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Janet Yellen’s global campaign to defund Russia’s war machine

The U.S. is pushing leaders around the world to buy oil from Russia only at heavily discounted prices. Obstacles loom.

Treasury Secretary Janet L. Yellen meets with Japanese economic officials on Tuesday in Tokyo. Yellen is pushing U.S. allies to agree to a global price cap on purchases of Russian oil. (Kiyoshi Ota/Bloomberg News)
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TOKYO — Treasury Secretary Janet L. Yellen was feted by Japan’s leaders after arriving here on Sunday, lunching with the country’s top economists, meeting with senior executives from Sony and Panasonic and lighting incense at the wake of former prime minister Shinzo Abe.

But beneath the public bonhomie, Yellen’s hosts quietly expressed concerns about potential fallout from her push to create a new global price cap on Russian oil. Japanese officials have communicated that they are worried that Russia could retaliate to the price cap by restricting natural gas exports to Japan, a senior Treasury official said, damaging the country’s economy at an already precarious moment.

Yellen tried assuring the Japanese the United States will help meet its energy needs. But she still must persuade many international colleagues that her plan to diminish Russia’s massive revenue from energy sales won’t destabilize the global economy. After visiting Japan, Yellen flew on Wednesday to Indonesia for meetings of finance ministers from the Group of 20 industrialized nations, where she will attempt to rally a much broader swath of countries to pledge to buy Russian oil only at a discount rate.

If successful, her campaign could deliver a major blow to Russia’s war effort and help prevent the United States and the rest of the world from plunging into economic recession. If not, the West could continue sending billions to Russia or face skyrocketing energy prices that trigger a global recession. Soaring energy prices this year have already hammered economies in the United States and elsewhere, contributing heavily to a 40-year high that U.S. inflation reached in June.

Yellen thinks she has a solution. “We’ve had two motivations: to deprive Russia of revenue to the maximum extent possible to impair their ability to wage war against Ukraine, and to shield the global economy from the adverse impacts of the war,” Yellen told The Washington Post on Wednesday in an interview while traveling between Japan and Indonesia.

Russia’s tax revenue 'will increase significantly to more than $180 billion'

This story is based on interviews with more than a dozen people, several of whom spoke on the condition of anonymity to discuss details of private diplomatic conversations. They include U.S. and European government officials and other domestic and international experts briefed on the Treasury Department’s lobbying blitz for the price cap.

The campaign began with a private dinner in April attended by the world’s most powerful economic leaders, overcame initial unease from other parts of the Biden administration, and now is turning to focus on international leaders beyond America’s closest allies.

Yellen’s high-stakes standoff with Moscow could have enormous consequences — for the war effort, for the U.S. and global economies, and, potentially, for the personal legacy of America’s first female treasury secretary.

Already, Putin has stoked fears he could respond to the price cap by slashing energy exports. International competitors such as India and China could step in and buy Russian oil above the price cap, depleting the West’s energy supply even as Russia continues to make money. And, at least for now, major questions remain unsettled about how the price cap would be implemented.

Untangling these diplomatic knots will fall to Yellen. Stymied in many of her top priorities both domestically and internationally, the treasury secretary has been absorbed in rallying the world to her proposal. That has made the bookish former chair of the Federal Reserve an unlikely commander in the West’s economic war — a macroeconomist marshaling forces on the financial battlefield.

“If it succeeds, if it even partly succeeds, and you manage to eat at Russia’s revenue — that’s a huge deal,” said Daniel Fried, who served on the National Security Council under prior administrations and is now at the Atlantic Council, a D.C.-based think tank. “There are enormous, enormous risks. But there’s a lot to be gained, if you can manage it.”

Yellen’s pitch began in April

On the night of April 21, as the West weighed its next move to counter Russia’s war in Ukraine, Yellen gathered some the world’s most powerful financial leaders together for a private dinner in Washington.

The obvious potential moves all appeared to have huge risks. Russia continued to earn billions of dollars in energy sales despite U.S. and European efforts to impose an unparalleled sanctions regime on the Kremlin. Before the war, Russia was shipping out roughly 3 million barrels a day of crude oil. But demand for energy soared as the world rebounded from covid, and that number moved closer to 4 million barrels a day, according to Simon Johnson, a professor at the Massachusetts Institute of Technology who served as chief economist of the International Monetary Fund. In an attempt to contain prices, the West exempted energy from sanctions, and continued purchases of Russian oil were undermining its pledges to stand in solidarity with Ukraine. Ukrainian President Volodymyr Zelensky begged the allies to immediately stop buying oil from Putin.

As they began to work toward a sixth sanctions package this spring, European officials discussed targeting the insurance firms that underwrite tankers hauling Russian oil — the vast majority of which are British or in the European Union. Stripping insurance from ships carrying Russian oil would prevent them from accessing some international waterways, while also undercutting the financing necessary for transporting the oil.

But in internal analyses, Treasury staff found such a move could cause the price of oil to soar past $150 per barrel and keep rising, two people familiar with the matter said. (It recently peaked around $120 a barrel but has since fallen closer to $100.) Worst-case scenarios suggested price shocks could be even higher. A senior Treasury official said estimates showed roughly 3 to 5 million barrels a day of Russian oil could be closed off from global energy markets. The United States could face a 1970s-style oil shock, and what had started as a limited energy crunch could drag down the world economy. Up to that point, Yellen had been publicly confident that the war wouldn’t pull the United States into recession. But if Europe went through with the ban on insurance firms, that calculus could change.

