U.S. Bid to Cap Russian Oil Prices Draws Skepticism Over Enforcement
WASHINGTON — The Biden administration’s push to form an international buyers’ cartel to cap the price of Russian oil is facing resistance amid private sector concerns that it cannot be reliably enforced, posing a challenge for the U.S.-led effort to drain President Vladimir V. Putin’s war chest and stabilize global energy prices.
The price cap has been a top priority of Treasury Secretary Janet L. Yellen, who has been trying to head off another spike in global oil costs at the end of the year. The Biden administration fears that the combination of a European Union embargo on Russian oil imports and a ban on the insurance and financing of Russian oil shipments will send prices soaring by taking millions of barrels of that oil off the market.
But the untested concept has drawn skepticism from energy experts and, in particular, the maritime insurance sector, which facilitates global oil shipments and is key to making the proposal work. Under the plan, it would be legal for them to grant insurance for oil cargo only if it was being sold at or below a certain price.
The insurers, which are primarily in the European Union and Britain, fear they would have to enforce the price cap by verifying whether Russia and oil buyers around the world were honoring the agreement.
“We can ask to see evidence of the price paid, but as an enforcement mechanism, it’s not very effective,” said Mike Salthouse, global claims director at The North of England P&I Association Limited, a leading global marine insurer. “If you have sophisticated state actors wanting to deceive people, it’s very easy to do.”
He added: “We’ve said it won’t work. We’ve explained to everybody why.”
That has not deterred Ms. Yellen and her top aides, who have been crisscrossing the globe to make their case with international counterparts, banks and insurers that an oil price cap can — and must — work at a moment of rapid inflation and the risk of recession.
“At a time of global anxiety over high prices, a price cap on Russian oil is one of the most powerful tools we have to address inflation by preventing future spikes in energy costs,” Ms. Yellen said in July.
The Biden administration is trying to mitigate fallout from sanctions adopted by the European Union in June, which would ban imports of Russian oil and the financing and insuring of Russian oil exports by year’s end. Britain was expected to enact a similar ban but has not yet done so.
Ms. Yellen and other Treasury officials want those sanctions to include a carve-out that allows for Russian oil to be sold, insured and shipped if it is purchased at a price that is well below market rates. They argue that this would diminish the revenue that Russia took in while keeping oil flowing.
The plan relies heavily on the maritime insurance industry, a web of insurers that provide coverage for ships and their cargo, liability for potential spills and reinsurance, a form of secondary insurance used to defray the risk of losses. Most of the major insurers are based within the Group of 7 nations, which have been coordinating sanctions against Russia for its war in Ukraine.
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Lars Lange, secretary general of the International Union of Marine Insurance, a consortium based in Germany, said he believed that even with a price cap, insurers would still be reluctant to cover Russian oil exports for fear of violating sanctions.
“This insurance industry is more than prepared to comply, but please set up the sanctions in a way that we understand and that we can comply,” Mr. Lange said. “And with this oil cap, there are challenges, at least from our side.”
Mr. Lange said the cap would not work if only a few countries agreed to it, because insurers from other countries would pick up the slack and cover the cargo at market prices.
Treasury Department officials working on the plan have been meeting with the insurance and financial services sectors to try to allay some of their concerns. They have suggested that the industry would not bear responsibility if sanctions were flouted, and that Russia and its oil customers would have to “attest” to the purchase price. Enforcing the cap, they said, would be similar to dealing with sanctions that have targeted oil exports from countries such as Iran and Venezuela.
Officials have also played down the notion that global participation is needed, arguing that countries such as India and China, which have been purchasing Russian oil at deep discounts, could benefit from a price cap without signing on to the agreement.
Leaders of the G7 agreed in late June to explore the concept. The idea drew mixed reviews after finance ministers of the Group of 20 nations met in Indonesia in July. South Korea said it was willing to get behind it, while Indonesia’s finance minister, Sri Mulyani Indrawati, warned that a price cap would not solve the world’s oil supply problems. European officials, who have been skeptical, continue to say they are analyzing its viability.
