The United States and its allies are leaning heavily on economic sanctions to punish Russia for its invasion of Ukraine. But a key element in that strategy, restrictions on Russian oil exports, mostly appears to be causing pain for ordinary people in other countries. European nations, in particular, are causing considerable damage to their own economies without reducing Russia’s oil revenue.
Nations seeking to help Ukraine are aiming at the wrong target. They have focused on reducing Russia’s energy exports instead of reducing Russia’s earnings from energy exports. Russia is exporting less oil but, in a perverse twist, it is earning more money, according to the Center for Research on Energy and Clean Air, based in Finland. The sanctions have raised prices, more than offsetting the decline in exports. In May 2022, Russia earned 883 million euros per day from oil exports, up from 633 million euros per day in May 2021.
The situation is about to take a turn for the worse. New sanctions that the European Union and Britain have agreed to impose on Russia by year’s end are likely to drive oil prices even higher. Some analysts warn that the price for a barrel of oil could exceed $200, well above the spike in the early weeks of the war, when oil prices topped out around $124. That could easily push Western economies into a recession.
The Biden administration has a plan that could avert this crisis. It would establish a buyer’s cartel — an agreement among Russia’s customers to put a price ceiling on Russian oil. That ceiling would be significantly lower than the current market price, sharply reducing the role of Western consumers in funding the Russian military. But the price would still allow Russia to make some profit, so that it has an incentive to export its oil to members of the cartel. Some of the key participants in the plan, including the United States, have banned the importation of Russian oil, but other nations that America hopes to enlist, notably India, continue to import large volumes of Russian oil.
It is an audacious and untested idea. It also appears to be the best available option. If it works, it could deprive Russia of revenue without devastating the economies of nations that are trying to support Ukraine.
Constructing a cartel is not easy. The United States has already secured the agreement in principle of the other members of the Group of 7, a coordinating body for the major democratic economic powers. American officials, including Treasury Secretary Janet Yellen, are working with their counterparts to hammer out the details. The buyers’ cartel would be strengthened if other big buyers of Russian oil, notably India and China, could be persuaded to participate. That seems unlikely. But U.S. officials argue the cartel could still increase pressure on Russia by allowing nations that are not participating to extract larger discounts, too.
Maintaining a cartel is also hard. Because the participants can benefit by cheating on the price ceiling, policing a price-fixing agreement is notoriously difficult. But in this case, there may be a plausible enforcement mechanism. A key piece of the new sanctions by the European Union and Britain is a ban on insuring tankers that carry Russian oil. Shippers need insurance to navigate canals and to enter harbors. European companies dominate the market; in April and May, 68 percent of Russian oil exports traveled on tankers insured by European businesses. That measure could be modified to ban insurance for tankers with oil purchased at a price above the cartel’s ceiling.
The Russian government has sought to forestall the plan by warning that it would refuse to go along with it. “As far as I understand, we won’t be supplying oil to those countries which would impose such a cap, and our oil, oil products will be redirected to the countries which are ready to cooperate with us,” Elvira Nabiullina, the governor of Russia’s central bank, said at a news conference last week. Analysts, however, say that if a cartel is established, Russia’s real choice would be between accepting its terms and leaving a large share of current oil production in the ground.
Perhaps the most compelling objection is that the price ceiling plan removes the stigma on Russian oil. Ukrainian leaders argue that the best way to aid their cause is to abstain from spending any money on Russian energy; a cartel would normalize those purchases.
The world would surely be in a better position today if it had not developed a dependence on Russian energy. That is a tale with its own lessons, including the urgency of transitioning to sustainable energy that can be generated closer to home and the need to align trade policy more closely with other national priorities. The only lasting way to reduce Russia’s economic power as an energy exporter is to reduce demand for its energy.
But those shifts will take time. A buyer’s cartel is a temporary expedient. After decades of complacent dependence on Russia, European nations are scrambling to adopt new plans to reduce energy use and expand sustainable wind and solar power. The war in Ukraine ought to catalyze similar investments by the United States, which is a net energy exporter but remains dependent on fossil fuel imports.
In the meantime, Ukraine needs the sustained support of its allies in what may be a prolonged struggle. It is counterproductive to impose unnecessary pain.