The G7 world leaders’ pledge to step up enforcement of the cap on
Russian oil prices – and further punish violators — could help
course-correct what’s been a successful, but imperfect, approach to
pressuring Russian oil revenues, according to MIT Sloan School of
Management professor of energy economics Catherine Wolfram, who
recommends four key steps to accomplish that goal.
In December 2022, several months after Russia invaded Ukraine, a
$60 per barrel cap for Russian crude oil took effect. This measure
was put in place by a coalition of countries — G7, EU, and close
allies — as a way to reduce Russia’s ability to finance its war.
One of the world’s largest oil producers, Russia prior to the
invasion produced about 10 million barrels of oil a day, or 10% of
the world’s total, and it depended on revenue from all fossil fuel
exports to fund 40% of its budget.
The cap applies to any purchase of crude oil exported by sea
from Russia after December 5, 2022 involving maritime, financial,
or other services from companies based in coalition members’
jurisdictions. Violators face penalties in their home country. A
similar cap applied to refined petroleum products after February 5,
2023.
“There’s still a lot of misunderstanding around the goals of the
price cap, and whether or not those goals have been achieved,” said
Wolfram, who’s also former Deputy Assistant Secretary for Climate
and Energy Economics at the U.S. Treasury and one of the main
architects of the oil price cap.
In a paper produced as part of a recent Brookings Center event,
Wolfram, along with MIT Sloan professor of entrepreneurship and
former chief economist at the International Monetary Fund Simon
Johnson, stressed that the price cap on Russian oil has worked at
keeping Russian oil on the market and preventing a spike in world
oil prices that could have plunged vulnerable global economies into
a recession.
“If oil had gotten stuck in Russia, world oil prices would have
gone up at a time when we were coming out of the pandemic and
worried about inflation,” she said. “We all would have suffered.
It’s OK that countries like China and India are buying, they just
have to buy below the cap.”
In early 2024, Russian oil exports remained remarkably steady,
with daily volumes similar to pre-war levels. Meanwhile, the prices
of Urals crude oil compared to global oil prices have stayed low
since the cap started, though the gap has narrowed over the last
year. Part of the reason could be bad actors who are circumventing
the cap, and calling into question its overall effectiveness, plus
sparse enforcement of those bad actors.
“The cap could have been enforced more,” Wolfram says.
“Governments could have cranked the screws a little bit tighter.
It’s one thing to have laws and another to enforce them. If they’re
not going to be enforced, they’re going to be less effective.”
Wolfram and Johnson recommend four measures enforcement agencies
can take, or should continue to pursue.
Increase transparency
The U.S. Office of Foreign Asset Control’s requirement that oil
service providers have attestations on the cap for every oil
shipment — as opposed to blanket attestations for several shipments
— should be maintained, the researchers say.
This requirement will likely lower Urals prices for Russian oil
as coalition service providers pass on the increased costs from
compliance and charge more given the added risk.
Expand sanction actions
To keep more transactions in line with the cap, additional
coalition countries could designate Russian entities as sanctioned.
For example, when the U.S. Treasury designated Sovcomflot ships,
the main ships Russia uses for non-coalition transactions, as
blocked property, buyers demanded a premium to transact with this
“shadow fleet.”
“When it looks like the U.S. is stepping up enforcement, that
drives down the price that Russia is able to get,” said
Wolfram.
Coalition countries could also ban sales of tankers from
coalition country owners to undisclosed buyers to keep the shadow
fleet from expanding further, she said.
Establish a list of “allowed” traders
A list of companies known not to violate the cap is
controversial because it forces regulators to pick winners and
losers and makes it harder to punish violators.
An alternative solution could entail service providers applying
for a renewable license to remain in the business. Companies that
ended up not complying with the price cap would then face severe
penalties, including criminal ones.
Impose secondary sanctions for any transaction above the
cap
The most extreme, but most effective, solution would be for the
U.S. to impose secondary sanctions on non-Russian companies
involved in transactions over the cap, according to the
researchers.
For example, the U.S. could prohibit a Chinese shipping company
that transported Russian oil bought at a price above the cap from
transacting at all in U.S. dollars.
“It’s a way to reach beyond our borders,” Wolfram says. “The
thought being, companies would not want to run afoul of that.”
Ultimately, world leaders have to strike a careful balance
between stepping up enforcement in an effort to hamper Russia’s war
effort, and showing restraint to make sure Russian oil stays on the
market and global oil prices don’t skyrocket. Exactly how
enforcement evolves “depends on where leaders want to come down as
they balance these two objectives,” says Wolfram.
Casey Bayer
MIT Sloan School of Management
914.584.9095
bayerc@mit.edu