The race to carry out such a complex plan in just a few months comes as the United States struggles to deliver on international agreements such as the a global tax pact, which Ms. Yellen brokered last year but is now stalled in Congress. In recent months, Ms. Yellen has dispatched her deputy, Wally Adeyemo, and Ben Harris, her assistant secretary for economic policy, to make the case for the cap on national security and economic grounds.
Mr. Adeyemo said in an interview that “a great deal of progress has been made amongst the G7 finance ministers and energy ministers, in terms of having conversations about how we actually design this at a technical level.”
He added that “we’ve also made progress in terms of talking to other countries about joining our coalition in pulling together a price cap.”
Mr. Adeyemo said officials were working to design the cap so insurers would not have to vet every transaction to ensure compliance.
“We’ve also had very constructive conversations with members of industry who are involved in the seaborne oil trade, both helping to understand how that oil is both sold and who has information about the price,” he said. “But also how we can design a method for attestation that will be as simple as possible in order to make sure that we’re able to enforce the price cap.”
Some former Treasury officials are skeptical that the plan could work.
“I think it is a clever analytical idea, but there’s a reason why the phrase ‘too clever by half’ was invented,” said Lawrence H. Summers, who was Treasury secretary during the Obama administration.
Noting that there are scant examples of successful buyers’ cartels, and that oil transactions can be often be hidden, Mr. Summers said, “It might not be workable.”
The United States hopes to have an agreement in place by Dec. 5, when the European Union ban takes effect, but many details remain unresolved, including the price at which Russian oil would be capped.
Treasury officials have said the price would be set high enough so Russia had an incentive to keep producing. Some commodities analysts have pointed to a range of $50 to $60 per barrel as a likely target, which is far lower than the current price of around $100 a barrel.
But a big wild card is how Russia might respond, including whether it retaliates in ways that drive up prices.
The Russian central bank governor, Elvira Nabiullina, said last month that she believed Russia would not supply oil to countries that imposed a cap, and predicted it would lead to higher oil prices worldwide. Other Russian officials have suggested that the nation would not sell oil at prices below its production costs.
In a report last month, J.P. Morgan analysts predicted that if Russia did not cooperate with a price cap, three million barrels of Russian oil per day could be removed from global markets, sending prices up to $190 per barrel. Curbing output indefinitely would damage its wells, they said, but Russia could handle a shutdown temporarily while sustaining its finances.
Paul Sheldon, chief geopolitical adviser for S&P Global Commodity Insights, said a successful cap could be the best hope for stabilizing oil prices once the European Union ban took effect. He said it was unlikely that Russia, which has restricted natural gas flows to parts of Europe in retaliation for sanctions, would curb oil exports because of their importance to its economy.
“Our assumption is that Russia will not curtail production,” Mr. Sheldon said.
Brian O’ Toole, a former adviser in Treasury’s office of foreign assets control, said that even a brief shutdown of Russian oil exports could destabilize markets. But he added that Russia’s invasion of Ukraine demonstrated that it was willing to take actions that were at odds with its economic fortunes.
“This assumes that Putin is a rational economic actor,” Mr. O’Toole, a nonresident senior fellow at the Atlantic Council who works in the financial services industry, said of Russia’s cooperation with a price cap. “If that were the case, he wouldn’t have invaded Ukraine in the first place.”
But proponents believe that if the European Union bans insurance transactions, an oil price cap may be the best chance to mitigate the economic fallout.
John E. Smith, former director of the foreign assets control unit, said the key was ensuring that financial services firms and maritime insurers were not responsible for vetting every oil transaction, as well as providing guidance on complying with the sanctions.
“The question is will enough jurisdictions agree on the details to move this forward,” said Mr. Smith, who is now co-head of Morrison & Foerster’s national security practice. “If they do, it could be a win for everyone but Russia.”
Matina Stevis-Gridneff contributed reporting from Brussels.