US, EU discuss caps on Russia oil revenue: Yellen

The US and EU are jointly looking at ways to limit Russia's oil revenue intake following the phaseout of Russian oil imports into Europe, including through price caps.

US treasury secretary Janet Yellen in remarks before the Senate Finance Committee today described "extremely active" talks with her European counterparts that she said aim to limit the oil revenue going to Russia. While tariffs and a "buyers' cartel" were among ideas previously discussed, imposing price caps on Russian oil exports is a proposal gaining ground among policymakers in Washington.

The US' experience with imposing sanctions against major producers in the past decade — Iran and Venezuela — involved imposition of sanctions that either prohibited US and foreign purchases of oil sourced from those countries, or, in the case of Iran in 2012-15, imposed numerical caps on purchases by foreign countries.

But the size of Russian exports — 4.5mn b/d of crude and 2.7mn b/d of products last year — is prompting a change in the approach at a time when tight supply has struggled to catch up with rising oil demand following global recovery from the Covid-19 pandemic.

"What we want to do is keep Russian oil flowing into the global market to hold down global prices and try to avoid a spike that causes a worldwide recession and drives up oil prices," Yellen told the Senate panel.

US officials have also been hesitant about imposing an outright global ban on Russian oil exports because a potential price spike could more than offset the decline in the volume of Russian exports.

Self-sanctioning by big oil companies and trading firms in Europe has redirected some Russian exports, at steep discounts, to markets in India and China. The Russian oil refining sector registered deep declines in April already, President Vladimir Putin said today at a discussion with his economic advisers — a rare Kremlin admission that western sanctions are having a negative effect.

Biden has already banned imports of Russian oil and other energy commodities into the US, but the administration has a sanctions waiver in place until 24 June for foreign buyers of Russian energy products. With the EU preparing to end imports of seaborne crude from Russia by December and all oil products by February 2023, the US is likely to adjust the terms of its sanctions waiver. The US-EU discussions are aiming to continue a synchronized approach to sanctions imposed on Russia following its invasion of Ukraine.

A theoretical price cap on Russian oil exports would be set below the prevailing market rate, with sanctions targeting any buyer that pays more than the cap. The mechanism, in theory, is less politically divisive to buyers outside the US and EU who complain about the extra-territorial reach of sanctions. And it would meet the dual objective of limiting Russian oil revenue and preventing a sudden global supply shock — but only as long as Russia complies with such restrictions.

"As a practical matter, (a price cap) is going to be extraordinarily difficult, if not impossible, to put in play," Washington think tank Atlantic Council senior fellow Brian O'Toole said. "One of the ways that the US can have an impact on that is to say that US banks can no longer process any transaction related to Russian oil exports."

The US administration has not made any decisions ahead of the 24 June sanctions waiver deadline, besides signaling it would give sufficient notice if its terms change.

By Haik Gugarats