Page 5 - FSUOGM Week 39 2022

FSUOGM COMMENTARY FSUOGM

Russian oil price cap proposal is "a

waste of time" and could backfire

The US treasury would be unable to tell whether the price cap was being
adherred to, and it could well backfire for consumers.

RUSSIA THE proposed price cap on Russian oil exports made a back-end arrangement to evade the price
by the West is “a waste of time because it can be cap” and that “attempts to use opaque payment
WHAT: easily circumvented and could be a lose-lose mechanisms may indicate the customer or coun-
The G7 group want to strategy for the countries that implement it,” terparty is avoiding creating documentation
introduce a cap on Philip Verleger, a senior research scholar at Yale around payment,” the treasury stated.
Russian oil exports. University, has argued. “Despite such vigilance, there is no way for
The US Treasury issued “preliminary guid- the treasury to learn of buyers who pay the
WHY: ance” on the price cap, backed by the G7 group Russian central bank sums that entitle them to
Yale University research and the EU, in mid-September. It is set to take acquire Russian oil,” Verleger said. “Put bluntly,
Philip Verleger warns that effect on December 5 for crude oil transported such transactions are invisible to the treasury.
the US treasury would be by ship, in line with the EU deadline for banning The easiest way for Russia to circumvent the
unable to know whether the import of such trade. It will be extended to price cap would be to announce that buyers
the restriction was being the maritime transportation of petroleum prod- interested in Russian oil must purchase a licence
complied with. ucts on February 5, likewise in step with EU to do so from the country’s central bank.”
embargo plans. The price of that licence would be the differ-
WHAT NEXT: The aim of the price cap is to keep Russian oil ence between global oil prices and the treasury’s
The measure could also supply stable, so that the global energy crisis is ceiling price.
drive global oil prices to not exacerbated, while depriving the Kremlin of “Oil purchases by licensees would be invoiced
$150 per barrel. revenue it can plough into its war in Ukraine. It at the ceiling price or even a discount from the
will work by imposing sanctions on anyone buy- ceiling price,” he said. “Buyers would obtain such
ing, transporting or insuring Russian oil cargoes discounts, just as they do today.”
that do not comply. Verleger warns that such an approach would
However, the system can be “easily circum- boost Russia’s receipts rather than shrink them,
vented,” according to Verleger. even if the paperwork says otherwise.
“Start with the fact that several companies “For example, a crude buyer could create
export Russian crude,” he said in a commentary a large account with the Russian central bank.
published by Energy Intelligence. “This means Funds would be deducted from the account to
that the Russian government cannot easily procure licences to cover every barrel it pur-
impose regulations that change the export price chases,” he said. “The purchase invoices, how-
of its oil. However, the government can tax and ever, would indicate, falsely, that the buyer had
license exports, and it is through its licensing paid a price close to the ceiling price established
authority that Russia can outmanoeuvre US and by the US treasury. The ceiling price strategy,
wider G7 efforts.” then, would not affect Russia’s oil revenues.”
Verleger argues that export entitlements that Furthermore, Verleger stresses that the price
are not transparent to the US “are the obvious cap could drive global oil prices higher, poten-
way for Russia to obtain prices at or near world tially to as much as $150 per barrel.
levels for its exports.” “This boost would occur only if the G7 action
The US Treasury acknowledges in its guid- ‘froze’ trade in global oil due to the uncertainty
ance that it will need to look out for efforts to regarding the US government’s actions,” he said.
evade sanctions, such as “unusually favourable “If it did happen, it could raise Russia’s oil income
payment terms, inflated costs or insistence on by 50% while worsening the global recession.”
using circuitous or opaque payment mecha- China and India – key markets for Russian
nisms.” It also notes that “seaborne Russian oil oil – have both resisted Western calls to commit
purchased so far below the price cap as to be eco- to the price cap proposal. But in some sense,
nomically non-viable for the Russian exporter according to reports, they have already helped
may be an indication that the purchaser has reduce Russia’s revenues from oil exports. Rus-
made a back-end arrangement to evade the price sia is now offering China and India significant
cap.” discounts on oil supplies, to dissuade them
Likewise, “excessively high service costs from agreeing to the Western proposal, various
may be an indication that a service provider has reports in the Asian media have claimed. ™

Week 39 30•September•2022 www. NEWSBASE .com P5