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The Hard Way Every Time, Part 2 - In G-7's Plans for Price Cap, Punishing Russia is Easier Said Than Done

Economic sanctions can be a powerful tool to punish a country or group, especially if they involve an essential commodity like crude oil. Imposed for a variety of reasons (military, political, social), sanctions can cause serious harm to the targeted entity. But levying them effectively is not as simple as it may seem, and even the most well-intentioned plans can fall short or have unintended consequences or backfire altogether. In today’s RBN blog we look at a plan by the U.S. and its allies to limit the price of Russian crude oil and the significant challenges in designing a cap that is effective and enforceable.

Russia’s catastrophic invasion of Ukraine sent a jolt through the international community and tensions shot higher Wednesday after Russian President Vladimir Putin announced a massive call-up of military reservists and made other thinly veiled threats about Russia’s military capabilities. Apart from the humanitarian tragedy unfolding, the subsequent increase in energy prices and their effect on inflation has been by far the most significant concern for energy this year. Much like with the 1973 oil embargo, as we discussed in Part 1 of this blog series, the U.S. has explored and in some cases implemented a host of options to bring energy prices under control, from the record Strategic Petroleum Reserve (SPR) withdrawals that ramped up this spring and summer and a waiver of summer ethanol blending limits to proposals such as a ban on U.S. crude exports, a windfall profits tax on energy producers and suspension of the federal gasoline tax.

The most recent idea to gain traction with politicians is a cap on the price of Russian crude, with G-7 finance ministers pledging September 2 to implement such a plan, something the Biden administration has been working on for months. The G-7 (Canada, France, Germany, Italy, Japan, the UK and the U.S.), along with other allies and partners, would attempt to prohibit the seaborne transportation of Russian crude oil unless purchased at or below a yet-to-be-determined price cap. This comes after the EU, on June 3, adopted a partial embargo against Russian oil that will ban seaborne imports as of December 5 and ban refined product imports as of February 2023. (Pipeline imports of crude oil and refined products will remain exempt, as some EU members depend on Russian imports via the Druzhba pipeline.) There is serious concern that the EU’s new sanctions, in addition to the major disruptions going on in the gas market (more on that in a moment), could send energy prices higher and tip the global economy into a recession, a risk that U.S. Treasury Secretary Janet Yellen said the cap is intended to mitigate. (Yellen said the price cap would keep Russian barrels flowing to Europe; without it, Russia could end up shutting in production, causing global prices to spike.) Russia, which has close ties to EU member Hungary and supplies about half of its crude oil, has long shown a willingness to use its energy supplies as a weapon and has been using its crude oil and refined products as a wedge against EU unity and as a tool to limit the impact of sanctions.

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