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At the beginning of June, at the behest of the Biden administration, the German leader gathered top economic officials from the Group of 7 countries for a video conference with the aim of dealing a major financial blow to Russia.
America has tried, in a series of one-off conversations over the past year, to sound out its counterparts in Europe, Canada and Japan about unusual and untested ideas. Administration officials want to try to cap the price Moscow can command for every barrel of oil sold on the world market. Treasury Secretary Janet L. Yellen had floated the plan several weeks earlier at a meeting of finance ministers in Bonn, Germany.
The reception has been mixed, partly because other countries are not convinced of the seriousness of the administration. But the call in early June is not in doubt: American officials said they were committed to the idea of ​​oil price cap and urged others to get on board. At the end of the month, Group 7 leaders signed on to the concept.
As the Group of 7 prepares to meet again this week in Hiroshima, Japan, official and market data show the untried idea has helped meet the twin’s initial goals since the price cap took effect in December. The cap appears to be forcing Russia to sell oil at a lower price than other major producers, while crude oil prices have fallen sharply from levels immediately following Russia’s invasion of Ukraine.
Data from Russia and international agencies suggest Moscow’s profits have fallen, forcing budget choices that administration officials say will likely hamper the war effort. Drivers in America and elsewhere are paying less at the gas pump than some analysts fear.
Russia’s oil revenues in March fell 43 percent from a year ago, the International Energy Agency reported last month, even as the volume of export sales increased. This week, the agency reported that Russian revenues have rebounded but are still down 27 percent from a year ago. Government tax receipts from the oil and gas sector fell by almost two-thirds from a year ago.
Russian officials have been forced to change how they tax oil production in an apparent bid to make up for some of the lost profits. They also appear to be spending government money to try to build their own shipping networks, insurance companies and other essentials in the oil trade, efforts that European and American officials say are signs of success.
“The Russian price cap is working, and it’s working very well,” Wally Adeyemo, the Treasury’s deputy secretary, said in an interview. “The money that’s being spent on building this ecosystem to support energy trade is money that can’t be spent on building missiles or buying tanks. And what we’re going to continue to do is force Russia to have these tough choices.
Some analysts doubt that the plan is nearly as good as administration officials claim, at least when it comes to profits. He said the most-cited data on the prices Russia receives for exported oil is unreliable. And he said other data, like customs reports from India, showed Russian officials may have used elaborate fraud measures to evade the cap and sell crude oil at prices higher than the limit.
“I’m worried that the Biden administration is desperate to claim victory with the price cap preventing them from admitting what isn’t working and taking steps that could help them win,” said Steve Cicala, an energy economist at Tufts University who has written about potential evasion in cover.
The price cap was created as an escape from financial penalties announced by the United States, Europe and others on Russian oil exports after the invasion. The sanctions include a ban to prevent wealthy democracies from buying Russian oil on the world market. But at the beginning of the war, he really retreated. They increase the cost of all oil worldwide, regardless of where the production comes from. Higher prices resulted in record exports to Moscow, while driving American gasoline prices above $5 per gallon and contributing to President Biden’s approval rating.
A new round of European sanctions is set to hit Russian oil hard in December. Economists on Wall Street and in the Biden administration warned that the punishment could take oil off the market, and prices would rise again. So administration officials decided to try to challenge Western dominance of the oil shipping trade — including how it’s transported and financed — and force a hard bargain on Russia.
Under the plan, Russia could continue to sell oil, but if it wanted access to Western shipping infrastructure, it would have to sell it at a discount. In December, European leaders agreed to set the cap at $60 per barrel. They followed other caps for different types of petroleum products, such as diesel.
Many analysts were skeptical that it could. The highly punitive cap has the potential to encourage Russia to limit the amount of oil it pumps and sells. The move could cause crude oil prices to rise. Alternatively, an overly permissive cap may not affect Russian oil sales and profits.
Neither scenario is happening. Russia announced modest production cuts this spring, but largely kept production at the same level it did when the war began.
Fatih Birol, executive director of the International Energy Agency, called the price cap an important “safety valve” and an important policy that forces Russia to sell oil at prices lower than international benchmark prices. Russian oil is currently selling for $25 to $35 a barrel less than other oils on the global market, Treasury Department officials estimate.
“Russia is playing the energy card, and it is not winning,” Mr. Birol wrote in a February report. “Since energy is the backbone of Russia’s economy, it is not surprising that difficulties in this area cause more problems. The budget deficit is increasing because military spending and subsidies for the general population exceed export income.
Biden administration officials said there was no evidence of Russian involvement, and that Mr. Cicala’s analysis of Indian customs reports did not account for the increase in the cost of transporting Russian oil to India, which was included in customs data. White House officials told reporters traveling with Mr Biden in Hiroshima on Thursday that the Group of 7 leaders would adopt new measures to combat price evasion at a meeting this weekend.
There’s no disputing that the world is avoiding what was the biggest concern of Biden officials last summer: rising oil prices.
American drivers paid an average of $3.54 per gallon for gas on Monday. That’s down nearly $1 from a year ago, and it’s nowhere near the $7 a gallon some administration officials fear the cap has failed to prevent a second oil shock from a Russian invasion. Gas prices are a source of mild relief for Mr. Biden as high inflation continues to hamper approval among voters.
After a sharp rise in the months surrounding the Russian invasion, global oil prices have fallen until the end of 2021. The decline is partly driven by the cooling of the world economy, and has persisted even as large producers like Saudi Arabia have cut production.
Falling global prices have contributed to Russia’s falling profits, but they are not the whole story. The reported sales price for exported Russian oil, known as Urals, has fallen by twice as much as the global price for Brent crude.
This week’s meeting of Group of 7 leaders in Japan may not waste much time, instead focusing on yet another collective effort to limit Russia’s economy and profits. And the biggest winners of the closing decision will not be at the top.
“The immediate beneficiaries are mostly emerging markets and low-income countries that import oil from Russia,” Treasury officials said in a recent report.
The official pointed to several countries outside the Group of 7 – notably India and China – using the cap as leverage to pay for Russian oil discounts. Neither India nor China has joined the official cap effort, but oil consumers are seeing the lowest prices.
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