Treasury officials had already begun discussing the idea of a price cap when the Europeans started pushing their insurance ban. Treasury aides realized that the insurance ban could be an ideal mechanism for implementing the price cap proposal, giving them a vital chokepoint in the Russian oil supply chain. “There was always the question of: ‘How do you implement the price cap?,” Yellen told The Post. “This was a great enforcement mechanism.”

Yellen made her first major pitch to the economic leaders of the Group of Seven allies when they gathered over short ribs in the Treasury Department’s second-floor dining room, which overlooks the White House. Simply cutting off exports of Russian oil to the West could backfire, Yellen warned. Rather than deprive the Russian war machine of revenue, that move could drive up the price of oil — meaning Moscow would make even more money than it did before. The sanctions also risked devastating Western economies by starving them of energy, Yellen cautioned, creating a domestic political backlash that could undermine support for the war.

When Yellen pitched the price cap instead, some finance ministers had immediate questions about how it could work. But Yellen maintained that this plan could allow the West to solve a vexing financial and diplomatic puzzle, allowing Russian oil to flow while also reducing the Kremlin’s single biggest source of revenue. The ministers began to talk.

Yellen dispatched top aides for a global campaign

Yellen’s plan faced skepticism both at home and abroad. State Department and Energy Department officials were initially lukewarm to it, according to two people briefed on internal administration deliberations. Energy aides were concerned about the potential for Russian oil to go outside official channels, which would make it harder to track, the people said. (An Energy official said in a statement that the department “carefully reviews every policy that we generate or that we are asked to analyze by other parts of the government” but that it is “fully supportive” of the effort. State Department officials have also now joined the diplomatic push for the cap.)

Some European officials also initially chafed at the idea. Germany was already struggling to persuade E.U. allies to back the phased-in oil embargo. The price cap was first seen as a potential distraction from that effort. (Treasury officials have defended the cap as a way to augment, rather than replace, the oil ban, trying to not dictate the Europeans’ decisions.)

Three of Yellen’s top aides — Wally Adeyemo, the deputy treasury secretary; Elizabeth Rosenberg, assistant secretary for terrorist financing and financial crimes; and Ben Harris, assistant director for economic policy — were dispatched to lead the effort internationally. They flew to Brussels and met with top European officials, addressing questions and concerns posed by the Germans, French, British and others in the G-7. The European Commission played a key role in winning over allies.

Sometimes, Treasury negotiators found that different branches of the same country’s government would have different views of the plan. When Rosenberg and Harris reached an impasse, or if a government appeared uneasy about the idea, Yellen would make a call to a top-level official to keep negotiations moving. After months of back-and-forth, the G-7 endorsed the idea in principle in June. Although it remains unclear how committed the European powers are to, in fact, executing the plan, the endorsement was a major breakthrough for Yellen, with Biden also helping sell the plan.

“This is where Yellen is at her best: The economic officials in the rest of the world know her and respect her,” said David Wessel, director of the Hutchins Center at the Brookings Institution, a D.C.-based think tank. “It’s made a difference.”

But Treasury officials likely faces a steeper climb selling the price cap to countries in the G-20, a group that technically still counts Russia as a member. Of particular concern is whether China, India, Turkey and other nations will simply refuse to join the United States and instead purchase as much Russian oil as possible, enriching Putin while cutting off Europe’s energy supply. India, for instance, has substantially stepped up its purchases of Russian oil since the war began.

Yellen personally pitched the idea to officials in the Chinese and Indian governments, who were noncommittal, according to a Treasury official familiar with the matter. A senior Treasury official projected that only 20 percent of Russian oil sales — or, at most, 40 percent — might evade the cap.

“My national interest tells me I should buy it where it is cheaper,” India’s finance minister, Nirmala Sitharaman, told the Wall Street Journal last month.

Bob McNally, a former energy official in the George W. Bush administration now at the Rapidan Energy Group, said Putin may not be bluffing about slashing oil or natural gas exports, and could bet he can withstand the economic pain longer than Washington and Europe.

After Japanese officials floated setting the oil cap price at half the current rate, Putin warned of “catastrophic consequences” for global energy markets. If Russia’s costs for producing the oil exceeds what it can earn under a low price cap, Moscow could close wells and curtail production. That could feed into much higher oil prices at a time when the Biden administration already faces enormous political challenges from expensive gas.

“This thing could go horribly wrong,” McNally said. “Let’s say Putin decides to have an endurance contest with the West. Who can survive $6 gas longer?”

Ariel Cohen, a senior fellow at the Atlantic Council, also pointed out that Putin has already demonstrated his willingness to retaliate against Europe by cutting off Russian gas, at least temporarily. Should Putin shut off oil altogether, the authoritarian government in the Kremlin may be able to outlast European democracies in the face of a popular backlash.

A senior Treasury official acknowledged that predicting Putin’s next move would prove difficult and said cutting off natural gas in particular “is clearly in his playbook.” Yellen has emphasized the price cap will be set above Russia’s cost of production and that it would not be “logical” for Russia to stop selling at discounted rates.

Yellen said Treasury had not talked to Russian officials about their potential reaction and was not considering doing so. U.S. officials aren’t planning to meet with their counterparts from Moscow in meetings in Bali this week. But not every country at the conference will avoid Russia’s emissaries.