The US offer to cap Russian oil prices raises skepticism about enforcement

WASHINGTON — The Biden administration’s push to form an international cartel of buyers to curb the price of Russian oil is facing resistance amid private-sector concerns that it cannot be credibly enforced, posing a challenge to the U.S.-led effort to drain the war of President Vladimir V. Putin. chest and stabilization of global energy prices.

The price cap has been a top priority for Treasury Secretary Janet L. Yellen, who is trying to prevent another spike in global oil costs at the end of the year. The Biden administration fears that the combination of a European Union embargo on Russian oil imports and a ban on insurance and financing of Russian oil shipments will send prices skyrocketing, taking millions of barrels of that oil off the market.

But the untested idea has drawn skepticism from experts in the energy sector and, in particular, in the marine insurance sector that facilitates global oil shipments and is key to the proposal’s implementation. Under the plan, it would be legal for them to issue insurance on oil cargo only if it is sold at or below a certain price.

Insurers, based mainly in the European Union and Britain, fear they will have to enforce the price cap by verifying whether Russia and oil buyers around the world are sticking to the deal.

“We can ask to see evidence of the price paid, but as an enforcement mechanism, it’s not very effective,” he said Mike Salthouse, director of global claims at The North of England P&I Association Limited, a leading global marine insurer. “If you have sophisticated state actors who want to deceive people, it’s very easy to do that.”

He added: “We said it won’t work. We have explained to everyone why.”

That has not deterred Ms. Yellen and her top aides, who have crisscrossed the globe to argue with their international counterparts, banks and insurers that an oil price ceiling can — and should — work at a time of soaring inflation and risk. recession.

“At a time of global concern about high prices, a price cap on Russian oil is one of the most powerful tools we have to tackle inflation by preventing future spikes in energy costs,” Ms Yellen said in July.

The Biden administration is trying to mitigate the effects of sanctions passed by the European Union in June, which would ban Russian oil imports and the financing and insurance of Russian oil exports until the end of the year. Britain was expected to enact a similar ban, but none has yet.

Ms. Yellen and other Treasury officials want those sanctions to include a carve-out that allows Russian oil to be sold, insured and shipped if it is bought at a price that is well below market prices. They argue that this would reduce the revenue Russia collects while keeping the oil flowing.

The plan relies heavily on the marine insurance industry, a network of insurers that provide coverage for ships and their cargo, liability for potential spills, and reinsurance, a form of secondary insurance used to cover the risk of loss. Most of the major insurance companies are based within the Group of 7 nations, which coordinate sanctions against Russia for its war in Ukraine.

Lars Lang, secretary general of the International Marine Insurance Association, a Germany-based consortium, said he believed that even with a price cap, insurers would still be reluctant to cover Russian oil exports for fear of violating sanctions.

“This insurance industry is more than ready to comply, but please set the penalties in a way that we understand and can comply with,” Mr. Lang said. “And with this oil cap, there are challenges, at least on our end.”

Mr Lange said the cap would not work if only a few countries agreed to it, because insurers from other countries would pick up the slack and cover the cargo at market rates.

Treasury officials working on the plan have met with the insurance and financial services industries to try to assuage some of their concerns. They have suggested that the industry will not be held liable if the sanctions are breached and that Russia and its oil customers should “confirm” the purchase price. Imposing the cap, they said, would be similar to dealing with sanctions that have targeted oil exports from countries such as Iran and Venezuela.

Officials have also played down the idea that global participation is needed, arguing that countries such as India and China, which buy Russian oil at deep discounts, could benefit from a price cap without signing up to the deal.

G7 leaders agreed in late June to explore the idea. The idea drew mixed reviews after the Group of 20 finance ministers met in Indonesia in July. South Korea has said it is willing to support it, while Indonesia’s finance minister, Sri Mulyani Indrawati, has warned that a price cap would not solve the world’s oil supply problems. European officials, who were skeptical, continue to say they are analyzing its viability.

The scramble to implement such a complex plan in just a few months comes as the United States struggles to secure international agreements such as the global tax pact, which Ms. Yellen brokered last year but is now stalled in Congress. In recent months, Ms. Yellen has sent her deputy, Wally Adeyemo, and Ben Harris, her assistant secretary for economic policy, to argue for the cap on national security and economic grounds.

Mr. Adeyemo said in an interview that “a lot of progress has been made between the G7 finance and energy ministers in terms of discussions on how we actually design this at a technical level.”

He added that “we have also made progress in talking to other countries about joining our coalition to achieve a price ceiling.”

Mr. Adeyemo said officials are working to design the cap so that insurers do not have to audit every transaction to ensure compliance.

“We’ve also had very constructive conversations with members of the industry involved in the marine oil trade, helping both to understand how that oil is sold and who has price information,” he said. “But also how can we design an attestation method that’s as simple as possible to make sure we’re able to enforce the price cap.”

Some former Treasury officials are skeptical that the plan could work.

“I think it’s a clever analytical idea, but there’s a reason why the phrase ‘too clever by half’ was coined,” said Lawrence H. Summers, who was Treasury secretary during the Obama administration.

Noting that there are few examples of successful buyer cartels and that oil deals can often be hidden, Mr Summers said it “may not be possible”.

The United States hopes to have a deal in place by Dec. 5, when the European Union ban takes effect, but many details remain unresolved, including the price at which Russian oil will be capped.

Treasury officials have said the price will be set high enough to give Russia an incentive to keep producing. Some commodity analysts have pointed to a range of $50 to $60 a barrel as a possible target, which is well below the current price of around $100 a barrel.

But a big wild card is how Russia might react, including whether it responds in ways that raise prices.

The governor of the Russian central bank, Elvira Nabiullina, said last month that she believed Russia would not supply oil to countries imposing a cap and predicted that this would lead to higher oil prices worldwide. Other Russian officials have suggested that the nation will not sell oil below its production cost.

In a report last month, JP Morgan analysts predicted that if Russia does not cooperate with a price cap, three million barrels of Russian oil per day could be removed from global markets, driving prices as high as $190 a barrel. Curbing output indefinitely would damage its wells, they said, but Russia could handle a temporary shutdown while preserving its finances.

Paul Sheldon, chief geopolitical adviser at S&P Global Commodity Insights, said a successful cap could be the best hope for stabilizing oil prices once the European Union ban takes effect. He said it was unlikely that Russia, which has cut gas flows to parts of Europe in retaliation for sanctions, would cut oil exports because of its importance to its economy.

“Our assumption is that Russia will not cut production,” Mr. Sheldon said.

Brian O’Toole, a former adviser in the Treasury Department’s office of foreign asset controls, said even a brief shutdown of Russian oil exports could destabilize markets. But he added that Russia’s invasion of Ukraine shows it is willing to take steps that run counter to its economic fortunes.

“That assumes Putin is a rational economic agent,” said Mr O’Toole, a non-resident senior fellow at the Atlantic Council who works in the financial services industry, said of Russia’s cooperation with a price ceiling. “If that was the case, he wouldn’t have invaded Ukraine in the first place.”

But advocates believe that if the European Union bans insurance trading, an oil price cap may be the best chance to cushion the financial impact.

John E. Smith, former director of the Foreign Assets Control Unit, said the key is to ensure that financial services firms and marine insurance companies are not responsible for checking every oil transaction, as well as providing guidance on compliance with the sanctions.

“The question is whether enough jurisdictions will agree on the details to move this forward,” said Mr. Smith, who is now co-head of Morrison & Foerster’s national security practice. “If they do, it could be a win for everyone except Russia.”

Matina Stevis-Grindnevcontributed reporting from Brussels.