In the wake of Russia’s illegal invasion of Ukraine, the international community levied a series of sweeping and unprecedented sanctions designed to disrupt the Russian economy and limit Russian President Vladimir Putin’s ability to wage war. This effort included a price cap on Russian oil, a novel sanctions regime collectively imposed by the G-7, the European Union and Australia, designed to simultaneously lower Russian revenue while preserving the supply of oil in the global markets. Preliminary assessments, such as an Aug. 3, 2023, analysis by the U.S. Treasury Department, suggest that the price cap has largely achieved these goals to date. Global supply remains mostly stable and Russian oil continues to be sold at a discount relative to similar products produced by other countries.

The Origins of the Price Cap

In the days preceding Russia’s initial invasion of Ukraine on Feb. 24, 2022, White House intelligence officials requested that the Treasury Department analyze the economic impacts arising from a possible invasion. Given the outsized influence of Russian oil and gas exports on the global economy, these markets were the primary focus of this analysis, although the Treasury studied impacts on other markets—such as agriculture and raw minerals—as well.

A topline question in the analysis was whether Russia would “weaponize” its oil exports by restricting supply to create artificial scarcity, as it had with natural gas exports to European markets over the second half of 2021. On the eve of the invasion, Gazprom-controlled natural gas stocks in Europe hovered around 10%—drastically below the levels observed in prior winters. Initial findings suggested it was unlikely Russia would weaponize its oil trade, including crude and refined products, for four reasons. First, Russia could not isolate the impact of the reduced oil trade on the West as it had with gas—sharply reducing exports would afflict virtually every oil importer on the planet. Second, Russia was substantially more dependent on oil revenues than it was on gas, with oil export revenues amounting to 11% of its GDP in 2021 while pipeline gas totaled around 3.5% of GDP. (Liquified natural gas exports, which have not been weaponized, contributed another 0.5% to Russia’s GDP.) Third, the physical mechanics of depressing the oil trade were more complex and costly than depressing the gas trade. Russia’s vast network of oil wells are primitive relative to its competitors and reducing production on a large scale could permanently impact the wells’ ability to continue pumping oil. While it was difficult to estimate the precise share of Russian production that could not be “turned off” without lasting damage, the exit of Western oil companies coupled with export sanctions on Russian imports exacerbated this challenge. Fourth, Russia was unlikely to weaponize refined oil exports because it relied on gasoline refined from its own crude oil to fuel domestic demand.

Over the course of the spring, with the invasion lasting longer than many anticipated, it became clear that international sanctions on Russian oil represented a crucial opportunity to inflict economic harm. On March 8, 2022, the U.S. banned the import of Russian oil. Yet this move had little direct effect on trade flows since the U.S. relied minimally on Russian oil and could easily turn to other sources to compensate for the minor disruption. Throughout the spring, the U.S. and its allies continued a campaign of levying unprecedented sanctions on the Russian economy, including freezing assets held by the Russian central bank in U.S. financial institutions. Further sanctions on Russian oil exports were considered and developed.

In early June 2022, the European Union adopted a comprehensive sanctions package designed to limit member states’ ability to transact Russia oil. This package—referred to as the “6^th sanctions package”—had two major components related to oil: the prohibition of EU-based companies from participating in certain elements of the Russian oil trade, with the notable exclusion of shipping services, and an eventual ban on the importation of Russian crude oil and refined products to much of the EU.

The EU ban on the importation of Russian oil promised an unequivocal win. Russian oil would now need to travel much farther to find a home, which would meaningfully drive up the cost of exports and damage profits, all else equal. But the ban on service provisions raised the potential for a shortfall in the global oil supply, as EU-based companies played a central role in the export of Russian oil. For example, one report noted that approximately 85% to 90% of Russian oil trades were executed using insurance, reinsurance or brokering services from an EU- or U.K.-based provider.

If the 6^th sanctions package caused a widespread shut-in of Russian oil, world prices would rise sharply—with the potential to blunt macroeconomic stability. The ultimate price impact depended on both the magnitude of the shock and the price elasticity—how much global prices would change in response to the reduction in supply. On the higher end of the potential shock and price elasticity range, global prices could rise above $130 per barrel for Brent oil traded out of Europe—an increase of roughly 50% relative to the average pre-invasion price in January 2022. Such an increase would sharply escalate the odds of a global recession.

