Home BusinessEnergy & Environment U.S. Bid to Cap Russian Oil Prices Draws Skepticism Over Enforcement

U.S. Bid to Cap Russian Oil Prices Draws Skepticism Over Enforcement

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WASHINGTON—The Biden administration’s push to form an international buyers cartel to limit Russian oil prices faces resistance amid private-sector fears that it won’t work reliably, Vladimir V. Putin Strengthen the president’s armaments and stabilize global energy prices.

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

But the untested concept has drawn skepticism from energy experts, particularly the maritime insurance sector, which is key to facilitating global oil transportation and making the proposal work. , it would be legal to give insurance only if oil cargoes are sold below a certain price.

Insurers, mainly in the European Union and the United Kingdom, fear they will have to enforce price caps by checking whether oil buyers in Russia and around the world are honoring the agreement.

“You can ask them to show you proof of what you paid, but it’s not a very effective enforcement mechanism,” he said. Mike Salthouseis the Global Claims Director for North of England P&I Association Limited, one of the world’s leading marine insurers. “It’s very easy when you have sophisticated state actors trying to deceive people.”

He added: I explained to everyone why. “

However, Ms Yellen and her aides have argued to their international counterparts, banks and insurers that oil price caps can and must work in times of rapid inflation and risk. I travel all over the world to sue. recession.

In July, Yellen said, “At a time of growing global fears of high prices, capping the price of Russian oil is one of the most powerful tools to prevent future energy cost spikes and combat inflation. ‘ said.

The Biden administration is trying to ease the impact of sanctions adopted by the European Union in June. The sanctions will prohibit imports of Russian oil and the financing and insurance of Russian oil exports by the end of the year. The UK was expected to enact a similar ban, but has yet to do so.

Yellen and other Treasury officials said sanctions could include carve-outs that would allow Russian oil to be sold, insured and shipped if the oil was purchased at well below market prices. I hope They argue that this will reduce the revenues earned by Russia while maintaining the flow of oil.

The plan aims to support the marine insurance industry, a network of insurers that provide cover for ships and their cargo, liability for potential spills, and reinsurance, a type of secondary insurance used to bear the risk of loss. heavily dependent on Most of the major insurers are based in her G7 countries, which have coordinated sanctions against Russia over the war in Ukraine.

Lars Lange, secretary-general of the International Marine Insurance Federation, a Germany-based consortium, said insurers were still reluctant to cover Russia’s oil exports, even with price caps, for fear of violating sanctions. He said he thought it was.

“This insurance industry is ready to comply, but I want sanctions set in a way that we can understand and comply with,” Lange said. “And this oil cap has challenges, at least from our side.”

Lange said the cap won’t work if only a few countries agree because insurers in other countries will cover the cargo at market prices.

Treasury officials working on the plan have met with the insurance and financial services sector to try to allay some of their concerns. They suggest the industry will not be held liable if the sanctions are ignored, requiring Russia and its oil customers to “prove” their purchase prices. He said it would be similar to dealing with sanctions targeting oil exports from countries such as Iran and Venezuela.

Officials also argued that countries such as India and China, which buy Russian oil at deep discounts, could benefit from the price cap even without signing the deal, arguing that global It neglects the notion that there is a need for strong participation.

G7 leaders agreed to consider the concept in late June. The idea sparked controversy after G20 finance ministers met in Indonesia in July.South Korea said it would be happy to support it, but Indonesia’s Finance Minister Sri Mulyani Indwati said the price cap would be It does not solve the world oil supply problem. Skeptical European officials continue to say they are analyzing its feasibility.

The race to implement such a complex plan in just a few months has seen the United States struggle to implement international agreements, such as the global tax treaty that was brokered by Yellen last year but is currently stalled in Congress. It’s because you’re struggling. In recent months, Yellen has dispatched Deputy Secretary Wally Adiemo and Undersecretary for Economic Policy Ben Harris to explain the cap’s rationale for national security and economic reasons.

“There’s been a lot of progress between the G7 finance and energy ministers in terms of talking about how to actually design this on a technical level,” Adeyemo said in an interview.

He added that “progress has also been made in terms of talking to other countries about joining the coalition to put together price caps.”

Adeyemo said the authorities are working on designing the cap so that insurers don’t have to vet every transaction to ensure compliance.

“We’ve also had very constructive conversations with industry members involved in the offshore oil trade, and both of them are asking how that oil is being marketed and who has information on prices. “But how can we design authentication methods that are as simple as possible to make sure we can enforce price caps?”

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

“I think it’s a clever analytical idea, but there’s a reason the phrase ‘half too smart’ was invented,” said Lawrence H. Summers, who served as Secretary of the Treasury in the Obama administration. .

“It may not work,” Summers said, noting that buyers cartels rarely succeed and oil deals are often covered up.

The US hopes to reach a deal by Dec. 5, when the EU embargo will take effect, but many details, such as a price ceiling for Russian oil, remain unresolved.

Finance officials say the price will be set high enough to give Russia an incentive to keep producing. Some commodity analysts are targeting a range of $50 to $60 per barrel, pointing to well below the current price of around $100 per barrel.

But the big wildcard is how Russia will respond, including whether it will retaliate in ways that push prices higher.

Russian Central Bank Governor Elvira Nabiullina said last month that she believed Russia would not supply oil to countries that imposed caps, which she predicted would lead to higher global oil prices. It suggests that the country will not sell oil at a price below its cost of production.

In a report last month, JP Morgan analysts said that if Russia did not cooperate with the price cap, 3 million barrels a day of Russian oil could be removed from global markets, pushing prices up to $190 a barrel. I predicted it would. Curbing production indefinitely would damage the wells, they said, but Russia would be able to cope with the temporary shutdown while maintaining its finances.

Paul Sheldon, chief geopolitical adviser at S&P Global Commodities Insights, said a successful cap could be the best hope for stabilizing oil prices after the European Union embargo takes effect. said there is. He said Russia, which has restricted the flow of natural gas to parts of Europe in retaliation for sanctions, is unlikely to curb oil exports because it is critical to its economy.

“I assume Russia will not cut production,” Sheldon said.

Brian O’Toole, a former adviser to the Treasury Department’s Office of Foreign Assets Control, said even a temporary suspension of Russian oil exports could destabilize markets. But he added that Russia’s aggression in Ukraine showed Russia’s willingness to act against its economic fortunes.

“This assumes that Putin is a rational economic entity,” said O’Toole, a non-resident. Senior Fellow, Atlantic Council The financial services industry worker spoke about cooperating with Russia’s price cap. “If he did, he wouldn’t have invaded Ukraine in the first place.”

But proponents believe that if the European Union bans insurance transactions, an oil price cap could be the best opportunity to mitigate the economic impact.

John E. Smith, former director of foreign asset management, said it was important to ensure that financial services and marine insurers were not held accountable for scrutinizing every oil transaction, as well as guidance on sanctions compliance. to provide

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

Matina Stevis-Gridnev Contributed to reporting from Brussels.

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