A cap on the price of Russian crude oil sold on world markets went into effect on Monday. This is an important step towards reducing Russia’s ability to continue the war in Ukraine.
The cap was designed with two major goals in mind: to prevent Russia from disrupting global oil markets and to limit the Kremlin’s oil revenues. So far it has worked well. But to continue making progress, the coalition imposing the cap – the G-7, the European Union and Australia – should create a political committee, with regular monthly meetings, to assess the effect of the cap and announce a further tightening of the regime, if necessary.
The EU announced this week that it would no longer buy Russian crude and would no longer allow its service providers, including banks and insurance companies, to support this trade. This step was laudable, but Russia is a major oil exporter – selling around 8 million barrels a day, in a world that consumes just over 100 million barrels a day. There was a real danger that the EU embargo would reduce the flow of Russian oil in a way that would also drive up oil prices so much that Putin’s regime would receive a windfall gain.
Putin would like nothing more than a rise in the world price of oil, which would also cause inflation to spike, slow growth and create more political tension everywhere. Putin achieved this result in the natural gas market by cutting exports to Europe and manipulating the market, which caused prices to spike and strain European economies.
The oil price cap stipulates that Western companies can transport, finance and insure Russian oil exports, but only if these take place at or below $60 a barrel. The benchmark Brent oil price was around $86 at the end of last week, but fell to around $83 on Monday. Over the weekend, financial journalists around the world focused on the impending embargo. By Tuesday morning, it was clear that global oil prices had not risen.
The second goal is to immediately reduce Putin’s oil revenue, below what he has received so far in 2022. Oil exports currently provide almost 50% of Russian government revenue, as well as almost all the foreign currency needed to stabilize the ruble and make it possible to buy arms, missile parts and ammunition abroad.
According to two major data sources, the price of Russian oil from the Baltic and Black Sea fell to a range of $45 to $55 per barrel in late November, likely because of the stigma, inconvenience and uncertainty associated with the Russian oil purchases have increased. If this continues, Russian revenues will soon be significantly squeezed.
A price cap imposed by a broad coalition of countries is a spectacular example of international policy coordination. But because it is so new, the policy will undoubtedly need adjustment and continuous evaluation. To do this, the coalition should create a body somewhat similar to the federal Open Market Committee, which sets monetary policy in the United States. The committee could meet monthly, possibly led by the US Treasury Secretary and a senior EU official. A permanent staff could carry out a detailed analysis of the flow of Russian oil revenues and other aspects of the cap program, based on information from the G-7 finance ministries, the International Monetary Fund, the International Agency energy and private sector sources.
After each meeting, the chairman and deputy chairman of the committee could provide an assessment of the current flow of Russian oil revenues and, if deemed appropriate, announce further reductions in the ceiling – for example, in response to further attacks by missiles or atrocities of war by Russia. .
The committee can also issue “forward guidance” to give the private sector an indication of what is likely to come next and support advanced planning among companies and market players. The objective is to reduce Russian oil revenues as best as possible, without destabilizing the world oil market.
Used appropriately, the new political instrument can significantly weaken Russia’s ability to wage war while minimizing the economic costs to people around the world. Ultimately, this will support broader international efforts to end the current war and ensure that Russia never again has the resources to engage in this type of unlawful aggression.
Simon Johnson is a professor at MIT Sloan. Łukasz Rachel is Assistant Professor at University College London. Catherine Wolfram is a professor at the Haas School of Business at UC Berkeley and a visiting professor at Harvard University.
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