The US is preparing to announce new measures to increase the costs and difficulties for Russia to evade a price cap on its oil exports, a senior administration official told CNN on Wednesday. The move comes as the price of Russian crude oil has risen above the $60 per barrel limit set by the G7 and Australia last year, signaling that the sanction may have lost some of its effectiveness.
The price cap was introduced in December 2022 as part of a series of actions to punish Russia for its invasion of Ukraine and cut off its main source of revenue. The policy prohibits Western companies from providing shipping, insurance, financing and other services for Russian seaborne oil exports unless they are sold below the cap. The goal was to limit Russia’s profits while maintaining enough oil supply for the global market.
However, Russia has been developing alternative ways to transport and sell its oil above the cap, such as using non-Western shippers and insurers, building pipelines and railroads, and creating a parallel market for its oil products. According to Treasury Secretary Janet Yellen, these efforts have reduced the effectiveness of the price cap and allowed Russia to earn more from its oil than intended.
Yellen said the US was working with its allies to crack down on Russia’s evasion tactics and impose new costs on its oil sector. She did not provide details on what the new measures would entail, but said they would be announced on Thursday. She also said the policy process had been underway for several months.
The price cap has been a controversial and novel tool of economic statecraft, as it attempts to balance the competing interests of hurting Russia, helping Ukraine, and stabilizing global energy markets. Some analysts have questioned its legality, feasibility and impact. Others have praised it as a smart and effective way to impose costs on Russia without causing major disruptions or inflation.
According to a report by the U.S. Department of the Treasury, the price cap has significantly reduced Russia’s revenue over the last 10 months while promoting stable energy markets. The report estimates that Russia’s oil-related revenues fell by 49% compared to the period March-November 2022 and by 23% compared to the period from January 2021 to January 2022.
However, the report also acknowledges that Russia has been spending huge amounts on its alternative ecosystem to export energy products. For example, Russia has built a fleet of ships that can transport oil without Western services. It has also increased its pipeline exports to China and Europe. Moreover, it has created a parallel market for its oil products, such as diesel and gasoline, that are not subject to the price cap.
These evasion strategies have allowed Russia to sell some of its oil above the cap, especially to countries like India that are willing to pay a premium for Russian crude. As a result, the price of Russian Urals crude topped $60 a barrel in July 2023 for the first time since the cap was introduced.
The US hopes that by tightening the sanctions on Russian oil evasion, it can restore the effectiveness of the price cap and increase the pressure on Moscow to end its aggression in Ukraine. The US also hopes that by working with its allies, it can prevent any loopholes or exemptions that could undermine the policy.
The US faces some challenges in implementing the new measures, however. For one thing, it may be difficult to monitor and enforce compliance with the sanctions, especially in countries that are not part of the coalition or that have strong economic ties with Russia. For another thing, it may be hard to predict how Russia will react and adapt to the new sanctions, and whether it will escalate or de-escalate its military actions in Ukraine.
The US also has to balance its own interests and values in dealing with Russia. On one hand, it wants to deter Russia from further aggression and support Ukraine’s sovereignty and territorial integrity. On the other hand, it wants to avoid a full-scale war or a humanitarian crisis in Europe. It also wants to cooperate with Russia on other issues of mutual concern, such as nuclear proliferation, climate change and cyber security.
The US will have to navigate these trade-offs carefully as it announces and implements its new measures against Russian oil evasion. The success or failure of this policy could have significant implications for regional stability, global energy markets and international relations.