The oil price cap will damage Russia's war machine
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The oil price cap will damage Russia's war machine

Sep 25, 2023

The United States and Europe recently introduced the oil price cap — a new measure to make it harder for Russia to fund its war machine by making monster profits from oil exports. Agathe Demarais is the author of "Backfire: How Sanctions Reshape the World Against U.S. Interests" (Columbia University Press), a new book on the global ripple effects of U.S. sanctions, and global forecasting director at the Economist Intelligence Unit. I interviewed her by email, asking about the oil price cap as well as how U.S. and European efforts to coordinate on sanctions are faring. The interview has been edited for style.

Q: U.S., E.U. and other countries have introduced an oil price cap to stop Russia from making big profits on oil exports. Why have they opted for this, rather than more conventional economic sanctions?

A: Western countries have long known that targeting the Russian energy sector would weigh on Moscow's financial ability to wage war in Ukraine. Oil and gas production represents one-third of Russia's GDP, half of fiscal revenue, and 60 percent of export receipts. The dependence goes both ways: before the war started, 30 percent of globally traded oil and gas came from Russia.

U.S. policymakers have mulled imposing a ban on Russian oil exports since 2014, when Russia annexed Crimea. However, Washington faced two issues. First, the E.U. was previously opposed to this measure (reflecting Europe's previous dependence on Russian oil). Second, abruptly taking Russian crude away from the global market would send oil prices to sky-high levels. This would fuel anti-Western resentment in emerging countries and possibly send the global economy in a recession.

The oil price cap is a smart fix for these issues. Implementing a price cap — instead of banning Russian oil exports — meant that global oil prices did not spike, averting fears that Western countries would be shooting themselves in the foot. In addition, lengthy negotiations to design the cap gave European firms time to switch suppliers (the E.U. has now implemented a ban on Russian oil imports).

The cap prevents Western shipping and insurance firms from transporting and insuring Russian oil shipments priced above $60 per barrel. This measure is a first step, but it is imperfect. At $60, the price cap does not imply a huge discount from the current price of Russian crude. In addition, India, China and many developing countries will not apply the price cap. As a result, Russia will reroute its oil shipments toward non-Western buyers and double down on efforts to build its own fleet of oil tankers.

Q:Your book describes the difficult sanctions relationship between the U.S. and E.U. over decades. Has this changed after Russia's invasion of Ukraine?

A: The U.S. and the E.U. have often been at loggerheads about sanctions, and in particular U.S. secondary sanctions. These measures force all firms around the world, American or foreign, to choose between doing business with the U.S. and doing business with targeted countries (such as Iran). Secondary sanctions put European firms in a tricky position after the U.S. exited the nuclear deal in 2018: E.U. governments were adamant that European firms could stay in Tehran, but the U.S. argued that if they did so, they would fall under U.S. secondary sanctions and need to exit the U.S. market.

Europeans welcomed the election of Joe Biden as U.S. president. The Biden team has proved far more understanding of Europe's concerns regarding U.S. extraterritorial sanctions than previous administrations (both Democratic and Republican). Transatlantic unity on sanctions has been almost perfect since the start of the war in Ukraine. The only crack appeared after the U.S. hastily suggested a ban on Russian oil exports shortly after the invasion, prompting consternation across Europe. Washington quickly backpedaled for fear of undermining U.S.-E.U. cohesion.

This does not mean that all is well for transatlantic sanctions cooperation. As I explain in my book, "Backfire," export controls will be the sanctions of tomorrow. This reflects the growing importance of technology for economic and military dominance. Washington has recently imposed stringent measures restricting China's access to U.S. semiconductor know-how. America's calls for European firms to comply with these rules are not met with enthusiasm in Europe: in a remake of secondary sanctions disputes, E.U. tech firms fear that the U.S. will try to make them ditch the Chinese market.

Q: Your book describes U.S. worries that the E.U. is not very good at enforcing sanctions. Is the E.U. getting better?

A: The U.S. has long accused Europe of being soft on sanctions enforcement. Washington has a point. In 2013 the U.S. uncovered a Greece-based scheme to bust Iran sanctions that the Greek authorities had never suspected. Greek companies had managed to buy eight mega tankers undetected and to smuggle oil from Iran at a time when both E.U. and U.S. sanctions forbade Tehran from exporting crude. In 2016, E.U. judges also lifted sanctions on a Russian oligarch, Arkady Rotenberg, arguing that they could not find evidence that he had anything to do with Russia's annexation of Crimea. This was a surprising conclusion: Rotenberg's company built the bridge connecting the Crimean peninsula to the Russian mainland.

Since Russia's invasion of Ukraine, the E.U. has prioritized strengthening sanctions enforcement and closing loopholes, in part to ensure smooth cooperation with the U.S. However, this will be easier said than done. The key problem is that E.U. sanctions are adopted at the European level, but implemented at the national level. Some European countries may therefore have different interpretations of sanctions legislation and be more lenient than others. To address this problem, the E.U. is keen to set up a European sanctions agency, similar to OFAC. However, this will not be a magic bullet to all enforcement issues.

Q: Is it risky for the E.U. to become more closely aligned with the U.S., say if a less Europe friendly U.S. president is elected in 2024?

A: The short answer is yes. Transatlantic tensions around sanctions predate the Trump era, but they undoubtedly peaked under his presidency. The election of a U.S. president who was less friendly toward Europe in 2024 might spell the end of U.S.-E.U. cooperation on Russia sanctions and the return to an "America First" policy that would irk Europe. This would be a terrible development for Ukraine and would likely benefit the Kremlin: Putin rejoices every time he sees cracks in the Western alliance.