In late June, the G7 (the United States, United Kingdom, Italy, Germany, France, Canada, and Japan) met for their annual leaders’ summit in Elmau, Germany. After the three-day event, the world’s economic powerhouses settled on a consensus to pressure Russian President Vladimir Putin‘s war-chest: go after Russia’s oil industry by establishing a cap on how much importers can pay for Russian crude. Allegedly the brainchild of U.S. Treasury Secretary Janet Yellen, the price cap aimed to cut Russia’s oil revenue while ensuring global supply wouldn’t plummet.
G7 finance ministers will discuss the specifics of the price cap plan on Friday, Sept. 2, with the goal of unrolling a framework about how it would operate. The concept is a flawless one, in theory. If Washington and its European partners assemble a widespread “buyer’s cartel” and actually enforce it, Moscow would no longer be able to exploit today’s high market prices and could lose out on tens of billions of dollars a year. Russia is expected to make $337 billion from energy exports this year, a 38 percent increase from 2021. And because Russia would still be permitted to export oil to customers around the world, the price cap scheme would prevent an energy crisis that would otherwise result from a full-on Russian oil ban.
Yet the optimal question is whether the plan would work in practice. There are political, legal, and practical reasons for why caution is in order.
First, since the European Union (EU) will be a participant in the price cap, EU member states will need to enter into a whole new negotiation among themselves to determine the specifics. It’s important to note that the price cap is essentially a repudiation of the EU sanctions regime that was announced in early June, which not only placed an import ban on Russian crude but also prohibited EU operators from providing maritime insurance to vessels carrying Russian oil. Those talks were laborious for the EU, which has sought to maintain internal cohesion in the face of Russia’s unjust war in Ukraine. Hungary was able to take advantage of the EU’s desperation for unity, holding out on a deal for weeks until Budapest was granted an exemption to the new rules. The last thing the EU wants is to re-open that negotiation three months after it was closed—particularly when other nations could seek to emulate Hungary’s tactics in order to extract their own concessions.
Second, implementation of a price cap is not as easy as simply dictating a price and assuming the vessels responsible for transporting Russian crude to overseas buyers will comply with it. Any cap will need to be enforced. Because EU and U.K. insurance covers around 90 percent of the world’s tankers, the U.S. and G7 have argued that such a ban could be enforced by withholding insurance from tankers refusing to abide by the cap. But insurers, like most companies, like clarity and are risk adverse. If the rules and procedures end up being murky, the insurers may simply opt out of covering Russian oil deliveries altogether to save themselves the trouble of potential legal challenges. In that case, a significant amount of Russian oil barrels would be removed from the market, hiking prices globally.
A price cap could also have the unintended effect of making Russian crude so inexpensive that buyers will rush to Moscow to sign deals. The net result: Russia scoops up more contracts, attracts more clients and potentially makes more money, mitigating whatever financial squeeze the cap was designed to produce. As Brenda Shaffer of the Atlantic Council told Politico Europe, if the price of a barrel of Russian oil is low compared to alternatives, “It’s the most attractive in the market and suddenly Russia is the darling of the ball everyone wants to dance with.”
Settling on a number could also prove contentious. The cap price would have to be large enough to incentivize Russia to keep pumping at current levels, but low enough to hit Russia’s budget hard. According to some experts, Russia could still make a profit even if crude declined to the $25-$30 a barrel range. This would be bad news for other suppliers, as customers gravitate toward Russia as a source and force them to offer steep discounts to compete. If the choice is between buying at the current market rate of $90-$95 a barrel or at a price that could be more than half that number, who do you think would win out?
Washington and its allies will also have to be cognizant of how Putin will react—and he will react. While there’s an assumption the Russian strongman wouldn’t cut off production entirely (oil is, after all, a cash cow for the Russian federal budget), nobody can say with certainty how Putin will act. A significant decrease in Russian crude production could be an option, which would tighten supply and exacerbate the energy problems the West is already facing. This is precisely the strategy the Russians are using with respect to natural gas, including the surprise announcement of short-term maintenance delays on the Nord Stream pipeline or the reduction of the pipeline’s capacity to 20 percent. The strategy has ballooned natural gas prices in Europe by more than 733 percent over the last 12 months, grossly raising energy bills for average Europeans and forcing the EU to conserve supplies for the coming winter. A similar play, this time with oil, shouldn’t be ruled out.
“A price cap on Russian oil is one of our most powerful tools to address the pain that Americans and families across the world are feeling at the gas pump and the grocery store right now,” Treasury Secretary Yellen said at the end of a G20 finance ministers meeting in mid-July. Soon enough, this theory will be put to the test.
Daniel R. DePetris is a fellow at Defense Priorities and a foreign affairs columnist at Newsweek.
The views expressed in this article are the writer’s own.