The solution was conceived by the price cap coalition of the G-7, the European Union and Australia: to implement a “price exemption” on the EU’s 6^th sanctions package. Under this approach, coalition members would simultaneously ban service provisions associated with the trade of Russian oil unless the oil was traded under a certain price. There would be three price caps: one on crude oil, one on high-value refined product (like diesel) and one on low-value refined product (like fuel oil). The crude price cap would go into effect on Dec. 5, 2022, while the refined product price caps would go into effect on Feb. 5, 2023—the dates the EU’s 6^th sanctions package would implement bans on services related to Russian trade. An important addition to the package subjected shipping services to sanctions provisions. This established a situation whereby failure to establish a price cap would mean that EU ships would be permitted to carry Russian oil at any price, while an agreed-upon price cap would only allow the transport of Russian oil if it was sold below the respective caps.

The coalition members expressed a range of views regarding the appropriate levels for the price caps. In general, EU member states with outsized economic interests tied to the Russian oil trade advocated for higher price cap levels, while nations that bore a greater security risk from Russia preferred lower price cap levels—for example, Poland publicly advocated for an ultra-low $30 price cap on Russian crude oil. With respect to crude, which was the first cap to be established, the non-EU coalition members generally preferred a higher level within the range, reserving the right to ratchet down the level over time. The price caps on refined product proved somewhat less contentious, although some EU states were concerned about a possible shut-in of refined product—especially diesel—and favored a relatively higher cap on “high value” refined product. Despite varying economic and strategic interests, the price cap coalition successfully agreed to specific price cap levels and implemented the new sanctions regime, representing a major international collaboration against Russia’s aggression in Ukraine. 

Evidence of the Price Cap’s Impact

The coalition members envisioned and implemented the price cap regime in approximately six months, an exceptionally quick timeline given the novelty of the design and the international coordination required. With the crude price cap in place by early December, attention quickly turned to analyzing the price cap’s efficacy.

Energy experts were skeptical, although the source of the skepticism was far from uniform. One frequent critique was that the price cap would be ineffective at disturbing the Russian oil trade. Critics argued that Russia would immediately deploy alternative service providers, such as a ghost fleet of ships, to facilitate its oil trade and simply “trade around” the cap. A related critique was that coalition members were either ill-prepared or unwilling to enforce the cap, resulting in little more than a symbolic gesture against Russian aggression.

On the flip side, some experts expressed concern that the price cap would force the shut-in of Russian oil, either because Putin would be unwilling to comply with the sanctions regime or because compliance would be too unmanageable—especially for risk-adverse corporate compliance officials who were wary of violating international sanctions. This line of criticism was typically more pronounced for refined products than for crude, since the non-Western fleet capacity for refined products was especially limited.

Other critiques related to the design of the price cap. These included concerns about how companies should comply with the sanctions and how the process of adjusting the price cap levels would work. Experts wondered whether the caps would be adjusted at regular intervals, whether there would be forward guidance and whether coalition governments would be transparent in their reasons for changing price levels.

Analysts did not reach consensus on the impacts, and this disagreement appeared to be rooted in two principal sources of confusion. To start, experts disagreed on how to evaluate the price cap, especially on defining an appropriate baseline against which to compare the price cap’s impact. One option was to evaluate the joint impact of the 6^th sanctions package and the price cap exemption, in effect assuming the pre-6^th sanctions landscape as the baseline, while a separate approach was to evaluate the marginal impact of the price cap while accepting the 6^th sanctions package as given. If the baseline included the 6^th sanctions package, the price cap could only increase (or hold constant) global supply since there would be no scenario under which the price cap in isolation would lower Russian production. Alternatively, the combined impact of the 6^th sanctions package and the price cap could only lower (or hold constant) global production, since a circumstance under which these two policies would jointly raise Russian production was unlikely.

A second notable issue concerned the criteria for success. In official statements, the U.S. Treasury Department repeatedly defined success as both reducing Russian revenue and maintaining global supply, while other coalition members had varied or undefined measures of achievement. Reflecting confusion over the price cap’s objectives, some commentators criticized the efficacy of the price cap without acknowledging these dual goals—only focusing on the cap’s impact on Russian revenue without acknowledging the desire to preserve global supply and stabilize prices.

In fairness, precisely assessing the impact of the price cap is difficult since there is no way to observe the overall levels of production with or without the cap. Russian oil export data are notoriously unreliable, and the impact of other changes—such as magnitude and incidence of increased shipping costs—are challenging to pinpoint. Yet there are several outcomes which evaluators know with near certainty.

