In Ukraine, the West has made great strides in designing sanctions to stop or prevent Russian President Vladimir Putin’s aggressive war. But it must now complete the work by setting a price cap on marine oil exports that are still generating revenue for the Russian war machine.
KYIV – Europe, the United States and other allies of Ukraine have implemented two of the three measures necessary to bring the Russian economy to its knees and hamper President Vladimir Putin’s aggressive war. Strong fiscal sanctions are in effect and Europe has formed a buyers’ union to put a restriction on more oil imported from Russia later this year. But now we need a third critical part of the puzzle: to squeeze Putin’s revenues from sea crude, start immediately.
The economic sanctions adopted after the invasion were effective. The freezing of the reserves of the Russian Central Bank has removed much of the country’s buffer against shocks. The ruble’s stability rests solely on strong capital controls and the constant influx of hard currency from the sale of oil and gas. It is an uncertain system that can easily be broken by further negative shocks.
By creating a buyers’ union, the European Union has already created a mechanism to deliver such a shock. After much deliberation, EU member states have decided to stop buying Russian shipping by ship, starting just five months from now. Russia is still exporting over 1.25 million barrels per day to the EU by sea, curtailing this transit could have a major impact on Putin’s revenue stream, the ruble’s power and the already fragile Russian economy.
But waiting five months before hobling Putin’s war machine is unacceptable. Every day, most Ukrainians are being killed by Russian forces. We can’t wait. We need the final part of the strategy to reduce the price that Russia pays for its raw and processed products, thereby limiting Kremlin revenues.
Those returns will remain robust. In May, the EU alone imported $ 5 billion worth of Russian crude by sea and is on track to buy the same amount in June. For every barrel of oil sold, Putin is getting up to $ 100 that can be applied directly to the war effort. The same influx placed the ruble more strongly than it would have otherwise been.
Somewhat paradoxically, the third part of the puzzle is not placed under a complete zero-shipment restriction, which prohibits oil exports to EU-owned, EU-insured or EU-funded vessels to the rest of the world. That kind of hammer blow could raise oil prices, cause economic woes around the world, and boost Putin’s earnings from countries that do not comply with sanctions.
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But if the third set of measures are properly designed, these negative effects can be mitigated and perhaps completely avoided. To that end, we support the recent proposals of US Treasury Secretary Janet Yellen and Italian Prime Minister Mario Draghi to limit the price that Russia receives per barrel of oil. The EU can do this by using its purchasing power over the next five months, and by using the fact that most Russian oil – about 70% – is shipped in units owned, insured and financed by units in the EU, the United States. Kingdom and other allies. These measures are being actively discussed among EU members and we encourage all other countries to get behind them.
Since the marginal cost of production is exceptionally low in existing Russian oil fields, the price limit can be set at rock-bottom level to squeeze Putin’s revenues without removing Russian incentives to continue exporting. Oil will continue to supply to the international market, preventing a short-term negative impact on worldwide price levels.
This price limit can be implemented as a direct restriction or tariff in several ways. The advantage of a tariff or tax-type structure is that it generates income that can be used to offset the cost of hosting approximately five million Ukrainian refugees currently sheltered in the EU, or to help other low-income people. Europe and elsewhere) who were severely damaged by the effects of Putin’s aggressive war.
Of course, Russia may refuse to supply oil at this low price. But it is worth remembering that during the pandemic, when prices fell by as much as $ 20 per barrel, they were keen to sell as much as they could. Moreover, if Russia “shut down” its production, it would damage its oil wells and effectively resign its membership in OPEC +. The loss to the Russian economy will be immediate and the pressure on the ruble will be immense.
Without hard currency, Putin would have a difficult time buying his rockets and other weapons units from other countries. Without government revenues, Russia will have to print more money to support its war effort – causing its inflation to accelerate. The West has made great strides in designing sanctions to stop the Putin war in Ukraine. Now it must finish the job.