US Treasury Secretary Janet Yellen has launched a worldwide persuasion campaign to promote a proposal that she claims will reduce the chances of a global recession, trying to solve the technical and diplomatic challenges facing her plan to set a ceiling for Russian oil.
There are two goals to the price cap Shilan has been trying to promote for months: lowering the price of energy by keeping Russian oil flowing into the global market, along with limiting the revenue that Russia can get from sales.
The new proposal has gained momentum in recent weeks, with President Joe Biden and other leaders in the seven-state group supporting discussions to promote it. Yellen will focus her first trip to Asia as finance minister in filling out the proposal with vital details in order for it to be applicable. It is expected to discuss the price ceiling with its counterparts in Japan this week and the finance ministers’ meetings of the 20 leading economies to be held in Indonesia. Yellen will also stop by to visit South Korea.
Will Russia also sell oil at a price set by the West?
There are some issues that need to be addressed before a price cap decision can be announced. Among them: clarifying how this can be enforced, persuading other countries to join the initiative and determining the price at which Western countries will allow the purchase of Russian oil. The implication that hangs over the entire proposal is that Russia will continue to sell oil even at a discounted price to be set by the US and its allies.
Russia today continues to make billions in oil sales because of the high fuel prices that have caused the highest inflation in several decades, and officials in the Biden administration and other Western countries are looking for new economic tools to slow down its invasion of Ukraine.
Traveling to Europe in May, Yellen acknowledged the difficulty of applying a price cap.
“While I think a lot of people, including me, think it’s an appealing idea at the general economic level, but the actual implementation is difficult and there are many issues that have not been addressed yet,” she said during a visit to Germany.
The current proposal for a price cap stems from a package of EU sanctions that includes an embargo on oil imports from Russia and a ban on European companies insuring offshore shipments of Russian oil. These steps are set to begin by the end of the year. Because many shipments of Russian oil to countries around the world are insured by a company from the EU and the UK, Yellen has repeatedly expressed concern that EU sanctions could eliminate Russian oil completely from the global market.
A steep drop in world supplies could raise prices to such an extent that Russia will receive revenues similar to what it has today even if it sells less oil, and could skew the entire world economy into recession, Yellen said. Some analysts predict that oil, which trades around $ 105 a barrel, will skyrocket to $ 200 a barrel if Russian production declines significantly.
A barrel of oil for $ 140?
A senior Treasury official who traveled on Yellen’s delegation said the ministry’s estimates could cost as much as $ 140 a barrel if there was a significant reduction in production, though he added that estimate was uncertain.
Now, Yellen and Western officials are seeking to exempt from sanctions the ban on shipping insurance. Such a change would allow companies in the EU, UK and elsewhere to insure Russian oil shipments, as long as the sale price is lower or equal to the ceiling price to be set. The program aims to maintain the ability of many developing countries, as well as China and India, to purchase oil from Russia. The country’s oil is also being sold at a discount compared to global benchmarks, while the US and the EU are moving towards an embargo.
A key question in this plan is how to make sure Russian oil tankers comply with the price cap, after insurance companies said they would have a hard time enforcing this limit.
Letters of credit for oil trading that usually include the sale price, as well as customs checks are ways in which officials think about enforcing the price cap, a senior U.S. Treasury official said.
The official added that even if countries do not agree to the ceiling price, Russian oil shipped without Western insurance and financial backing will probably in any case be sold at an additional discount. This will reduce Russia’s revenue from such sales, the official said.
There are those who doubt whether Russia will stick to the economic logic at the heart of the plan. This would require Russian President Vladimir Putin to sell oil at a large discount in order to avoid clogging oil wells and reduce Russia’s productivity capacity on a regular basis. A Russian official recently said that Russia would not sell oil if a ceiling was imposed on it, Reuters reported.
“Although it is marketed as a very pragmatic policy, I think this is the situation on paper more than in practice, and the basic premise is that Russia will say ‘oh okay, you can not get the price I want so I will sell at half price’,” said Adam Posen, president of the Patterson Institute To the international economy.
Japanese Prime Minister Fumio Kishida said in a recent speech that a ceiling price would be set at about half the current price at which Russian oil is sold, Japanese media reported.
How will India, China and EU countries react?
Yellen’s efforts to promote a price cap began with this idea addressed to the finance ministers of the seven countries at an April dinner hosted by the Treasury for the G-7 at the International Monetary Fund’s World Bank and World Bank spring meeting, a senior ministry official said.
While the idea of a ceiling price has since gained momentum, the political and practical obstacles to its implementation may prove to be too great. One of Yellen’s previous international achievements, the international corporate tax treaty to which more than 100 countries have in principle agreed, is still awaiting implementation and is stuck in complicated political debates in the European Union and the US Congress.
In order for the ceiling price for oil to work, the US will again need to mobilize a broad international coalition to support it. Profiting from a cheaper price for Russian oil, some analysts predict that these countries will be reluctant to join an international effort to harm Russia with U.S. transportation. The U.S. is turning to many countries, including India, as part of its efforts to set the ceiling price.