A well-known outcome is the stability of Russian oil exports since the onset of the invasion. According to the Center for Research on Energy and Clean Air’s Russia Fossil Tracker, the volume of crude oil exports has been stable overall, experiencing only minor shifts following a modest dip in March and April 2022. For example, in the month prior to the invasion, Russia exported an average of around 700 million metric tons of crude daily, falling to approximately 560 million metric tons in the first half of April 2022, as global trade routes were reshuffling, before climbing to an average of about 740 million metric tons from May 2022 through today. Exports of oil products have been similarly stable, generally within 150 million to 250 million metric tons per day from May 2022 through the current period.

A second outcome is the dramatic change in the composition of importers of Russia oil, with a marked elongation in the distance traveled to reach new export destinations. The shift is nothing short of remarkable. Prior to the invasion, the bulk of Russian fossil fuel exports—roughly 55%—was exported to the EU, with China comprising another 18% or so and India taking only 1-2% of these products. By January 2023, these trade relationships had shifted considerably. The share of Russian fossil fuel exports going to the EU fell to just 20%, and that share would be halved to about 10% by summer 2023. China, India and Turkey would instead assume these barrels, with these three nations now importing about two-thirds of Russian fossil fuel exports.

An important consequence of these new trade patterns is dramatically higher shipping and insurance costs. The precise increase in these costs is not well-documented but is likely due to a combination of factors. Perhaps the most obvious is the higher cost associated with longer trade routes; a voyage to Indian and Chinese ports takes about 16 to 18 days—compared to prior voyages of four to six days to European ports. Another factor for the higher costs is a “sanctions premium” that drives up the per-mile cost of shipping and insuring Russia-origin oil above-and-beyond the price charged to other exporters. According to one report, the combined impact of these factors meant that an excess of one-third of a Russian oil shipment’s value was captured by these higher costs. A weakly established factor driving costs higher is that Russia is using elevated shipping costs to circumvent the price cap—coupling fraudulently high shipping rates with below-cap prices for oil as a scheme for evading sanctions. While theoretically possible on a widespread scale, such an arrangement would involve regular kickbacks to the Kremlin from a host of private companies, and to-date there has been no such evidence of such a scheme occurring.

A third outcome to the price cap is that Russian government revenue has declined, relative to what it would have been without a price cap. Evaluators cannot make this assertion with the same confidence as the first two outcomes, given the opacity of both Russian government statistics and uncertainty over the price received by Russia on oil trades. Yet it is likely that the price cap’s imposition helped preserve the unprecedented price spread between Russian oil exports and oil from other sources. This spread, which refers to the price of oil exclusive of shipping and related costs, had long been close to zero before the invasion. After the invasion, the spread quickly grew to around $35 per barrel, and then stabilized at around $20 per barrel following the implementation of the price cap. The combination of these factors, plus the decline in the global price of oil, led the U.S. Treasury Department to cite reports from the Russian Finance Ministry that its oil revenue had fallen by over 40% in the first quarter of 2023 relative to one year earlier.

Some critics have questioned the negative revenue impact, citing a reported price of Ural-grade crude oil above the $60 price cap as evidence of widespread evasion. While certainly suggestive of a muted revenue impact, a Urals price above the cap does not necessarily imply evasion. To start, some analysts appear to point to a price that is inclusive of shipping and insurance costs, which does not necessarily violate the terms of the cap. Also, reported prices for Russian oil are notoriously difficult to come by, and may not represent the actual price paid. Lastly, since Russia is exporting substantial amounts of oil on trades that do not use Western services, such trades can occur at any price without violating the cap. For the purposes of revenue impact, the key analytical question is at what price Russia would have traded oil in the absence of a cap.

Conclusion

The price cap regime imposed on Russia by the G-7, the EU and Australia represented a historic step toward sanctioning a global producer of oil. Initial skepticism around the price cap’s efficacy faded as Russian production stabilized along with global oil prices, and as the cap preserved the unprecedented spread between Russian and other-origin oil producers. But it is still difficult to assess the precise impact of the cap, since it requires both an accurate assessment of the current trade (including the price paid to Russia for each barrel of export and the change in other shipping-related costs) and a similarly precise assessment of the trade that would occur without the cap. Overall, evaluations show that the price cap helped preserve global production of oil, introduced frictions leading to higher shipping costs into the Russian oil trade, and helped preserve the wide discount importers paid on Russian oil imports. The combination of these factors almost certainly led to lower revenue received by Russia, likely driving down revenue by about 30% to 40% over the first six months of the price cap’s existence. Russia’s countermeasures, which include expanding the fleet of ships available to transport oil around the price cap, will require close monitoring and strict enforcement to maintain this level of depressed revenue moving forward.

Opinions expressed herein are solely those of the author, unless otherwise stated. Photo by Evgeny Fedorov, shared via a CC BY 3.0 license.