategic and International Studies, said he believes the price cap is “better than the status quo” — the expected European embargo on oil and the ban on marine insurance. But, Cahill adds, it will introduce complexities in the marketplace that could drive up the cost of doing business.

“It’s a big gamble,” he said.