WASHINGTON – The Biden administration’s push to create an international buyer group to cap the price of Russian oil is facing resistance amid private-sector concerns that it can’t be reliably enforced. poses a challenge to the US-led effort to gut President Vladimir V. Putin’s chest of war and stabilize global energy prices.
Capping prices is a priority for Treasury Secretary Janet L. Yellen, who is trying to fend off another spike in global oil costs later this year. The Biden administration is concerned that a combination of the European Union’s embargo on Russian oil imports and a ban on insurance and financing of Russian oil shipments will send oil prices soaring by bringing millions of that barrel of oil out of the market.
But the untested concept has drawn skepticism from energy experts and especially the marine insurance sector, which facilitates global oil shipments and is key to bringing This proposal was successful. Under the plan, it would be legal for them to only cover the oil cargo if it sold for at or below a certain price.
Insurers, mainly in the European Union and the UK, fear that they will have to enforce price caps by verifying whether Russia and oil buyers around the world are honoring the deal. .
“We could ask to see proof of the cost, but as an enforcement mechanism, it’s not very efficient.” Mike Salthouse, director of global claims at The North of England P&I Association Limited, a leading global marine insurer. “If you have crooks who want to cheat people, it’s very easy to do.”
He added: “We were told it wouldn’t work. We explained to everyone why. “
That hasn’t stopped Ms Yellen and her top aides, who have traveled the world to pitch their case to international partners, banks and insurance companies that limit the price. Oil can – and must – work at a time of rapid inflation and recession risk.
“At a time of global anxiety about high prices, the Russian oil price cap is one of the most powerful tools we have to tackle inflation by preventing a spike,” said Yellen. of future energy costs”.
The Biden administration is trying to mitigate the impact of sanctions passed by the European Union in June that would ban Russian oil imports and finance and guarantee Russian oil exports. later this year. The UK is expected to issue a similar ban but has yet to do so.
Yellen and other Treasury officials want those sanctions to include remedial work that would allow Russian oil to be sold, insured and transported if the oil was purchased at much lower than market value. school. They argue that this will reduce the revenue that Russia earns while maintaining the flow of oil.
The plan relies heavily on the marine insurance industry, a network of insurers that provide cover for ships and their cargo, potential indemnity and reinsurance, a form of secondary insurance. level is used to minimize the risk of loss. Most of the major insurers are based in the Group of Seven, which have coordinated sanctions against Russia because of the war in Ukraine.
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Lars Lange, Secretary General of the International Union of Marine Insurance, a German-based consortium, said he believes that even with price caps, insurers are still reluctant to cover exports. Russian oil imports for fear of violating sanctions.
“The insurance industry is not just about preparing to comply, but setting sanctions in a way that we understand and we can comply with,” Mr. Lange said. “And with this oil cap, there are challenges, at least on our part.”
Mr. Lange said the cap would not be effective if only a few countries agreed, because insurers from other countries would take the shortfall and cover the goods at market prices.
Treasury officials working on the plan met with the insurance and financial services sectors to try to address some of their concerns. They have suggested that the industry will not be held responsible if sanctions are introduced, and that Russia and its oil customers will have to “endorse” the purchase price. They argue that enforcing the limit would be similar to dealing with sanctions targeting oil exports from countries like Iran and Venezuela.
Officials also rejected the notion that global participation was necessary, arguing that countries such as India and China, which are buying Russian oil at a deep discount, could benefit from the cap. price without signing the agreement.
The leaders of the G7 agreed in late June to explore the concept. The idea drew mixed reviews after the Group of 20 finance ministers met in Indonesia in July. South Korea said it was willing to stand behind it, while Indonesia’s Finance Minister, Sri Mulyani Indrawati, warned that the price cap would does not solve the world’s oil supply problem. European officials, who were skeptical, went on to say they were analyzing its viability.
The race to implement such a complex scheme in just a few months comes as the United States struggles to implement international agreements, such as the global tax accord, that Yellen has centered around. time last year but is currently stalled in Congress. In recent months, Yellen sent her deputy, Wally Adeyemo, and Ben Harris, her assistant secretary of state for economic policy, to make the limited case for economic and national security reasons. .
Mr. Adeyemo said in an interview that “a lot of progress has been made between the G7 finance and energy ministers, in terms of talking about how we actually designed this on a technical level.”
“We’ve also made progress talking to other countries about joining our coalition to pull the price ceiling together,” he added.
Mr. Adeyemo said officials are working to design the limit so insurers won’t have to check every transaction to ensure compliance.
“We have also had very constructive conversations with industry members involved in the seaborne oil trade, helping to understand how oil is sold and who has price information,” he said. . “But also how we can design as simple a validation method as possible to ensure that we can enforce a price cap.”
Some former Treasury officials are skeptical that the plan can work.
“I think it’s a clever analytical idea, but there’s a reason why the phrase ‘half too smart’ was invented,” said Lawrence H. Summers, who served as Treasury Secretary in the administration. Obama, said.
Noting that there are very few examples of successful buyer cartels and that oil transactions can often be concealed, Mr. Summers said, “It may not be possible.”
The United States hopes to have a deal by December 5, when the European Union ban goes into effect, but many details remain unresolved, including that the price of Russian oil will be capped.
Treasury officials say prices will be set high enough to give Russia an incentive to resume production. Some commodity analysts have pointed to a possible target of $50 to $60 per barrel, well below current prices of around $100 a barrel.
But one big issue is how Russia might respond, including whether it will retaliate in ways that raise prices.
The Governor of the Central Bank of Russia, Elvira Nabiullina, said last month that she believes Russia will not supply oil to countries that impose limits and predicts this will lead to higher oil prices worldwide. . Other Russian officials have suggested that the country will not sell oil for less than its cost of production.
In a report last month, JP Morgan analysts predicted that if Russia did not cooperate with the price cap, three million barrels of Russian oil per day could be removed from the global market, sending prices up. up to 190 USD/barrel. They say that curbing production indefinitely will damage the country’s wells, but Russia can handle the temporary shutdown while maintaining its finances.
Paul Sheldon, geopolitical adviser at S&P Global Commodity Insights, said a successful ceiling could be the best hope for stabilizing oil prices once the European Union ban takes effect. He said that it is unlikely that Russia, which has restricted natural gas flows to parts of Europe in retaliation for the sanctions, would limit oil exports because of their importance to the country’s economy.
“Our assumption is that Russia will not cut production,” Mr. Sheldon said.
Brian O’ Toole, a former adviser at the Treasury Department’s Office of Foreign Assets Control, said that even a short-term halt in Russian oil exports could destabilize the market. But he added that Russia’s invasion of Ukraine demonstrates its willingness to take actions that are contrary to its economic destiny.
“This assumes that Putin is a rational economic actor,” said O’Toole, a non-resident senior member at Atlantic Council who works in the financial services industry, talks about Russia’s cooperation with price caps. “If that’s the case, he wouldn’t have invaded Ukraine in the first place.”
But advocates believe that if the European Union bans insurance deals, capping oil prices could be the best chance at mitigating an economic downturn.
John E. Smith, a former head of the offshore asset control unit, said the key was to make sure that financial services firms and marine insurers weren’t responsible for vetting every oil transaction, as well as providing guidance on compliance with sanctions.
Mr Smith, who is now the co-director of national security practice for Morrison & Foerster, said: “The question is whether enough jurisdictions agree on the details to proceed with this. “If they do, it could be a win for everyone but Russia.”
Matina Stevis-Gridneff contribution report from Brussels.
