US bid to curb Russian oil prices sparks enforcement skepticism

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WASHINGTON — Pressure from the Biden administration to form an international buyers cartel to curb the price of Russian oil has met resistance amid private sector concerns that it cannot be reliably enforced, which poses a challenge to the US-led attempt to wiretap President Vladimir V. Putin. war chest and stabilizing global energy prices.

The price cap has been a top priority for Treasury Secretary Janet L. Yellen, who has tried to avoid another spike in global oil costs at the end of the year. The Biden administration fears that the combination of a European Union embargo on Russian oil imports and a ban on the insurance and financing of Russian oil shipments will push prices up by taking millions of barrels of that oil off the market.

But the untested concept has sparked skepticism among energy experts and in particular the maritime insurance industry, which facilitates global oil shipments and is essential for the proposal to work. Under the plan, it would be legal for them to provide oil cargo insurance only if it was sold at or below a certain price.

The insurers, who are mainly in the European Union and Britain, fear they would have to maintain the price cap by checking whether Russia and oil buyers around the world are complying with the agreement.

“We can ask for proof of the price paid, but it is not very effective as an enforcement mechanism,” said Mike Salthouse, global claims director at The North of England P&I Association Limited, a leading global maritime insurer. “If you have sophisticated state actors who want to mislead people, it’s very easy to do.”

He added: “We’ve said it won’t work. We explained to everyone why.”

That hasn’t deterred Ms. Yellen and her top executives, who have traveled the globe advocating to international counterparts, banks and insurers that an oil price cap can – and should – work at a time of rapid inflation and the risk of recession.

“At a time of global concern about high prices, a price cap for Russian oil is one of the most powerful tools we have for tackling inflation by preventing future spikes in energy costs,” Ms Yellen said in July.

The Biden administration is seeking to mitigate the impact of sanctions passed by the European Union in June that would ban Russian oil imports and the financing and insurance of Russian oil exports by the end of the year. Britain was expected to issue a similar ban, but has not yet done so.

Ms. Yellen and other Treasury Department officials want those sanctions to include a spin-off that would allow Russian oil to be sold, insured and shipped if bought at a price well below market price. They claim that this would reduce the revenue Russia brought in while the oil flow would continue to flow.

The plan relies heavily on the marine insurance industry, a web of insurers that provide cover for ships and their cargo, liability for potential spills, and reinsurance, a form of secondary insurance used to cover the risk of losses. Most of the major insurers are based in the Group of 7 countries, which have coordinated sanctions against Russia for its war in Ukraine.

Lars Lange, secretary general of the International Union of Marine Insurance, a consortium based in Germany, said he believed that even with a price cap, insurers would still be reluctant to cover Russia’s oil exports for fear of violating regulations. sanctions.

“This insurance industry is more than willing to comply, but please set the sanctions in such a way that we understand and can comply with them,” said Mr Lange. “And with this oil cap, there are challenges, at least on our part.”

Mr Lange said the cap wouldn’t work if only a few countries agreed, as insurers from other countries would pick up the slack and cover the load at market prices.

Treasury Department officials working on the plan have met with the insurance and financial services industries to try to allay some of their concerns. They have suggested that the industry would bear no responsibility if sanctions were ignored, and that Russia and its oil customers should “prove” the purchase price. Enforcing the cap, they said, would be akin to dealing with sanctions targeting oil exports from countries like Iran and Venezuela.

Officials have also downplayed the idea that global participation is needed, arguing that countries like India and China, which have bought Russian oil at deep discounts, could benefit from a price cap without signing up to the agreement.

G7 leaders agreed in late June to examine the concept. The idea received mixed reviews after the finance ministers of the Group of 20 countries met in Indonesia in July. South Korea said it was willing to find out, while Indonesia’s finance minister, Sri Mulyani Indrawati, warned that a price cap would not solve the world’s oil supply problems. European officials, who were skeptical, continue to say they are analyzing its viability.

The race to execute such a complex plan in just a few months comes as the United States struggles to honor international agreements, such as the global tax pact, which Ms Yellen brokered last year but is now bogged down in the Congres. In recent months, Ms Yellen has sent her deputy, Wally Adeyemo, and Ben Harris, her assistant secretary for economic policy, to argue for the limit on national security and economic grounds.

Adeyemo said in an interview that “a lot of progress has been made between the G7 finance and energy ministers in terms of having conversations about how we actually shape this at a technical level.”

He added that “we have also made progress in terms of talking with other countries about joining our coalition to put together a price cap.”

Mr Adeyemo said officials are working to design the cap so insurers don’t have to scrutinize every transaction to ensure compliance.

“We’ve also had very constructive conversations with members of the industry involved in the offshore oil trade, both to understand how that oil is sold and who has information about its price,” he said. “But also how we can design the simplest possible attestation method to ensure that we can maintain the price ceiling.”

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

“I think it’s a smart analytical idea, but there’s a reason the phrase ‘too smart halfway’ was invented,” said Lawrence H. Summers, Secretary of the Treasury during the Obama administration.

Mr Summers noted that there are few examples of successful buyer cartels and that oil transactions can often be hidden and said, “It may not be workable.”

The United States hopes to reach an agreement by December 5, when the European Union ban goes into effect, but many details remain unresolved, including the price at which Russian oil would be capped.

Treasury officials have said the price would be high enough so that Russia had an incentive to keep producing. Some commodities analysts have pointed to a range of $50 to $60 a barrel as a likely target, which is much lower than the current price of around $100 a barrel.

But a big joker is how Russia might react, including whether it will retaliate in ways that drive up prices.

The governor of Russia’s central bank, Elvira Nabiullina, said last month that she believed Russia would not supply oil to countries that imposed a limit, and predicted that this would lead to higher oil prices worldwide. Other Russian officials have suggested that the country would not sell oil at prices below the cost of production.

In a report last month, analysts at JP Morgan predicted that if Russia did not cooperate with a price cap, three million barrels of Russian oil per day could be removed from world markets, pushing prices to $190 a barrel. Cutting production indefinitely would damage its resources, they said, but Russia could handle a temporary shutdown while maintaining its finances.

Paul Sheldon, chief geopolitical adviser for S&P Global Commodity Insights, said a successful cap could be the best hope for stabilizing oil prices once the European Union ban goes into effect. He said it is unlikely that Russia, which has restricted natural gas flows to parts of Europe in retaliation for sanctions, would curb oil exports because of its importance to its economy.

“Our assumption is that Russia will not curtail production,” said Mr Sheldon.

Brian O’ Toole, a former adviser to the Treasury Department’s Foreign Asset Control Department, said even a brief halt to Russian oil exports could destabilize markets. But he added that the Russian invasion of Ukraine showed its willingness to take actions contrary to its economic fate.

“This assumes Putin is a rational economic player,” Mr O’Toole, a non-resident senior fellow at the Atlantic Council who works in financial services, said of Russia’s price cap cooperation. “If that were the case, 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 may be the best chance to mitigate the economic impact.

John E. Smith, former director of the Foreign Asset Control Unit, said it was essential to ensure financial services and marine insurers were not responsible for vetting every oil transaction, as well as providing guidance on compliance. of the sanctions.

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

Matina Stevis-Gridneff contributed report from Brussels.



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