Apr 11, 2023 - Economy

The price cap on Russian oil seems to be working

Data: International Energy Agency; Chart: Axios Visuals

Russia is still shipping crude, but its oil revenues have plunged, fulfilling the twin goals of the energy price cap the U.S. government devised last year.

Why it matters: After it launched its war on Ukraine in 2022, Russia's position as a major oil supplier to global markets was seen as a constraint on the West's ability to punish Moscow.

  • Now, the price cap may be helping to solve that problem.

The latest: There are fresh signs that Russia's finances are in trouble.

Background: Last year global oil prices were soaring — $5 gasoline! — amid widespread uncertainty about access to supplies.

What they did: In December, the European Union — long Russia's largest buyer — imposed an embargo on Russian oil (the U.S. did so back in March 2022)

How it works: In practice, the plan is actually a series of rules and restrictions on companies like shipping giants and insurance providers — almost all based in the West — that are the backbone of the global oil market.

  • Basically, shippers and insurers are required to get those buying and moving the oil to officially promise — in signed "attestations" — that the petroleum was sold below $60.
  • Violations would open companies to potential criminal and civil penalties.

The big picture: Given the obvious potential loopholes in the plan — for instance, people simply lying about paying less than $60 for Russian oil — there was a fair amount of skepticism that this price cap plan would work.

  • But the early evidence suggests that the cap, in conjunction with other sanctions, has been pretty successful at keeping Russian oil flowing — while reducing the amount of money Russia reaps from its sale (predominantly to China, India and Turkey).

What they're saying: "Most people would say it's probably helped reduce revenues," says Robert McNally, president of consulting firm Rapidan Energy Group, who served as an energy advisor in the administration of President George W. Bush. "It does give some leverage to India and China when they're negotiating with Russia."

  • On the other hand: Kevin Book, who heads up energy research at consulting firm ClearView Energy Partners, emphasizes that it remains to be seen how well the cap would operate if energy demand from China — where the economy has struggled to recover from the COVID crisis — fully bounced back.
  • "On the surface, it looks like both goals are being met," Book says. But "it's hard to see below the surface," he adds.

The bottom line: There are always a number of factors at play in market prices, making it essentially impossible to prove something is "the reason" a price is moving one way or the other. But the red ink in Russia's budget suggests this policy is performing pretty well.

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