Is the West’s oil price cap working?

In the 18 months since it was introduced, the oil price cap has become one of the more controversial Western sanctions slapped on Russia since it invaded Ukraine. Moscow and its oil clients have found it easy to circumvent the measures and Russia’s Urals blend of crude oil has long been exported above the $60-a-barrel limit. Meanwhile, the Kremlin’s oil revenues have returned towards record levels. The Bell asked two of the cap’s backers — one of the authors of the idea, former Assistant Secretary at the US Treasury Ben Harris, and the current US Assistant Secretary of State for Energy Geoffrey Pyatt — about whether they see the cap as working.

• The oil price cap — which bans Western companies from providing maritime services, including financing, insurance, and shipping for oil sold above a set limit —.was designed to reduce the flow of energy revenues to the Russian budget, while also preventing a jump in global prices due to a hit to supply. The latter goal was largely achieved. In December 2022 when it came into force, benchmark Brent crude was trading at $85 a barrel. It now costs $88. For large periods in between oil has been below the $85 mark.
• In developing measures targeting Russia’s oil sector, the authors of the sanctions were afraid that Russia would stop supplying oil to the world market altogether, Harris told The Bell. In the end they came to the conclusion that Russia’s dependence on its energy exports is too great to risk abandoning the world market to spite the West. That assessment may have turned out to be correct, but the effectiveness of the price cap as a constraint on Russia’s budget revenues is a much more complicated question. 
• Both Harris and Pyatt claim that the price cap has worked to reduce Russia’s income. According to US estimates, the Kremlin’s tax take from oil is down 30%. For 2023, Russian data generally supports this claim. According to the finance ministry, income fell 24% when calculated in rubles and almost 40% in US dollars. This year, however, the argument that Russia’s tax income has been hit breaks down. In the first quarter, Russia’s oil and gas revenues were up by 79% — effectively covering last year’s decline.
• But Harris makes another point about the financial hit. To circumvent the price cap, Russia is spending a lot of money, wasting funds that would otherwise be going to the war, he said. However, others see the direct costs of getting round the price cap through Russia’s “shadow fleet” of tankers as actually relatively low compared to the sums being brought in. According to one estimate, it costs Russia around $8.5 billion — or just a quarter of the Kremlin’s tax revenues for the first three months of this year. Harris told The Bell that the US Treasury estimates the cost to be higher, and secondly, that even that figure is a significant sum that could otherwise have been spent on tanks and artillery.
• One of Harris’ main arguments that the cap is working, however, comes down to the higher costs of trade. He estimates Russia is forced to pay an extra $10 on every exported barrel due to the loss of old trade routes. Tankers are no longer hopping across to northern Europe, instead having to voyage to the likes of India. Russia’s main buyers used to be four days away, now they are 30 or more, he said. While it is hard to dispute that, it is also fair to say this has nothing to do with the oil price cap. Russia is being forced to sell oil to far-flung countries because of the EU’s own ban on Russian oil imports, not the price cap.
• Where next in the West’s oil sanctions? The US and EU are determined to fight Russia’s shadow fleet which makes it possible for Moscow to get round the $60-a-barrel limit. The shadow tankers are expected to be the main target for new rounds of EU sanctions and new restrictions by the US — some tankers are already being targeted — will become a more regular feature of new sanctions announcements by Washington.

Why the world should care

The price cap has not proved to be the most effective constraint on Russia’s budget revenues. But US officials and politicians also understand the scale of the task they set for themselves. It is not easy to wipe out the energy revenues of the world’s second largest oil exporter without causing havoc in the global oil markets.