Yahoo Finance Team Biden touts Russian oil caps. Putin? He's meeting with China to get around them.
It was a bit more than six months ago when the G-7 announced a novel plan to try and cap the price of Russian oil worldwide.
The idea has faced skepticism, but new data has allowed Biden officials to say with increased certainty that the effort has cut deeply into Russian President Vladimir Putin's bottom line. Still, their victory lap was quickly tempered Tuesday by an announcement from Russia - possibly bolstered by China - of new efforts to get around the price limits.
The Russian leader put the price cap in his crosshairs Tuesday saying at the end of his closely-watched state visit with Chinese President Xi Jinping this week that he wants to resume "uninterrupted" oil imports between the two nations, according to Russian state media.
Putin added that energy cooperation was discussed at length during the two days of talks this week and could include both new oil cooperation and a natural gas pipeline. Xi also appears to be on board as his country's economy continues to rev up following COVID lockdowns with Chinese state media touting efforts to "jointly safeguard the energy security of the two countries."
The Western oil price cap—which is actually three different price caps depending on the type of oil—has the dual goals of stopping Russia from funding its war while keeping the oil flowing. The plan was developed by Treasury Assistant Secretary for Economic Policy Ben Harris and others with the idea of using sanctions on the energy services provided by the G-7 countries—things like the insurance that oil tankers need to travel, or trade financing—as a lever to force Russia to abide by a price cap.
Zongyuan Zoe Liu, Council on Foreign Relations Fellow for International Political Economy, told Yahoo Finance Live Monday that energy was a key agenda item from the visit as Russia and China both try to break free of Western restrictions including an effort towards "the use of non-dollar currencies in the pricing and the settlement of energy."
Putin has also discussed the currency issue Tuesday saying it will allow Russia and China to "be protected from the influence of third countries."
Evidence that the caps are working?
This week's moves against the West’s energy sanctions—which include both the price cap and an EU ban on oil that began in February—come after an International Energy Agency (IEA) report delivered good news to the White House. It found that while the price cap hasn't slowed down the Russian exports needed to help fuel the global economy, it has cut the Kremlin’s energy tax revenues by 42% since last February.
Megan Apper, a Treasury spokesperson, told Yahoo Finance in a statement that the IEA report “underscores that the price cap is working in achieving its duel goals.”
David Wessel, a senior fellow in Economic Studies at the Brookings Institution who has tracked the issue closely, added that “whether it has worked perfectly or not, it worked a whole lot better than the critics said.”
But, he said in a recent interview, “it's not clear that it had any effect whatsoever on Russia's conduct of the war. So that seems like a rather unfortunate detail.”
The cap, which currently sits at $60 per barrel, has even impacted the approximately 75% of Russian oil exports that don't use Western services because it gives importers everywhere more leverage.
Importers in places like China, India, Indonesia “never have to sign an oil price cap,” Wessel said, but are nevertheless profiting from it at the expense of Russia because, he added noting the pun, they have Russian exporters "over a barrel."
How the cap works
Whatever happens with Russia and China’s burgeoning alliance on the issue, experts say the cap has proven to be a durable economic lever—so far at least.
“We announced this in the fall and we were called lots of nice things on Twitter by experts who said, you don't understand how commodity markets work,” wryly recalled Assistant Secretary Harris during a recent appearance at the American Enterprise Institute.
“No, we actually do understand how commodity markets work,” he added.
Russia has had to accept “sizable discounts” around the world for months now, said the authors of a recent wide-ranging report from Columbia University. The cap may not be quite as effective as the administration claimed, but it is nevertheless being felt widely.
The researchers found that the gap between the price of Russian oil—known as the Urals price—and the worldwide market shrinking in 2023 compared to 2022. The effort has triggered "a fundamental fragmentation of the market for Russian crude oil.”
Russia is also trying launch its own "ghost fleet" of ships that could theoretically eliminate the leverage that importers currently enjoy. But is it not yet clear how effective the expensive, laborious, and secretive process will eventually be.
Meanwhile, if the cap can survive this latest round of tests from Putin and Xi, Western officials may discover they have unlocked an entirely new weapon that can be used in future conflicts—not just against Russia.
“I'm sure that OPEC and the Saudis are watching this really carefully to see, is this a tool that the West, the consuming nations could use in the future to further weaken our hold on the market?” Wessel of Brookings said.
Added Assistant Secretary Harris, who is reportedly planning to leave the administration soon: “I think the most tangible measure of success is that we end the war in Ukraine.”
Ben Werschkul is Washington correspondent for Yahoo Finance.
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