Biden administration’s bid to cap Russian oil prices faces resistance
WASHINGTON — The Biden administration’s push to form an international buyers’ cartel to cap the price of Russian oil is meeting resistance amid private sector concerns that it cannot be reliably enforced, which poses a challenge to the US-led effort to drain President Vladimir V. Putin. war chest and stabilize world energy prices.
Capping prices has been a top priority for Treasury Secretary Janet L. Yellen, who has been trying to head off another spike in global oil costs later in the year. The Biden administration fears the combination of a European Union embargo on Russian oil imports and a ban on insurance and financing of Russian oil shipments could drive up prices by taking millions out of barrels of this market oil.
But the untested concept has drawn skepticism from energy experts and, in particular, the marine insurance industry, which facilitates global oil shipments and is essential for the proposal to work. According to the plan, it would be legal for them to grant insurance for the oil cargo only if it was sold at or below a certain price.
Insurers, which are mainly located in the European Union and Britain, fear they will have to enforce the price cap as they check whether Russia and oil buyers around the world are sticking to the deal.
“We can ask to see proof of the price paid, but as an enforcement mechanism it’s not very effective,” said Mike Salthouse, global claims manager at the North of England P&I Association Limited, one of the world’s leading marine insurers. “If you have sophisticated state actors who want to deceive people, it’s very easy to do.”
He added: “We said it wouldn’t work. We explained to everyone why.
That hasn’t deterred Ms Yellen and her top aides, who have crisscrossed the globe arguing with international counterparts, banks and insurers that an oil price cap can – and should – work at a time of crisis. rapid inflation and risk of recession.
“At a time of global anxiety over high prices, a Russian oil price cap is one of the most powerful tools we have to fight inflation by preventing future spikes in energy costs.” , Ms Yellen said in July.
The Biden administration is trying to mitigate the fallout from sanctions passed by the European Union in June, which would ban Russian oil imports and the financing and insurance of Russian oil exports by the end of the year. Britain was due to enact a similar ban, but has yet to do so.
Ms Yellen and other Treasury officials want those sanctions to include an exclusion that allows Russian oil to be sold, insured and shipped if it is purchased at well below market rates. They argue that this would reduce the revenue Russia was collecting while keeping the oil in circulation.
The plan relies heavily on the marine insurance industry, a network of insurers that provide cover for ships and their cargo, liability for potential spills, and reinsurance, a form of secondary insurance used to cover the risk of loss. Most of the major insurers are based within the Group of 7 nations, which coordinate sanctions against Russia for its war in Ukraine.
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Lars Lange, general secretary of the International Marine Insurance Union, a German-based consortium, said he believed that even with a price cap, insurers would still be reluctant to cover Russian oil exports for fear of violate the penalties.
“This insurance industry is more than prepared to comply, but please implement the sanctions in a way that we understand and can respect,” Lange said. “And with this oil cap, there are challenges, at least on our side.”
Mr Lange said the cap would not work if only a few countries agreed to it, as insurers in other countries would pick up the slack and cover the cargo at market prices.
Treasury Department officials working on the plan have met with the insurance and financial services industries to try to allay some of their concerns. They suggested that the industry would not be responsible if the sanctions were flouted, and that Russia and its oil customers should “certify” the purchase price. Enforcing the cap, they said, would be similar to handling sanctions that have targeted oil exports from countries such as Iran and Venezuela.
Officials also downplayed the idea that global participation is necessary, arguing that countries like India and China, which buy Russian oil at deep discounts, could benefit from a price cap without signing the agreement. ‘OK.
G7 leaders agreed at the end of June to explore the concept. The idea drew mixed reviews after the Group of 20 finance ministers met in Indonesia in July. South Korea has said it is ready to support it, while Indonesian Finance Minister Sri Mulyani Indrawati has warned that a price cap will not solve global oil supply problems. European officials, who have been skeptical, continue to say they are analyzing its viability.
The race to complete such a complex plan in just a few months comes as the United States struggles to meet international agreements such as the global fiscal pact, which Ms Yellen negotiated last year but is now stalled in Congress. . In recent months, Ms. Yellen has dispatched her deputy, Wally Adeyemo, and Ben Harris, her assistant secretary for economic policy, to advocate for the cap on national security and economic grounds.
Mr Adeyemo said in an interview that “great progress has been made among G7 finance ministers and energy ministers, in terms of discussions on how we design this at a technical level.”
He added that “we have also made progress in discussing with other countries the possibility of joining our coalition to put in place a price cap”.
Mr Adeyemo said officials were working on designing the cap so that insurers would not have to check every transaction to ensure compliance.
“We have also had very constructive conversations with members of the industry who are involved in trading oil by sea, helping to understand how this oil is both sold and who has information on the price,” said he declared. “But also how we can design an attestation method that will be as simple as possible to ensure that we are able to enforce the price cap.”
Some former Treasury officials doubt the plan can work.
“I think it’s a smart analytical idea, but there’s a reason the phrase ‘half too smart’ was coined,” said Lawrence H. Summers, who served as Treasury secretary under the administration. Barack Obama.
Noting that there are few examples of successful buyer cartels and that oil deals can often be hidden, Mr Summers said: “That might not be workable.
The United States hopes to have a deal in place by December 5, when the European Union ban takes effect, but many details remain unresolved, including the price at which Russian oil would be capped.
Treasury officials said the price would be set high enough to give Russia an incentive to keep producing. Some commodity analysts have indicated a range of $50-60 a barrel as a likely target, which is well below the current price of around $100 a barrel.
But a big wild card is how Russia might react, including whether it retaliates in a way that pushes prices up.
Russian central bank governor Elvira Nabiullina said last month that she believed Russia would not supply oil to countries that imposed a cap and expected it would drive up oil prices around the world. Other Russian officials have suggested that the country will not sell oil at prices below its production costs.
In a report last month, JP Morgan analysts predicted that if Russia did not cooperate with a price cap, three million barrels of Russian oil a day could be pulled from world markets, pushing prices up to $190 a barrel. Limiting production indefinitely would damage its wells, they said, but Russia could manage a temporary shutdown while preserving its finances.
Paul Sheldon, chief geopolitical adviser for S&P Global Commodity Insights, said a successful cap may be the best hope for stabilizing oil prices once the European Union ban takes effect. He said Russia, which has restricted natural gas flows to parts of Europe in retaliation for sanctions, was unlikely to curb oil exports because of their importance to its economy.
“Our assumption is that Russia will not cut production,” Sheldon said.
Brian O’Toole, a former adviser to the Treasury’s office of foreign assets control, said even a brief halt in Russian oil exports could destabilize markets. But he added that Russia’s invasion of Ukraine demonstrated that it was willing to take action against its economic fortunes.
“It assumes that Putin is a rational economic actor,” O’Toole, a nonresident senior fellow at the Atlantic Council who works in the financial services sector, said of Russia’s cooperation with a cap. prices. “If that were the case, he wouldn’t have invaded Ukraine in the first place.”
But supporters believe that if the European Union bans insurance transactions, a cap on oil prices could be the best chance of mitigating the economic fallout.
John E. Smith, former director of the foreign assets control unit, said the key was to ensure that financial services companies and marine insurers are not responsible for verifying every oil transaction, as well than providing advice on compliance with sanctions.
“The question is whether enough jurisdictions will agree on the details to get things done,” said Smith, who is now co-head of Morrison & Foerster’s national security practice. “If they do, it could be a win for everyone but Russia.”
Matina Stevis-Gridneff contributed reporting from Brussels.