The United States and its allies rely heavily on economic sanctions to punish Russia for its invasion of Ukraine. But a key element in that strategy, restrictions on Russian oil exports, usually seems to cause pain in ordinary people in other countries. European countries in particular are causing considerable damage to their own economies without cutting Russia’s oil revenues.
Nations that want to help Ukraine are aiming at the wrong target. They have focused on reducing Russia’s energy exports rather than reducing Russia’s revenues from energy exports. Russia is export less oil but, in a perverse twist, it’s making more money, according to the Center for Energy and Clean Air Research, located in Finland. The sanctions have increased prices, which more than offset the decline in 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 take a turn. New sanctions that the European Union and Britain have agreed to impose on Russia by the end of the year are likely to push oil prices even further. Some analysts warn that the price for a barrel of oil could exceed $200, well above its peak in the early weeks of the war, when oil prices peaked around $124. That could easily push Western economies into recession.
The Biden Administration has a plan that could prevent this crisis. It would create a buyers’ cartel – an agreement between Russian customers to set a price cap for Russian oil. That ceiling would be significantly lower than the current market price, greatly reducing the role of Western consumers in financing the Russian military. But the price would still allow Russia to make some profit, giving it an incentive to export its oil to members of the cartel. Some of the main participants in the plan, including the United States, have banned imports of Russian oil, but other countries America hopes to source, notably India, continue to import large amounts of Russian oil.
It’s a bold and untried idea. It also seems to be the best option available. If it works, it could deprive Russia of revenue without destroying the economies of countries trying to support Ukraine.
Setting up a cartel is not easy. The United States has already reached an agreement in principle with the other members of the Group of 7, a coordinating body for the major democratic economic powers. US officials, including Secretary of the Treasury Janet Yellen, are working with their colleagues to work out the details. The buyers’ cartel would be strengthened if other major buyers of Russian oil, notably India and China, could be persuaded to join. That seems unlikely. But US officials argue that the cartel could still increase pressure on Russia by allowing countries that don’t participate also bigger discounts.
Maintaining a cartel is also difficult. Since the participants can profit by cheating on the price cap, maintaining a price-fixing agreement is notoriously difficult. But in this case, there may be a plausible enforcement mechanism. An important part of the new sanctions of the European Union and Great Britain is a ban on insuring tankers transporting Russian oil. Shippers need insurance to navigate canals and enter ports. European companies dominate the market; in April and May, 68 percent of Russian oil exports traveled on tankers insured by European companies. That measure could be changed to ban insurance for tankers with oil purchased at a price above the cartel ceiling.
The Russian government has tried to prevent the plan by warning it would refuse to cooperate. “As far as I understand, we will not supply oil to those countries that would impose such a limit, and our oil, oil products will be diverted to the countries that are willing to cooperate with us,” Elvira Nabiullina, the governor of the Russian central bank, said at a press conference last week. However, analysts say that if a cartel were formed, Russia’s real choice would be between accepting the terms and leaving much of its current oil production in 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 not to spend money on Russian energy; a cartel would normalize those purchases.
The world would certainly be in a better position today if it had not become dependent on Russian energy. That is a story with its own lessons, including the urgency of the transition to sustainable energy that can be generated closer to home and the need to better 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 shifts will take time. A buyer’s cartel is a temporary aid. After decades of complacent dependence on Russia, European countries struggling to adopt new plans to reduce energy consumption and renewable wind and solar energy. The war in Ukraine should boost similar investment from the United States, which is a net exporter of energy but remains dependent on fossil fuel imports.
Meanwhile, Ukraine needs the continued support of its allies in what could be a protracted battle. It is counterproductive to impose unnecessary pain.