In early June, at the behest of the Biden administration, German leaders assembled top economic officials from the Group of 7 nations for a video conference with the goal of striking a major financial blow to Russia.
The Americans had been trying, in a series of one-off conversations last year, to sound out their counterparts in Europe, Canada and Japan on an unusual and untested idea. Administration officials wanted to try to cap the price that Moscow could command for every barrel of oil it sold on the world market. Treasury Secretary Janet Yellen had floated the plan a few weeks earlier at a meeting of finance ministers in Bonn, Germany.
The reception had been mixed, in part because other countries were not sure how serious the administration was about proceeding. But the call in early June left no doubt: US officials said they were committed to the oil price cap idea and urged everyone else to get on board. At the end of the month, the G-7 leaders signed on to the concept.
As the G-7 prepares to meet again this week in Hiroshima, Japan, official and market data suggest the untried idea has helped achieve its twin initial goals since the price cap took effect in December. The cap appears to be forcing Russia to sell its oil for less than other major producers, when crude prices are down significantly from their levels immediately after Russia’s invasion of Ukraine.
Data from Russia and international agencies suggest that Moscow’s revenues have dropped, forcing budget choices that administration officials say could be starting to hamper its war effort. Drivers in America and elsewhere are paying far less at the gasoline pump than some analysts feared.
Russia’s oil revenues in March were down 43% from a year earlier, the International Energy Agency reported last month, even though its total export sales volume had grown. This week, the agency reported that Russian revenues had rebounded slightly but were still down 27% from a year ago. The government’s tax receipts from the oil and gas sectors were down by nearly two-thirds from a year ago.
Russian officials have been forced to change how they tax oil production in an apparent bid to make up for some of the lost revenues. They also appear to be spending government money to try to start building their own network of ships, insurance companies and other essentials of the oil trade, an effort that European and U.S. officials say is a clear sign of success.
“The Russian price cap is working, and working extremely well,” said Wally Adeyemo, the deputy Treasury secretary. “The money that they’re spending on building up 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 types of hard choices.”
Some analysts doubt the plan is working nearly as well as administration officials claim, at least when it comes to revenues. They say the most frequently cited data on the prices that Russia receives for its exported oil is unreliable. And they say other data, like customs reports from India, suggests that Russian officials may be employing elaborate deception measures to evade the cap and sell crude at prices well above its limit.
“I’m concerned 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 who has written about potential evasion under the cap.
The price cap was invented as an escape hatch to the financial penalties that the United States, Europe and others announced on Russian oil exports in the immediate aftermath of the invasion. Those penalties included bans preventing wealthy democracies from buying Russian oil on the world market. But early in the war, they essentially backfired. They drove up the cost of all oil globally, regardless of where it was produced. The higher prices delivered record exports revenues to Moscow, while driving American gasoline prices above $5 a gallon and contributing to President Joe Biden’s sagging approval rating.
A new round of European sanctions was set to hit Russian oil hard in December. Economists on Wall Street and in the Biden administration warned that those penalties could knock oil off the market, sending prices soaring again. So administration officials decided to try to leverage the West’s dominance of the oil shipping trade — including how it is transported and financed — and force a hard bargain on Russia.
Under the plan, Russia could keep selling oil, but if it wanted access to the West’s shipping infrastructure, it had to sell at a sharp discount. In December, European leaders agreed to set the cap at $60 a barrel. They followed with other caps for different types of petroleum products, like diesel.
Many analysts were skeptical it could work. A cap that was too punitive had the potential to encourage Russia to severely restrict how much oil it pumps and sells. Such a move could drive crude prices skyward. Alternatively, a cap that was too permissive might have failed to affect Russian oil sales and revenues at all.
Neither scenario has happened. Russia announced a modest production cut this spring but has mostly kept producing at about the same levels it did when the war began.
Fatih Birol, the 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 benchmark prices. Russian oil now trades for $25 to $35 a barrel less than other oil on the global market, Treasury Department officials estimate. — The New York Times
Jim Tankersley is a White House correspondent for The New York Times, with a focus on economic policy.
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