The United States and its allies rely heavily on economic sanctions to punish Russia for its invasion of Ukraine. But a key element of that strategy, Russian oil export restrictions, mostly seem to cause pain to ordinary people in other countries. European nations, in particular, are causing massive damage to their economies without reducing Russia’s oil revenues.
Nations trying to help Ukraine are aiming for the wrong target. They focused on reducing Russia’s energy exports instead of reducing Russia’s earnings from energy exports. Russia is exporting less oil but, in a perverse turn, is making more money, according to the Center for Research on Energy and Clean Air, based in Finland. Sanctions have raised prices, more than offsetting the drop in exports. In May 2022, Russia earned 883 million euros a day from oil exports, compared to 633 million euros a day in May 2021.
The situation is about to take a bad turn. The new sanctions that the European Union and Britain have decided to impose on Russia later this year are likely to push oil prices further. Some analysts warn that the price for a barrel of oil could exceed $ 200, well above the peak of the first weeks of the war, when oil prices hit $ 124. This could easily push Western economies into a recession.
The Biden administration has a plan that could avert this crisis. It would set up a buyer cartel, an agreement between Russian customers to set a ceiling on Russian oil prices. That ceiling would be significantly lower than the current market price, drastically reducing the role of Western consumers in financing the Russian military. But the price would still allow Russia to make some profit, so that it has an incentive to export its oil to cartel members. Some of the key participants in the plan, including the United States, have banned the import of Russian oil, but other nations America hopes to enlist, particularly India, continue to import large volumes of Russian oil.
It is a bold and untested idea. It also appears to be the best option available. If it works, it could deprive Russia of revenue without devastating the economies of the nations that are trying to support Ukraine.
Building a sign is not easy. The United States has already secured the agreement in principle of the other members of the Group of 7, the coordinating body of the major democratic economic powers. American officials, including Treasury Secretary Janet Yellen, are working with their counterparts to work out the details. The buyers’ cartel would strengthen if other large buyers of Russian oil, notably India and China, were persuaded to participate. It seems unlikely. But US officials say the cartel could still increase pressure on Russia by allowing even non-participating nations to get bigger discounts.
Maintaining a cartel is also difficult. Since participants can benefit from cheating on price caps, it is notoriously difficult to establish a price-fixing agreement. But in this case, there may be a plausible enforcement mechanism. A key element of the new sanctions by the European Union and Great Britain is the ban on insuring tankers carrying Russian oil. Shippers need insurance to navigate the canals and to enter ports. European companies dominate the market; in April and May, 68 percent of Russian oil exports traveled on tankers insured by European companies. This measure could be modified to ban insurance for oil tankers purchased at a price above the cartel ceiling.
The Russian government tried to forestall the plan by warning it would refuse to follow it. “As far as I understand, we will not supply oil to those countries that would impose such a limit, and our oil, petroleum products will be redirected to countries that are ready to cooperate with us,” Elvira Nabiullina, the governor of the Russian central bank, has said at a press conference last week. Analysts, however, say that if a cartel is established, Russia’s real choice would be between accepting its terms and leaving a large chunk of current oil production on the ground.
Perhaps the most compelling objection is that the price cap plan removes the stigma on Russian oil. Ukrainian leaders argue that the best way to help their cause is to refrain from spending money on Russian energy; a cartel would normalize those purchases.
The world would certainly be in a better position today if it hadn’t developed an addiction to Russian energy. This is a story with his lessons, including the urgency of the transition to sustainable energy that can be generated closer to home and the need to more closely align trade policy with other national priorities. The only lasting way to reduce Russia’s economic power as an energy exporter is to reduce the demand for its energy.
But those changes will take time. A buyer’s cartel is a temporary gimmick. After decades of complacent dependence on Russia, European nations are rushing to adopt new plans to reduce energy consumption and expand sustainable wind and solar energy. The war in Ukraine should catalyze similar investments by the US, which is a net exporter of energy but remains dependent on fossil fuel imports.
Meanwhile, Ukraine needs the constant support of its allies in what could be a protracted struggle. It is counterproductive to impose unnecessary pain.