Friday’s announcement that Group of Seven countries will limit how much they’ll pay for Russian oil is a creative solution to a difficult problem: how to reduce funding for Vladimir Putin’s war machine without having to abstain from Russian-produced energy that the world desperately needs.
I’m rooting for the policy to succeed. Even if I have some doubts that it will.
On paper, this oil-price-cap agreement looks quite elegant. It solves two seemingly intractable problems at once: keeping the Russian oil flowing while also depriving Russia of (some) revenue for that same oil. Here’s how it works:
The G-7 countries, plus possibly some others yet to be named, act as a sort of buyers’ cartel, refusing to purchase Russian oil or petroleum products unless they’re sold below a certain price. The exact price has not yet been determined; but the idea is that it would be set high enough to allow Russia to make a modest profit, a senior U.S. official told me, so that it’s still in Moscow’s financial interest to continue pumping oil.
The participating countries will also ban companies from financing or insuring Russian oil shipments, even those sold outside the coalition, unless those purchases are also sold below the price ceiling. Ninety percent of global shipping traffic is insured through participating countries, so they should have the ability to limit even nonparticipating countries from paying above the price cap.
The scheme is helped by the fact that even nonparticipating countries (such as China and India) don’t really want to pay more for oil. Presumably, they’re happy to have some leverage to bid down prices — and to be able to blame Westerners for forcing them to drive a hard bargain with their Russian friends.
U.S. officials, who lobbied for this plan for months, have pointed to reports that Russia has offered steeply discounted long-term oil contracts to some Asian countries as evidence that the G-7 plan is already working.
There are reasons to be skeptical, though, that what looks smart on paper will hold up in real life.
One concern is that it will be hard to monitor compliance. With every country eager for more oil, buyers might engage in side payments to move to the front of the line. They might, say, pay an allowed rate for oil while cutting a deal to pay inflated prices for Russian products that aren’t subject to a price cap, such as wheat or other commodities.
This kind of clever evasion is harder to detect than just physically tracking oil tankers, which is what U.S. officials emphasize when asked how they’ll enforce the agreement. That might work for other kinds of sanctions, when there are outright bans on purchases. But it’s less useful when purchases are allowed — just subject to price controls.
And then there’s the question of how Russia will react.
Western allies have suggested their plan leaves Russia, err, over a barrel: Sell to us (and everyone else!) at a cheap price or not at all. Putin and his underlings have threatened to call the G-7’s bluff and not sell to them at all. Whether Putin will carry out such a threat (as he has elsewhere) remains to be seen.
U.S. officials brush off concerns that Putin might cut off coalition countries. “If Russia wants to go out and negotiate service deals with others and to find ways to provide its own insurance and to find other financial providers and to find ships outside of our coalition, they should feel free to do that,” a senior U.S. official told me. “But it fits within our goal because that’s going to be far more expensive for them.”
U.S. officials also argue that a rupture might have happened anyway: In the absence of the new price-cap agreement, the European Union was on course to stop buying Russian oil almost completely in December as part of a more draconian sanctions package. Those sanctions, agreed to earlier this summer, would also bar European firms from insuring and financing the transport of oil to other countries, whatever the price.
That’s the scenario U.S. officials feared most: that the Europeans would stop buying Russian oil and effectively block nearly all shipments to other big buyers such as India; countries would fight over the suddenly much-more-limited supply of available crude, and energy prices would spike again, possibly precipitating a global recession.
Public officials rarely get credit for crises they prevent, as opposed to ones they scramble to fix after the fact. Treasury Secretary Janet L. Yellen and others who worked on this deal deserve plaudits for anticipating catastrophe and hopefully preventing it.
Emphasis on “hopefully.”