Is a price cap the most effective way to sanction Russian oil?
The Hundred #29: September 8, 2022
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“The price cap planned by the G7 is more flexible, bearable and hence more effective than a full embargo. The idea of the price cap is to not hamper Russian oil exports to countries outside the pro-Ukrainian coalition if these sales happen at a price below the cap. The practicalities of this are very complex and the incentives for cheating and circumvention are high. Most worryingly, such a system could drive importers even more into the arms of Russia. The substantial discount will encourage eligible importers to compete for “cheap” Russian oil through financial or economic kickbacks and political concessions.”
“If the purpose of sanctions targeting Russian oil is to minimize Russia’s revenues while maintaining supply and preventing excessive price increases, then a price cap seems a good idea. But the key is good implementation, such that the price cap is widely used and its circumvention caught and punished. Finally, even if we had such a perfect instrument, its effectiveness also depends on the behaviour of Russia itself. It can happen that in response to the price cap Russia will stop exports, which would mean large challenges to the world oil market and price increases.”
“A cap on the price of Russian crude oil and product exports is a clumsy policy in isolation. It’s unclear how it can be enforced reliably if at all, even if one creates stipulations for insurers and other services that facilitate trade. There is also the reality that heavily discounted supplies of crude oil will be popular, encouraging traders to buy Russian crude and pocket the difference reselling it. However, the threat of a potential cap is encouraging Russian firms to consider contractually discounting exports on their own. Talking about a cap is better (so far) than the actual policy.”
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