Reviews | Russia is making a lot of money from oil, but there is a way to stop it
The United States and its allies are relying heavily on economic sanctions to punish Russia for its invasion of Ukraine. But a key part of this strategy, restrictions on Russian oil exports, seems to cause pain mostly to ordinary people in other countries. European nations, in particular, are causing considerable damage to their own economies without reducing Russia’s oil revenues.
Nations seeking to help Ukraine are aiming at the wrong target. They focused on reducing Russia’s energy exports instead of reducing Russia’s income from energy exports. Russia exports less oil but, in a perverse twist, makes more money, according to the Finland-based Center for Energy and Clean Air Research. Sanctions pushed up prices, more than offsetting lower exports. In May 2022, Russia earned 883 million euros per day from oil exports, compared to 633 million euros per day in May 2021.
The situation is about to get worse. New sanctions that the European Union and Britain have agreed to impose on Russia by the end of the year are expected to push oil prices higher. Some analysts are warning that the price of oil could rise above $200 a barrel, well above the peak of the first weeks of the war, when oil prices hit around $124. This could easily plunge Western economies into a recession.
The Biden administration has a plan that could avert this crisis. This would establish a buyers’ cartel – an agreement among Russia’s customers to set a price cap on Russian oil. This ceiling would be significantly lower than the current market price, greatly reducing the role of Western consumers in financing the Russian army. But the price would still allow Russia to make a profit, so it would have an incentive to export its oil to cartel members. Some of the main participants in the plan, including the United States, have banned the import of Russian oil, but other countries that America hopes to enlist, including India, continue to import large volumes of Russian oil.
It’s a bold and untested idea. It also seems to be the best option available. If it works, it could starve Russia of revenue without devastating the economies of nations trying to support Ukraine.
Building a cartel is not easy. The United States has already obtained the agreement in principle of the other members of the Group of 7, the coordinating body of the major democratic economic powers. US officials, including Treasury Secretary Janet Yellen, are working with their counterparts to work out the details. The buyer cartel would be strengthened if other big buyers of Russian oil, including India and China, could be persuaded to join. It seems unlikely. But US officials say the cartel could further increase the pressure on Russia by also allowing non-participating countries to get bigger discounts.
Maintaining a cartel is also difficult. Since participants can profit from price cap fraud, it is notoriously difficult to enforce a price-fixing agreement. But in this case, there may be a plausible enforcement mechanism. A key part of the new sanctions imposed by the European Union and Britain is a 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% of Russian oil exports traveled on tankers insured by European companies. This measure could be modified to prohibit the insurance of oil tankers with oil purchased at a price higher than the cartel ceiling.
The Russian government sought to prevent the plan by warning that it would refuse to accept it. “As far as I know, we will not supply oil to countries that would impose such a cap, and our oil, petroleum products will be redirected to countries that are ready to cooperate with us,” said Elvira Nabiullina, the governor. of Russia’s central bank, said at a press conference last week. Analysts, however, say that if a cartel is established, Russia’s real choice would be between agreeing to its terms and leaving much of the current oil production in the ground.
Perhaps the most compelling objection is that the price cap plan removes the stigma of 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 these purchases.
The world would surely be in a better position today if it had not developed a dependence on Russian energy. It’s a story with its own lessons, including the urgency of transitioning to sustainable energy that can be produced closer to home and the need to align trade policy more closely with other national priorities. The only lasting way to reduce Russia’s economic power as an energy exporter is to reduce demand for its energy.
But these changes will take time. A buyers’ cartel is a temporary expedient. After decades of complacent dependence on Russia, European nations are scrambling to adopt new plans to reduce energy consumption and develop sustainable wind and solar power. The war in Ukraine is expected to catalyze similar investments by the United States, which is a net energy exporter but remains dependent on fossil fuel imports.
In the meantime, Ukraine needs the continued support of its allies in what could be a protracted struggle. It is counterproductive to impose unnecessary pain.