In early June, at the behest of the Biden government, German leaders brought together senior business leaders from the Group of Seven for a video conference with the aim of dealing a severe financial blow to Russia.
In a series of one-off talks last year, the Americans attempted to quiz their counterparts in Europe, Canada and Japan about an unusual and untried idea. Government officials wanted to try to limit the price Moscow could charge for each barrel of oil sold on the world market. Treasury Secretary Janet L. Yellen presented the plan a few weeks earlier at a finance ministers’ meeting in Bonn.
The response was mixed, partly because other countries weren’t sure how serious the government was about the move. But the call in early June left no doubt: American officials said they were committed to the idea of an oil price cap and urged everyone else to join. At the end of the month, the 7 leaders of the group approved the concept.
As the Group of Seven prepares to meet again this week in Hiroshima, Japan, official and market data suggests that the yet-untested idea has helped meet its two original targets since the price cap went into effect in December. The cap appears to be forcing Russia to sell its oil at a cheaper price than other major producers, while crude prices are well below their levels immediately after the Russian invasion of Ukraine.
Data from Russia and international agencies suggest Moscow’s revenues have fallen, leading to budget decisions that government officials say could begin to hamper its war effort. Motorists in America and elsewhere are paying far less at the pump than some analysts had feared.
Russia’s oil revenues fell 43 percent in March from a year earlier, the International Energy Agency reported last month, even as total export sales volume rose. This week, the agency reported that Russia’s revenue had recovered slightly but was still down 27 percent from a year earlier. Government tax revenues from the oil and gas sector fell by almost two-thirds from a year earlier.
Russian officials have been forced to change how oil production is taxed, apparently to make up for some of the lost revenue. They also appear to be spending government money to begin building their own network of vessels, insurance companies and other major oil traders, an effort European and American officials say is a clear sign of success.
“Russia’s price cap works, and it works very well,” Wally Adeyemo, the deputy finance minister, said in an interview. “The money they spend on building this ecosystem to support their energy trading, they can’t spend on building missiles or buying tanks. And what we will continue to do is force Russia to make such difficult decisions.”
Some analysts doubt the plan will work anywhere near as well as officials claim, at least in terms of revenue. They say the most widely cited data on the prices Russia receives for its exported oil is unreliable. And they say other data, such as customs reports from India, suggest Russian officials may be using sophisticated deception measures to circumvent the cap and sell crude oil at prices well above the cap.
“I worry that the Biden administration’s desperation to win with the price cap is preventing them from actually acknowledging what isn’t working and taking the steps that could actually help them win,” Steve said Cicala, an energy economist at Tufts University, has written about possible workarounds under the cap.
The price cap was invented as a fallback to the financial penalties imposed on Russian oil exports by the United States, Europe and others in the immediate aftermath of the invasion. These penalties included bans that prevented wealthy democracies from buying Russian oil on the world market. But by the time the war started, they essentially backfired. They’ve pushed up the cost of all oil in the world, no matter where it’s produced. The higher prices brought record export earnings to Moscow while driving US gasoline prices above $5 a gallon and helping President Biden’s approval ratings plummet.
A new round of European sanctions was set to hit Russian oil hard in December. Economists on Wall Street and in the Biden administration warned that these penalties could force oil out of the market and push prices higher again. So officials decided to exploit Western dominance in the oil shipping trade — including how it is transported and financed — and impose a tough trade on Russia.
According to the plan, Russia could continue to sell oil, but if it wanted access to the West’s shipping infrastructure, it would have to sell at a significant discount. In December, European leaders agreed to set the cap at $60 a barrel. Other caps followed for various types of petroleum products, such as diesel.
Many analysts were skeptical that it could work. Too strict a cap could prompt Russia to severely limit its oil production and sales volumes. Such a move could send crude oil prices higher. Alternatively, an overly generous cap might not have had any impact on Russian oil sales and revenues at all.
Neither of the two scenarios happened. Russia announced a small production cut that spring, but has been able to keep production largely at the same level as at the start of the war.
Fatih Birol, executive director of the International Energy Agency, called the price cap an important “safety valve” and a crucial policy that has forced Russia to sell oil at well below international reference prices. According to Treasury officials, Russian oil is currently trading at between $25 and $35 a barrel less than other oil on the world market.
“Russia played the energy card and didn’t win,” Mr Birol wrote in a February report. “Given that energy is the backbone of the Russian economy, it is not surprising that the difficulties in this area lead to broader problems. Its budget deficit is skyrocketing as military spending and popular subsidies far exceed export earnings.”
Biden administration officials say there is no evidence of widespread Russian evasion and that Mr. Cicala’s analysis of India’s customs reports failed to take into account the rising costs of transporting Russian oil to India, which are included in the customs data . A White House official told reporters traveling to Hiroshima with Mr Biden on Thursday that leaders of the Group of Seven would take new measures to counter price cap circumvention when they met this weekend.
There is no doubt that the world escaped last summer’s what was secretly the biggest concern for Biden officials: another round of skyrocketing oil prices.
American drivers paid an average of about $3.54 a gallon for gasoline on Monday. That’s nearly a dollar down from a year ago, and it’s nowhere near the $7 a gallon that some government officials feared had the cap failed to avert a second oil shock from the Russian invasion. Gasoline prices are an easy source of relief for Mr. Biden as high inflation continues to hurt his support with voters.
After a sharp rise in the months surrounding the Russian invasion, global oil prices have fallen back to late 2021 levels. Partly due to the economic slowdown around the world, the slump is continuing even as major producers like Saudi Arabia have curbed production.
Falling world prices have contributed to Russia’s falling revenues, but it’s not the whole story. Reported selling prices for exported Russian oil, known as the Urals, have fallen twice as much as the world price of Brent crude.
Leaders from the Group of Seven meeting in Japan this week are unlikely to spend much time on the cap, instead turning to other collective efforts to constrain Russia’s economy and revenues. And the biggest winners of the cap decision will not be at the summit.
“The direct beneficiaries are primarily emerging and low-income countries that import oil from Russia,” Treasury Department officials noted in a recent report.
The officials referred to a handful of countries outside the Group of Seven — notably India and China — that have used the cap as a bargaining chip to pay a rebate on Russian oil. Neither India nor China have joined the formal cap effort, but it is their oil consumers who get the lowest prices out of it.
